Smitty's Li'l Haulers

It was October 1998 and Jeff Malott, a young, aspiring entrepreneur, had just toured the rustic factory and retail store of Smitty's Li'l Haulers, a Shedden, Ontario-based manufacturer of children's toy wagons. Jeff was very impressed with what he had seen. Smitty's was for sale and Jeff wondered if this was the right opportunity for him.

Jeff Malott was a native of London, Ontario. Following high school, he apprenticed as an automotive mechanic specializing in European automobiles. Before he completed his apprenticeship Jeff realized he had a strong desire to pursue his own business. Jeff began his entrepreneurial pursuit by enrolling in business classes at local colleges. One of the ideas he was interested in exploring was a nightclub and bar concept. The lifestyle attracted him and he thought he had some ideas that would make the business a success. Jeff took a part-time job working for UPS while he pursued his education. His exploration led him to London's Small Business Centre in 1998 for some assistance in writing the business plan for the proposed bar. They in turn referred him to George Lightfoot, a retired commercial banker who had started a private entrepreneurship training school.

Jeff and George discussed Jeff's ideas at length. This led to Jeff enrolling in courses at the school to acquire additional business skills needed to run a small business and to finalize the business plan for the bar. In September 1998 George approached Jeff to take a look at Smitty's Li'l Haulers as a possible alternative to starting the bar and nightclub. George was acquainted with the owner of Smitty's and had been approached to assist in finding a buyer for the company. Initially, Jeff was surprised by the idea of buying a business. He had simply never considered it.

SMITTY'S LI'L HAULERS

Smitty's had been founded in 1986 in the small town of Shedden, Ontario, about 35 kilometres southwest of London, by John Smith and his family. The business made a line of rugged, high-quality toy wagons that could also be used for chores around the home and garden. (SeeExhibit C3-1for details on the product line.) The parts for the wagons were purchased from various suppliers and assembled in a made-over barn on the farm of one of John's friends. (SeeExhibit C3-2for photo.) They were sold through a retail store in Shedden and through a network of farm implement distributors and other select retailers in the southwestern Ontario region. About 65 percent of sales were through the Shedden store. Sales through these channels had grown to 400-500 units per year by 1978.

Smitty's had also ventured into the retail furniture business.John had created a division called "Once a Tree" to retail hand-crafted fine furniture made by regional craftsmen. They supplied the store in Shedden with china cabinets, tables, chairs, and shelving units, which sold at a premium price compared to the volume-manufactured items sold in urban furniture stores. This division accounted for about 30 percent of Smitty's sales volume by 1998.

In the mid-1990s Smitty's was able to secure two large orders for wagons: a 3000-unit order from a major tool distributor and a 600-unit order from a chain of independent retail hardware stores. The tool company used the wagons as part of a promotion to its dealers, and the wagons were branded with the company name and logo rather than the traditional Smitty's brand. The hardware stores sold the wagons through their network in southwestern Ontario. Smitty's had also entered into negotiations with Canadian Tire to distribute their wagons but were unable to come to a deal. These orders had been completed by the time Jeff first met John.

The size of the two large orders strained Smitty's assembly and financial capacity and the stress

took its toll on John Smith. According to Jeff, the strain nearly killed John. Faced with serious health problems, John approached his friend George Lightfoot to help him find a buyer for Smitty's. John was not interested in just any buyer, however. He wanted someone who would "take care of the business," according to Jeff. John wanted a buyer who would leave the business in Shedden and who had the same small-town values of quality and good value for the customer.

JEFF'S IMPRESSIONS OF SMITTY'S AND THE PROPOSED DEAL

Jeff's was very excited by his visit to the Smitty's assembly plant. His mechanical background told him this was a quality product, if a bit rough. He saw lots of opportunities to improve the design, the quality, and the operation of the business. For example, Smitty's had a paper-based, somewhat loose accounting system in place. The books were put in order only at the end of every year by the accountant. Smitty's also had no presence on the Internet. In fact, the business did not even own a computer. Jeff also thought there were opportunities to grow the business, either by pursuing additional large orders or by expanding the distribution network. He also thought the business would eventually have to leave Shedden in order to achieve this growth, and this would likely be a deal-killer for John.

Jeff and John talked at length about the business during Jeff's visit. "John liked me," according to Jeff and, "he liked my youthful enthusiasm." John shared some financial statements with Jeff and was very proud to point out the huge impact the two large orders had on the company's results. John wanted $100,000 for Smitty's, which included the inventory of parts and finished goods, all tools and equipment, goodwill, and the "Once a Tree" furniture division. Jeff was not really interested in "Once a Tree," but John insisted it had to be part of any eventual deal.

THE RIGHT OPPORTUNITY?

If buying Smitty's was the right opportunity for him, Jeff had first to answer several questions. How should he assess the Smitty's opportunity? Were there better opportunities out there?

ADDITIONAL DATA IS PROVIDED BELOW:

Sales (units):

Year Total number of units sold, all models

1995 1,000

1996 2,300

1997 2,400

1998 2,500

Questions:

1. Smitty's current product lines are wide and deep. Which products out of the above lines will you recommend to reduce/delete from the product portfolio? Why? Explain your answer.
2. In order to help Jeff, determine sales value for 1998 and forecast sales for 1999, 2000, 2001. Clearly state your assumptions.