How do family logics influence the financial options available to Two Seasons?

Option One: Trade Sale to Billabong Billabong, a producer of sport clothes and apparel, offered Stuart 2.5 million for Two Seasons. To assess if this was suitable, Stuart undertook researched benchmark information based on Sports Direct, a similar but much larger competitor (see Exhibit Nine). Billabong's rational for purchasing Two Seasons was clear. As a large Australian multi-national eager to extend their reach into the UK, Two Seasons offered Billabong a ready-made retail platform for their sports clothing and equipment. Billabong knew that Two Seasons was well-regarded by its customers and that they could build on its established footprint of thirteen stores by opening further stores in other parts of the UK. Billabong also recognised that there were on-going changes in how sports equipment and clothing was being retailed. The retailer, Sports Direct International, had integrated its supply-chain by acquiring suppliers like Kangol. This backward integration increased profit margins because there was no need to pay intermediaries. If Billabong could buy Two Seasons, this would allow for forward integration and potentially lead to increased profits. For example, instead of only selling six per cent of their goods through Two Seasons, they might be able to increase this to fifty per cent. Finally, if they did buy Two Seasons they could make it a condition of the sale that Stuart and his team would have to stay in post for three years to smooth the business transition. This would help Billabong because they had limited retail experience in the UK. Stuart could see the advantages of selling out to Billabong. They had the logistics, finance and brand to make it work. He believed that he could lead Billabong into making the transition to being a major player in the UK. As the shareholder with the biggest stake in the business (Exhibit Two), it would also give him and other family members a sizeable payout that could allow them to meet their aspirations. In particular, it would give his parents the chance of a more comfortable retirement, something that Stuart felt was important given the huge support they had given him over the years. Yet, Stuart knew that he himself would not be able to retire if he was to sell Two Seasons. Billabong might suggest that working for a large multinational would be attractive and involve lots of international travel, but he wondered if this would compensate for his emotional attachment to Two Seasons. Supported by his family, Stuart had built up Two Seasons virtually from nothing. This had been difficult. He explains: "we had been through very tough times and at times - struggled to keep the business afloat. This meant the management team was very tight and as we grew the business it became an extension of our personal successes". It was not Stuart's managerial style to force issues. He knew that if he wanted to sell to Billabong, he would need to win over his younger brother and sister. His sister, Helen, was a strong fiery character. While she saw advantages for her parents in selling out to Billabong, she preferred a longer term exit strategy. This would make it easier for her to realise her passion and dream of living in a European ski region. Alun was also interested in an exit over a ten year horizon. From his perspective, this would give the business the opportunity to develop further and would mean that the family could sell the business for more money. He pondered if it really was worth now, aged 45, to sell his life's work to Billabong. He wanted to do the right thing and was conscious of business pressures, but knew that there were competing family forces at play. He was also concerned that the 2.5 million that Billabong had offered was too low. He was not a qualified accountant but his hunch was that Billabong should pay more, and had thought 4 million was a fair price. Option Two: Fund growth through bank debt The finances for the growth to-date of Two Seasons were built on prudent cash flow management and a strong relationship with their bank. The bank had always supported Two Seasons when it had asked for further growth funding. For example, as the business expanded, the level of bank loan funding had kept up: it was 177,697 in 2003 and 985,839 (overdraft, 281,989; current portion of debt, 350,000; borrowings due after more than 12 months, 353,850) in 2007. Stuart saw real benefits in bank debt finance. "Having control over your own destiny and ownership kept the team very focused and fosters an independent attitude that takes responsibility for its actions". Using bank debt and retained earnings, Two Seasons had organically grown step-by-step, which meant that they were able to control and plan out their resources. This discipline had stood Two Seasons in good stead: "When you have your own money on the line it concentrates the effort and really focus's your cost commitments. We had seen other companies expand recklessly through mis-reading the market. This had led to their demise so we were nervous of outside intervention". However, Stuart saw risks in what had been a winning strategy. He knew