The Shoppes at Riverside.

Carter, Fonda L. ; Heriot, Kirk

INTRODUCTION

Laura Lewis, Patricia Robbins, and Mary Farley were eating lunch at a local delicatessen. The ladies were excited about a recent business opportunity that was presented to them by Lucy Taylor, the owner of The Shoppes at Riverside. Lucy wanted to sell her business to someone that would take over her vision for an art and antique store in the uptown Columbus, Georgia area.

Laura: "So what do ya'll think?"

Patricia: "I'm pretty excited about it. I think we can do this."

Mary: "I don't want to jump into this purchase without considering all the facts."

Laura: "Mary what do you mean? Lucy has given us all of the fact as she has given us a copy of a letter (originally written to the local real estate company handling the new lease) outlining all the employees and their pay rates; all of the operating expenses for the store; and the sales by month for the last three years. It all looks good to me."

Mary: "Yes, I am wearing my accountant's hat. We need to evaluate not only the business, but also other issues as well. For example, which one of us is going to manager the business on a day to day basis? I can't do this because I have a full time job. I have the expertise in accounting and finance to advise the business and prepare all the accounting records but that would have to be the extent of my involvement."

Laura: "Patricia and I neither one work. We would be available to manage the store on a day to day basis. Besides, Helen Mitchell, the manager of the store states she wants to stay on with the new owner. We would only have to oversee her. Patricia and I could split the duties. I could handle the employees and their work schedules and Patricia could handle the issues with the vendors".

Mary: "I think there may be other issues as well. Even though the purchase price is minimal, there is the opportunity cost of our time and effort that could be utilized elsewhere. Let's take a couple of days and think about it and evaluate all the advantages and disadvantages. I will prepare a cash flow analysis for the year 2007. We can meet again in a week to make a decision."

CASE HISTORY

The Shoppes at Riverside was originally opened in 1998 by two partners (Lucy Taylor and Sally Owens) in an older brick storefront in downtown in Columbus, Georgia. Columbus, Georgia is located on the Chattahoochee River (separating the city from the Alabama state line) approximately 150 miles southwest of Atlanta. It is the third largest city in Georgia and has a population in the metropolitan area of approximately 250,000 people.

The first building occupied by the store was approximately 3,000 square feet. The original intent of the business was to offer space to art and antique dealers for the sale of their merchandise. The purpose of opening the business was two-fold. The primary purpose was to offer upscale merchandise in Columbus as there were no other businesses that offered quality art and antiques. The second purpose was for it to be a secondary source of additional income for the two owners. The store opened with approximately twenty vendors. The store leased "booths" to these vendors ranging from 100 sq. feet to 200 sq. feet each. Rent was charged based on the size of the booth and ranged from $150 to $250 per vendor per month. The owners of the store also charged each vendor 10% of each sale as a commission and 2.5% for credit card sales to cover credit card fees. The owners were responsible for collection and remittance of sales taxes, credit card processing, and employment of sales assistants. While the original intent was to have only art and antique vendors, in order to lease all of the space, the owners added vendors that merchandised clothing, jewelry and gifts. Vendors were required to complete an application for space and were highly scrutinized to insure a high level of quality merchandise. In fact, the owners knew the majority of the vendors personally. The store also included a "tea room" that served a light lunch. Although no income statements were available for review, the owners stated that business was profitable at this location. Occupancy of the rented booths remained nearly 100% at all times.

In 2003, one of the partners, Lucy Taylor purchased two larger historic buildings in the next block with a separate partner (John Thomas as an investment. Each building housed three floors each with approximately 5,500 square feet on each floor. A floor on each building is located below the street level. The other two floors were above street level and both run parallel to a city street and both buildings take up a side of an entire block. The buildings were renovated from their original use as a clothing factory. The historic buildings' outside facade is attractive old brick. Since the lease at the previous location was up for renewal at the same time, Lucy and Sally then decided to move The Shoppes at Riverside into one of these old buildings. They spent approximately $30,000 in renovating the second floor (street level) of Building One. Renovation included subdividing the 5,500 square feet into booths for individual vendor spaces, adding a counter front/cash register station at the front of the store, installing a security system, installing phone lines, installing wiring/lights in each booth, and a kitchen area in the back of the store. The two bathrooms also had to be updated to comply with the city building code.

