The Edge Carwash: On the Edge of Change

Company Background

Thirty years ago, Jack Houston and his wife, Trinity, established The Edge Car Wash Inc. on 20 acres of worthless land on the outskirts of Amarillo, Texas. They would have never imagined the urban sprawl that now engulfed their business. For years, the Houstons worked 12 hours a day, seven days a week to support their family, almost losing the business several times. All that changed when developers, lured by inexpensive land prices began to build large subdivisions all around The Edge Car Wash. With each new subdivision, sales at The Edge, the only local car wash, increased significantly allowing the Houstons to hire their children who lacked other career prospects or the desire to advance their education after graduating from high school. They were each paid a modest salary with the expectation they would learn and eventually take over the day-to-day operation of the family business. Andy, the oldest, was responsible for maintaining their aging equipment and Heather, his little sister, oversaw marketing despite not being qualified. After employing their children for nearly ten years, Jack and Trinity realized their children lacked the desire and/or ability to take full responsibility for their given positions and the Houstons were not going to realize their dream of transitioning day-to-day operations of The Edge to Andy and Heather.

The Houstons would never get rich, but The Edge provided enough income to support their family and generated employment for their children and the disadvantaged in their community. Long ago, Jack and Trinity decided to hire graduates from New Hope Beginnings, a local drug and alcohol rehabilitation program. While most stayed at The Edge for only a year or two, a few graduates continued to work with the Houstons for several years. Jack and Trinity considered them family.

Jack and Trinity, now in their late 50s began to envision a retirement where they would slow down. With only the cash remaining in the corporations bank account after Jacks recent battle with cancer, The Edge was their only hope for a comfortable retirement. For years, commercial real estate developers have been buying the land all around The Edge to build fast food and quick service restaurants, convenience stores and even a dollar store, but no one expressed interest in The Edge - until now.

While Trinity was out of the office, a representative from a major big box retailer, SuperStore, approached Jack and offered to buy The Edge. The offer included all 20 acres with the intention of tearing down the business in order to build a massive 180,000 square foot hypermarket to sell groceries and general merchandise. While Jack was excited to share the good news with Trinity, he decided to wait and discuss the offer with her in person at home.

Sharing the Good News

After another long day, Jack was again stuck in traffic on his drive home. He couldnt help but contemplate what life would be like without The Edge. When he finally got home, Jack started, I had an interesting meeting today. A representative from SuperStore stopped by the office.

With surprise in her voice Trinity replied, What did he want?

SuperStore is interested in purchasing our land, Jack replied matter-of-factly.

I figured eventually somebody would want to buy us out, but I had no idea it would be SuperStore. What was their offer? she asked.

Jack wrote the offer amount on a scrap of paper and passed it to Trinity, They offered this much for all twenty acres.

Wow!! That is a lot of money. I remember when Mr. Johnson sold his 5-acre tract; McDowells only paid him $250,000. Why are they offering so much? Trinity pondered.

Well, there is a catch. The reason they offered us so much more is because they are including The Edge in their offer.

What will they do with The Edge? Trinity asked not really wanting to know his reply.

Their plan is to tear down The Edge and build a new SuperStore.

So, if we sell to SuperStore, we wont have a car wash anymore. Right? Trinity questioned.

Thats right, but we should be set for retirement. Isnt that great?

I dont know. What happens if we dont accept their offer?

From what I understand, they approached several businesses with comparable offers, but our location by far is their preferred location. Trinity, this is our opportunity to retire comfortably. I doubt we will get this opportunity again. What do you think?

Jack, I agree with you, but what will happen to Andy and Heather and the others who have been with us for so many years if we sell? We would not be able to support any of them going forward. Im worried with their limited education, experience and ambition that they wont be able to find jobs with comparable pay and benefits.

I am worried about them too. Im also worried about us. What would we do in retirement? Are we ready for retirement? The car wash has been our lives for 20 years, Jack replied with concern in his voice. Well, we only have a few days to decide before SuperStore moves on to other locations. Lets discuss with Bill Butterworth, our accountant, first thing Monday morning.

Sounds good. Lets get some sleep. Tomorrow will be another long day, Trinity answered.

Meeting with the Accountant

Hi Bill. Thanks for meeting with me on such short notice, Trinity commented. Im sorry Jack cant be here. The main pump went down again late yesterday. Andy couldnt be bothered, so Jack worked alone all night to get it fixed, just so we could open on time this morning. We cant afford to lose all of those sales.

