You are considering starting or acquiring a business that will brew and sell coffee. Determine which option is best and whether it is really a smart idea, as well as what other financial dangers you may be exposed to and how to manage them.

Option 1: Start-up

assumptions:

You estimate that you'll need $1,500,000 to get started with starting up shop and purchasing fixed assets.

• You expect to make a EBIT of $150,000 in year one, $250,000 in year two,

$350,000 in year three and $300,000 after that.

• Depreciation expense will be $150,000.
• You expect to need to spend $50,000 per year on capital expenditure every year going forward
• You expect average debtors to be $200,000, inventory to be $220,000 and accounts payable to be $100,000.

You plan to sell the company at the end of ten years, and you expect to get a sale price based on Enterprise Value being 3.5 times final year projected maintainable earnings.

Option 2: Acquisition assumptions:

You also have the option of purchasing an established roast plantation. The P&L can be found here. You believe the following results provide a credible foundation for future performance:

• There is no rent expense included in these owners own the buildings. You will need to rent this and expect rent expense to be $120,000.
• no remuneration included for two working owners. You will need to pay yourself and hire an additional person to replace them. You think fair remuneration for these two roles is $850,000 each.
• No legal fees
• You feel that the business will also need to spend $50,000 per year on capital expenditure going forward.
• You also expect average debtors to also be $250,000, inventory to be

$100,000 and accounts payable to be $100,000.

• The vendors are asking $1,850,000 for fixed assets and goodwill.
• At the end of 10 years, you intend selling the business and hope to receive a sale price based on Enterprise Value being a multiple of 3.5 times final year future maintainable earnings.