At the new location, the owners were able to add more vendors. This building space allowed for 28 booth rentals and 14 wall spaces for rent (see Table Two for a breakdown). Some artists were interested only in renting wall space located between individual booths. At this location, the owners stated the business was profitable for several years. The actual statements were not available for review. In 2005, Sally Owens decided to leave the business and Lucy Taylor bought out her interest. Over the next few years, the store experienced a decline in sales. According to Lucy, one of the main reasons was major construction work that was taking place in the downtown area where the store was located. Each city street underwent substantial work on the sewer lines causing problems in traffic flow. The construction project was projected to last a period of over two years. Even though only one street was under construction at a time, it was a nightmare trying to maneuver around the "construction of the moment". Many shoppers that had frequented downtown shops went to the north area of town. The construction was scheduled to be completed by the end of 2007.

In early 2007, Lucy Taylor and John Thomas decided to sell the two historic buildings to the foundation of a local college. The college had been establishing a downtown campus for the art and music departments. The two historic buildings were located on the block between two new structures the college owned. Adjacent to the two historic buildings was a large parking lot which was deemed a prime location for parking for the college's downtown campus. In the fall of 2007, Lucy Taylor also decided to sell The Shoppes at Riverside. She did not need any secondary income from the shops and basically used the ownership as a hobby. She was willing to sell all of the equipment, including cash registers, security system, sound system and inventory (a few books and wrapping products) for a nominal amount. Her main goal was to have someone take over the business that would continue her vision for an art and antiques store.

POTENTIAL PURCHASERS

Three of the present vendors (Patricia Robbins, Laura Lewis and Mary Farley) of The Shoppes at Riverside were approached by the owner, as well as the president of the Uptown Business Association, to see if they would be interested in purchasing the business. The potential purchasers were very familiar with the business but none of them had actual retail experience other than their present booth ownership. Patricia Robbins and Mary Farley owned a booth together featuring furniture and home accessories. Laura Lewis owned a booth with another individual. All three were good friends. Patricia Robbins and Laura Lewis were college graduates but at the present time did not work by choice. However, since they did not work they would have the time to spend on a day to day basis with the on-sight management of the business. Mary was a CPA but was currently teaching accounting at a local college. Her contribution would be financial advice as well as all of the bookkeeping duties of the business, including payroll taxes and returns; sales taxes and returns; and any other business related matters. Their initial purchase price would be minimal ($1). Lucy, the present owner, along with the management of the local college foundation and the management of the Uptown Business Association were looking for someone to purchase the business and retain its current retail focus.

The purchase price would include two computers; computer retail software (specifically written for the consignment store); build-outs for the booths including electrical outlets for each, a large front counter for the cash register with a laser printer; a kitchen area with a free-standing ice maker, a refrigerator, a microwave, sink, and built in cabinets; two bathrooms; all wrapping products (tissue paper, ribbon, cellophane bags, and shopping bags); a small inventory of books; an installed security system; and a sound system. The present owner basically wanted to walk away from the business and leave everything.

The owner has made available information to the potential purchasers in order to make their decision. A summary of the relevant information is given below.

STORE LOCATION

The store is located in approximately 5,500 square feet of space. It is an open building with walls separating the facility into individual booths. The walls between the booths run approximately 80% of the height of the ceiling leaving an open, airy feeling to the store. It is located across the street from the City of Columbus Center for Performing Arts, a Marriott Hotel, and the local convention center. While more retail businesses have located in the north end of town, local retail business in the uptown area has begun to grow again with the scheduled completion of the construction on the major streets. A local uptown business association has also started a more concentrated marketing effort for the "Uptown Area" (previously referred to as downtown Columbus). One of the adjacent buildings to the new store location also houses the local Convention and Trade Bureau and the floor below the store houses a Quiznos restaurant.

While the store is not located in the "booming" north end of town, there is potential for retail development. There are several major employers in the uptown/downtown area. One is a major credit card processor with approximately 3,000 employees in their uptown campus. It is located seven blocks away on the other side of the uptown area. Another employer is a bank holding company with approximately 500 employees located only three blocks away. A little further away but still within a close driving distance is the home office of large insurance company. There is also the local government center (two blocks away) as well as many smaller businesses, primarily law offices. One of the challenges of the new owners would be to target market to these companies and promote awareness of the store.