Trinity, I completely understand. Tell me what is so urgent?

Passing Jacks scrap paper to Bill Butterworth, Trinity explained, On Friday, SuperStore made us a great offer to buy The Edge and all of our land. While we are excited about their offer, Jack and I are also very nervous. We are not sure if SuperStores offer is what is best for us and we need your help to analyze our options.

That sounds like a great offer. Tell me more, said Butterworth.

A confident Trinity continued, The Edge is profitable now and we fully expect our profitability to only increase in the future. We had planned to upgrade the equipment and run The Edge for another 10 years before we sell out. If upgraded, our equipment would be more efficient and reliable, reducing our variable maintenance cost per car wash and Jack could spend more time with me and less time maintaining the equipment.

This is a tough decision, Butterworth replied.

On the other hand, if we dont accept their offer, SuperStore will move on to another location and we could be passing up a golden opportunity to retire. Please, we really need your input.

I would be happy to help. What financial information do you have? Butterworth asked.

Trinity handed Butterworth a paper with handwritten figures, Yes. While Jack was working last night, I put together forecast and financial data for the future.

Thanks. I will have something for you tomorrow morning.

Thank you. Jack and I look forward to hearing your recommendation. Trinity said as the meeting ended.

Case Requirements (Submit only your responses remove the above information before submission)

Case Forecast and Financial Data

Assume the role of Bill Butterworth, the accountant, and complete the following requirements using the forecast and financial data provided in Figure 1 to analyze and advise the owners of The Edge Car Wash. All requirements should be written in a professional manner and include an in-depth discussion of your analysis and your findings. Calculations must be submitted in the Excel template provided and be derived using formulas and cell references whenever possible.

1. The Houstons have a difficult business decision to make impacting their family, employees, and community. Identify and discuss the Houstons key issue(s).

Written response to Requirement 1 goes here.

2. Provide an initial evaluation of the car wash profitability.

   1. Calculate the current breakeven car washes (dollars & car washes), margin of safety and degree of operating leverage under the following scenarios:

      1. If the Houstons decide not to upgrade the equipment

      2. If the Houstons decide to upgrade the equipment

Responses for Requirement 2ai and 2aii go in the Excel template provided. The use of formulas and cell references (when applicable) are required for credit.

2. Provide a detailed explanation to assist the Houstons in understanding the impact the upgrade would have on the breakeven, margin of safety and degree of operating leverage. Based on this, discuss whether you would recommend upgrading the equipment. Why or why not? Is this enough information to base your decision on? Why or why not?

Written response to Requirement 2c goes here.

3. Assume the Houstons decide to upgrade the equipment and continue to operate The Edge.

   1. Using a contribution margin formatted income statement, forecast The Edge after-tax net income for each of the next ten years after the upgrade.

Responses for Requirement 3a go in the Excel template provided. The use of formulas and cell references (when applicable) are required for credit.

2. Consider Trinitys motivation, when she generated the forecast and financial data. How could her motivation impact the accuracy of the forecast?

Written response to Requirement 3b goes here.

4. Calculate the net present value of after-tax cash flows if the Houstons upgrade their equipment and sell after 10 years. Calculate the after-tax net cash flows if they sold today.

Responses for Requirement 4 go in the Excel template provided. The use of formulas and cell references (when applicable) are required for credit.

1. Recommend if the Houstons should accept SuperStores offer or continue to operate The Edge. Provide a detailed explanation of your recommendation to ensure the Houstons understand your assessment.

Written response to Requirement 4a goes here.

2. List and discuss in detail three nonfinancial pros and three nonfinancial cons of your recommendation from the owners perspective.

Written response to Requirement 4b goes here.

3. Do the nonfinancial considerations impact your recommendation? Discuss why or why not?

Written response to Requirement 4c goes here.

5. Reflect on your calculations from Requirements 2, 3 and 4 and the amount of information provided in each requirement. Discuss how the calculations impacted your recommendation. Did the degree of confidence in your recommendation increase after performing more complex calculations? Which requirement, if any, do you believe is the most informative and why?

Written response to Requirement5 goes here.

6. Provide a detailed discussion (include financial and nonfinancial considerations) on how the Houstons decision to sell or continue to operate The Edge would impact you personally if you were:

   1. One of the Houstons children

Written response to Requirement 6a goes here.

2. A long term car wash employee and graduate of the New Hope Beginnings program

Written response to Requirement 6b goes here.