that his business was inevitably seasonal. Consequently, cashflow fluctuated, making it potentially difficult to service bank loans. Although Stuart had always paid back his loans on time, he also knew that banks could and did make hard decisions about whether to loan further or even to call in loans when they were nervous about the financial performance of a business. Illustrative of this was Stuart's earlier experience: "In the months prior to the Billabong offer, there was an opportunity to acquire a competitor. It had two stores. One of these was hemorrhaging money but the other one was very profitable. I knew it was the right opportunity. I went to the bank and they were keen to lend to me but they wanted my house as security. I talked to my wife. I explained that it could be a step too far but she saw the logic of the opportunity. My family were also supportive but in the end, it was my house on the line. I wasn't nineteen anymore with only having to worry about funding my next ski trip. I had my wife and kids to think about". Stuart had recently been to his bank to discuss if they were willing to fund the future growth of the business. He had already scoped a strategy where he would grow turnover to 10.4 million in the coming year with an operating profit of between 250-300,000. While he could continue to pick up off-centre stores that had gone into liquidation and fit them out for as little as 30,000, a more aggressive approach was to go into mainstream malls where the footfall was much higher. He had recently opened in a new store in a prime location in Derby (see Exhibit One). In the first three weeks of opening, footfall was 7,000 per week, compared to between 2,000-3,000 people coming through the doors of his other stores. The price, though, was that the mall landlords did not put in furnishings and shop fittings. To fit out the outlet had cost Two Seasons 260,000. If he were to add four more shops over the next four years, this would cost 1 million. Stuart had ambitious plans for the business. He had a good relationship with his bank and he could ask them for further funding. However, would it meet his business needs and how much more funding wouid the bank support? Option Three: Fund growth through equity finance Stuart knew that equity finance could sustain the rapid growth of Two Seasons. The urban lifestyle retailer, Fat Face, grew via successive rounds of venture capital finance. Although Fat Face's owners had seen their equity stake being diluted over time, they had still been able to walk away with 90 million when it was sold to a private equity firm. Private equity could provide finance for Two Seasons to invest in its business systems, fund further acquisitions and/or open up further new sites. Larger sales volumes meant it could go back to suppliers and negotiate even harder on price. The real potential of equity funding, though, was that it could lead Two Seasons to develop its own brand. Stuart had seen a competitor, JD Sports, successfully develop their own brand. He had seen how this vertical integration of the supply-chain had improved profit margins. Having a brand also meant that the business would be more appealing to investors in any further equity finance rounds. antur of hucinarrar out there who have opportunity. I went to the bank and they were keen to lend to me but they wanted my house as security. I talked to my wife. I explained that it could be a step too far but she saw the logic of the opportunity. My family were also supportive but in the end, it was my house on the line. I wasn't nineteen anymore with only having to worry about funding my next ski trip. I had my wife and kids to think about". Stuart had recently been to his bank to discuss if they were willing to fund the future growth of the business. He had already scoped a strategy where he would grow turnover to 10.4 million in the coming year with an operating profit of between 250-300,000. While he could continue to pick up off-centre stores that had gone into liquidation and fit them out for as little as 30,000, a more aggressive approach was to go into mainstream malls where the footfall was much higher. He had recently opened in a new store in a prime location in Derby (see Exhibit One). In the first three weeks of opening, footfall was 7,000 per week, compared to between 2,000-3,000 people coming through the doors of his other stores. The price, though, was that the mall landlords did not put in furnishings and shop fittings. To fit out the outlet had cost Two Seasons 260,000. If he were to add four more shops over the next four years, this would cost 1 million. Stuart had ambitious plans for the business. He had a good relationship with his bank and he could ask them for further funding. However, would it meet his business needs and how much more funding wouid the bank support? Option Three: Fund growth through equity finance Stuart knew that equity finance could sustain the rapid growth of Two Seasons. The urban lifestyle retailer, Fat Face, grew via successive rounds of venture capital finance. Although Fat Face's owners had seen their equity stake being diluted over time, they had still been able to walk