STORE INCOME

The store has several sources of income. There are direct store sales primarily from inventory of books (cook books and art related books) owned by the store itself. There is additional income from vendors in the form of rent and commissions. Each vendor pays three types of fees. A fee for the booth rental (the rental rates for the available booth and wall spaces are shown in Table Two); a percentage rent or 10% of each sale as a commission; and a fee twice a year for advertising. The fee for advertising is $100 for a booth renters and $50 for wall renters and is due on March 1 and October 1 each year. At the present time, the majority of the booth and wall spaces are rented. However, there are a few vacancies. The present owner stated she has not tried to rent these vacant spaces as she is not sure that she will continue the business if she cannot fine a purchaser. She does have a waiting list for individuals wanting to lease space. Vendors are required to sign a six-month lease and pay the first and last months' rent payment upon signing the lease. They are to give thirty days written notice to terminate the lease after the initial six-month period.

Rent Expense

The building the store occupies is currently being managed by a local real estate company on behalf of the foundation. With new ownership, the monthly rental will be $4,322 and a three year lease will be required. This rental rate is below local rental rates per square foot in the area. The rental payment includes the utilities for water and repairs for major maintenance costs. The lessee is responsible for minor repairs.

Utilities

Monthly electricity cost runs from $800-$1000 per month. It is typically higher in the summer months. The building is all electric and there are no other utility costs.

Employees

The store hours are from 10:00am to 5:30pm on Monday thru Friday and from 10:00am to 4:00 pm on Saturdays. The store is closed on Sundays. Two employees are needed during these hours and they usually arrive 15 minutes before the store is opened and leave 15 minutes after the closing time. They do not take a lunch hour but are allowed to take a break and eat lunch in the back kitchen area. During the holidays, additional employees may be needed. One employee acts as a manager and works four days (Monday--Thursday) a week and is paid $10 an hour. The manager has worked at the store for five years and would like to continue with the new ownership if possible. A second employee works two days during the week and is paid $8 an hour. Two additional employees work one day a week and are paid $7 an hour. The rest of the hours are completed by part-time employees paid $6.50 per hour. Employees are paid bi-weekly for the week ending the previous Saturday. The first payroll in the year 2007 is January 11th. The employees receive no benefits other than the payroll taxes required by law.

Insurance

Insurance has been averaging $2200 a year and includes general liability and workmen's compensation. It does not include any insurance on the items owned by the vendors but does include property insurance on the items owned by the company.

Janitorial Service

The store provides janitorial service for the common area, kitchen area and bathrooms. The cleaning crew comes once a week and the charge has been running $75 per week. Vendors are responsible for cleaning their own booths.

Advertising

Lucy Taylor, the current owner has an advertising contract with the local newspaper. This contract is $240 a month and includes three advertisements per week in a local newspaper. An annual contract has to be signed to obtain this rate. Some advertising is also done in two local magazines. Both magazines are bi-monthly and average $350 for a VV page ad space. Lucy stated she tried television advertising but it was too expensive in the current market. Lucy stated that the most effective advertising seemed to be direct mail. She currently has a list of approximately 1,200 customers. The cost to print and mail a basic two-color postcard averages around $600. She usually sends out a postcard twice a year. While some of the cost of the advertising is supplemented by the required fee, the cost of advertising in the past has been over and above that paid by the vendors. At the current time, there is no utilization of Internet advertising. The store does have a basic website that contains only two pages of information.

Telephone

The cost of telephone service averages around $350 a month and includes a two- line business phone and a separate line for a fax machine. Currently no Internet listing is utilized and there is no Internet connection. To add Internet to the present computers, it would add $60 a month and to add an Internet advertisement on Yellowpages.com, it would add approximately $95 a month.

Other operating expenses

Other operating expenses include store supplies (cleaning supplies, printer paper, bathroom supplies, etc..) and average up to $200 a month. Wrapping products (gift bags, tissue, and ribbon) are frequently used as the store offers "free gift wrapping" as a customer service. The wrapping products along with the bags used in each sale average 2% of sales.