away with 90 million when it was sold to a private equity firm. Private equity could provide finance for Two Seasons to invest in its business systems, fund further acquisitions and/or open up further new sites. Larger sales volumes meant it could go back to suppliers and negotiate even harder on price. The real potential of equity funding, though, was that it could lead Two Seasons to develop its own brand. Stuart had seen a competitor, JD Sports, successfully develop their own brand. He had seen how this vertical integration of the supply-chain had improved profit margins. Having a brand also meant that the business would be more appealing to investors in any further equity finance rounds. antur of hucinarrar out there who have Equity finance could also potentially change the nature of Two Seasons. It was a family business that had invested significantly in management and staff: "I have always believed that our staff-from those who work in the store through to buyers and support staff and senior management team - need to see a future for themselves. Developing the people side is often key in developing a business". The challenge with outside investors is that they may be capricious: "The issue with business angels is it is all on the individual. They could be fantastic or they could turn out to be like a football chairman who decides that he is not happy with the team's performance and decides to take his ball home". Venture capitalists might not be much better. If things got sticky, they were likely to replace the management team. Finding the correct match for Stuart was critical. They needed to be someone who "could understand the business and give us the freedom to continue to drive our own vision." Luckily, Stuart had recently been approached by both business angels and venture capitalists. One of his friends had access to a group of ultra-high net worth investors, many of whom had interests in retail, and could also be a potential source of equity investment and guidance. His presentation to these potential investors had been favourably received and he believed that there was an appetite to invest in Two Seasons. The problem, though, was finding the right balance between the level of investment and the equity stake that Stuart, his staff and his family would have to give up. One key upside was that equity finance could allow him to really drive the business forward. One downside, though, was the loss of business control. Although neither Stuart nor any equity financiers had discussed it yet, he wondered how he, his staff and family would react if they wanted more than 50 per cent of Two Seasons. Option One: Trade Sale to Billabong Billabong, a producer of sport clothes and apparel, offered Stuart 2.5 million for Two Seasons. To assess if this was suitable, Stuart undertook researched benchmark information based on Sports Direct, a similar but much larger competitor (see Exhibit Nine). Billabong's rational for purchasing Two Seasons was clear. As a large Australian multi-national eager to extend their reach into the UK, Two Seasons offered Billabong a ready-made retail platform for their sports clothing and equipment. Billabong knew that Two Seasons was well-regarded by its customers and that they could build on its established footprint of thirteen stores by opening further stores in other parts of the UK. Billabong also recognised that there were on-going changes in how sports equipment and clothing was being retailed. The retailer, Sports Direct International, had integrated its supply-chain by acquiring suppliers like Kangol. This backward integration increased profit margins because there was no need to pay intermediaries. If Billabong could buy Two Seasons, this would allow for forward integration and potentially lead to increased profits. For example, instead of only selling six per cent of their goods through Two Seasons, they might be able to increase this to fifty per cent. Finally, if they did buy Two Seasons they could make it a condition of the sale that Stuart and his team would have to stay in post for three years to smooth the business transition. This would help Billabong because they had limited retail experience in the UK. Stuart could see the advantages of selling out to Billabong. They had the logistics, finance and brand to make it work. He believed that he could lead Billabong into making the transition to being a major player in the UK. As the shareholder with the biggest stake in the business (Exhibit Two), it would also give him and other family members a sizeable payout that could allow them to meet their aspirations. In particular, it would give his parents the chance of a more comfortable retirement, something that Stuart felt was important given the huge support they had given him over the years. Yet, Stuart knew that he himself would not be able to retire if he was to sell Two Seasons. Billabong might suggest that working for a large multinational would be attractive and involve lots of international travel, but he wondered if this would compensate for his emotional attachment to Two Seasons. Supported by his family, Stuart had built up Two Seasons virtually from nothing. This had been difficult. He explains: "we had been through very tough times and at times - struggled to keep the business afloat. This meant the management team was very tight and as we grew the business it became an extension of our personal successes". It was not Stuart's managerial style to force issues. He knew that if he wanted to sell to Billabong, he would need to win over his younger brother and sister. His sister, Helen, was a strong fiery character. While she saw advantages for her parents in selling out to Billabong, she preferred a longer term exit strategy. This would make it easier for her to realise her passion and dream of living in a European ski region. Alun was also interested in an exit over a ten year horizon. From his perspective, this would give the business the opportunity to develop further and would mean that the family could sell the business for more money. He pondered if it really was worth now, aged 45, to sell his life's work to Billabong. He wanted to do the right thing and was conscious of business pressures, but knew that there were competing family forces at play. He was also concerned that the 2.5 million that Billabong had offered was too low. He was not a qualified accountant but his hunch was that Billabong should pay more, and had thought 4 million was a fair price. Option Two: Fund growth through bank debt The finances for the growth to-date of Two Seasons were built on prudent cash flow management and a strong relationship with their bank. The bank had always supported Two Seasons when it had asked for further growth funding. For example, as the business expanded, the level of bank loan funding had kept up: it was 177,697 in 2003 and 985,839 (overdraft, 281,989; current portion of debt, 350,000; borrowings due after more than 12 months, 353,850) in 2007. Stuart saw real benefits in bank debt finance. "Having control over your own destiny and ownership kept the team very focused and fosters an independent attitude that takes responsibility for its actions". Using bank debt and retained earnings, Two Seasons had organically grown step-by-step, which meant that they were able to control and plan out their resources. This discipline had stood Two Seasons in good stead: "When you have your own money on the line it concentrates the effort and really focus's your cost commitments. We had seen other companies expand recklessly through mis-reading the market. This had led to their demise so we were nervous of outside intervention". However, Stuart saw risks in what had been a winning strategy. He knew that his business was inevitably seasonal. Consequently, cashflow fluctuated, making it potentially difficult to service bank loans. Although Stuart had always paid back his loans on time, he also knew that banks could and did make hard decisions about whether to loan further or even to call in loans when they were nervous about the financial performance of a business. Illustrative of this was Stuart's earlier experience: "In the months prior to the Billabong offer, there was an opportunity to acquire a competitor. It had two stores. One of these was hemorrhaging money but the other one was very profitable. I knew it was the right opportunity. I went to the bank and they were keen to lend to me but they wanted my house as security. I talked to my wife. I explained that it could be a step too far but she saw the logic of the opportunity. My family were also supportive but in the end, it was my house on the line. I wasn't nineteen anymore with only having to worry about funding my next ski trip. I had my wife and kids to think about". Stuart had recently been to his bank to discuss if they were willing to fund the future growth of the business. He had already scoped a strategy where he would grow turnover to 10.4 million in the coming year with an operating profit of between 250-300,000. While he could continue to pick up off-centre stores that had gone into liquidation and fit them out for as little as 30,000, a more aggressive approach was to go into mainstream malls where the footfall was much higher. He had recently opened in a new store in a prime location in Derby (see Exhibit One). In the first three weeks of opening, footfall was 7,000 per week, compared to between 2,000-3,000 people coming through the doors of his other stores. The price, though, was that the mall landlords did not put in furnishings and shop fittings. To fit out the outlet had cost Two Seasons 260,000. If he were to add four more shops over the next four years, this would cost 1 million. Stuart had ambitious plans for the business. He had a good relationship with his bank and he could ask them for further funding. However, would it meet his business needs and how much more funding wouid the bank support? Option Three: Fund growth through equity finance Stuart knew that equity finance could sustain the rapid growth of Two Seasons. The urban lifestyle retailer, Fat Face, grew via successive rounds of venture capital finance. Although Fat Face's owners had seen their equity stake being diluted over time, they had still been able to walk away with 90 million when it was sold to a private equity firm. Private equity could provide finance for Two Seasons to invest in its business systems, fund further acquisitions and/or open up further new sites. Larger sales volumes meant it could go back to suppliers and negotiate even harder on price. The real potential of equity funding, though, was that it could lead Two Seasons to develop its own brand. Stuart had seen a competitor, JD Sports, successfully develop their own brand. He had seen how this vertical integration of the supply-chain had improved profit margins. Having a brand also meant that the business would be more appealing to investors in any further equity finance rounds. antur of hucinarrar out there who have opportunity. I went to the bank and they were keen to lend to me but they wanted my house as security. I talked to my wife. I explained that it could be a step too far but she saw the logic of the opportunity. My family were also supportive but in the end, it was my house on the line. I wasn't nineteen anymore with only having to worry about funding my next ski trip. I had my wife and kids to think about". Stuart had recently been to his bank to discuss if they were willing to fund the future growth of the business. He had already scoped a strategy where he would grow turnover to 10.4 million in the coming year with an operating profit of between 250-300,000. While he could continue to pick up off-centre stores that had gone into liquidation and fit them out for as little as 30,000, a more aggressive approach was to go into mainstream malls where the footfall was much higher. He had recently opened in a new store in a prime location in Derby (see Exhibit One). In the first three weeks of opening, footfall was 7,000 per week, compared to between 2,000-3,000 people coming through the doors of his other stores. The price, though, was that the mall landlords did not put in furnishings and shop fittings. To fit out the outlet had cost Two Seasons 260,000. If he were to add four more shops over the next four years, this would cost 1 million. Stuart had ambitious plans for the business. He had a good relationship with his bank and he could ask them for further funding. However, would it meet his business needs and how much more funding wouid the bank support? Option Three: Fund growth through equity finance Stuart knew that equity finance could sustain the rapid growth of Two Seasons. The urban lifestyle retailer, Fat Face, grew via successive rounds of venture capital finance. Although Fat Face's owners had seen their equity stake being diluted over time, they had still been able to walk away with 90 million when it was sold to a private equity firm. Private equity could provide finance for Two Seasons to invest in its business systems, fund further acquisitions and/or open up further new sites. Larger sales volumes meant it could go back to suppliers and negotiate even harder on price. The real potential of equity funding, though, was that it could lead Two Seasons to develop its own brand. Stuart had seen a competitor, JD Sports, successfully develop their own brand. He had seen how this vertical integration of the supply-chain had improved profit margins. Having a brand also meant that the business would be more appealing to investors in any further equity finance rounds. antur of hucinarrar out there who have Equity finance could also potentially change the nature of Two Seasons. It was a family business that had invested significantly in management and staff: "I have always believed that our staff-from those who work in the store through to buyers and support staff and senior management team - need to see a future for themselves. Developing the people side is often key in developing a business". The challenge with outside investors is that they may be capricious: "The issue with business angels is it is all on the individual. They could be fantastic or they could turn out to be like a football chairman who decides that he is not happy with the team's performance and decides to take his ball home". Venture capitalists might not be much better. If things got sticky, they were likely to replace the management team. Finding the correct match for Stuart was critical. They needed to be someone who "could understand the business and give us the freedom to continue to drive our own vision." Luckily, Stuart had recently been approached by both business angels and venture capitalists. One of his friends had access to a group of ultra-high net worth investors, many of whom had interests in retail, and could also be a potential source of equity investment and guidance. His presentation to these potential investors had been favourably received and he believed that there was an appetite to invest in Two Seasons. The problem, though, was finding the right balance between the level of investment and the equity stake that Stuart, his staff and his family would have to give up. One key upside was that equity finance could allow him to really drive the business forward. One downside, though, was the loss of business control. Although neither Stuart nor any equity financiers had discussed it yet, he wondered how he, his staff and family would react if they wanted more than 50 per cent of Two Seasons