Taxes

As stated previously, the store pays employment taxes on employees consisting of FICA at 7.65%; State Unemployment taxes on the first $8,000 of earnings at 2.7%; and Federal Unemployment taxes on the first $7,000 in earnings at .8%. Other taxes and fees include an annual fee for a business license ($100) and a fee for gross receipts (or .03% of each sale). The store collects and remits the state and local 7% sales taxes on all sales.

THE PURCHASE DECISION

The three individuals (Laura Lewis, Patricia Robbins and Mary Farley) need to evaluate the information given to them by Lucy and decide if they want to "purchase" the business. If they decide to purchase the business, they would also be required to sign a three- year lease on the building. An investment of cash would also be required for operating expenses and they would need to set up a credit card or line of credit with a bank. If the business is purchased, they also want to evaluate adding a line of business to increase direct income to the store owners. It would be essential for the new line of business not to compete with merchandise currently sold by the present vendors. Some of the types of businesses considered would be a stationery/personalized gift business or a lunch time restaurant. Other decisions to be made if the group decides to purchase the business would be the type of business organization to form with the three individual owners and how the management duties would be divided between them.

QUESTIONS

1. Table One presents monthly sales data for the last three years. Table Two presents the rented booth spaces and their rates. Based on the sales data, the rental data, and the operating expenses outlined in the case, construct a monthly projection of cash flows by month for the year 2007. It is up to the individual or group to be conservative in the occupancy percentages and sales, use averages or be aggressive in the projections. Based on the completed cash flow analysis, make a recommendation to the three potential purchasers as to whether they should purchase the business. Include in your presentation, both the advantages and disadvantages (identified from reading the case) of purchasing the business.

2. If the three individuals decide to purchase the business, what would be the best type of organization to form? Prepare a presentation to include the advantages and disadvantages of a standard partnership, an LLP, a C corporation and a Subchapter S corporation.

3. One of the lines of business the potential owners are considering is a "Personalization Station" center including custom printed stationery; on-site printing of invitations; customer ordered stationery and invitations sold to dealers printed by the stationery companies; wedding invitations and embossed stationery; monogramming for towels, handbags, and other miscellaneous items (the actual monogramming would be out-sourced); personalized jewelry and other miscellaneous personalized items. The new owners could utilize the space in one of the larger vacant booths to display the merchandise. There is currently only one retailer in the area offering an extensive amount of personalized merchandise and it is in the north end of town. The potential purchasers believe this to be a viable line of business as they are of the opinion that personalized merchandise is very popular in the southern United States. Research the internet and visit some retailers in your area and interview them on the start up costs for such a business. Develop a presentation to the new owners on the advantages and disadvantages of staring this new line of business.

4. Another type of business the new owners might consider is a lunch time restaurant or a "tea room" as was located in the previous location. A lunch time menu could be a draw for bringing in the type of clientele shopping for art, antiques and upscale gift merchandise. There is a small space that could be utilized for approximately five to six cafe type tables and chairs that could seat four diners each. The kitchen is not equipped as a commercial kitchen (as required by regulations) and would have to be renovated. Another idea would be to have a local restaurant deliver the food for the day. Interview a local restaurant owner and research other sources to determine the startup costs for opening a small restaurant. Evaluate the advantages and disadvantages and make a proposal to the potential purchasers.

5. At the current time, the business does not have any type of on-line presence other than a two page website. The potential purchasers are interested in developing a more informational website and possibly include information on each vendor. Develop a basic plan for designing the website and the information that should be included. Include in your plan, the anticipated cost for the website design. An additional consideration is the ability to update the website on a regular basis. The cost of the plan should include the cost for updates. Another selling strategy that could be presented to the potential purchasers is the feasibility of selling some of the original artwork and antique furniture on-line. This could be accomplished either through the company's own website or through a website service such as godaddy.com. Research the options available and the advantages and disadvantages of selling such merchandise on-line.

6. Research the type of advertising available to small retail stores in your area. From the information on advertising options available in your area, develop an advertising budget and make a recommendation for allocation of the advertising dollars between newspaper, local magazines (if any), television (local network and cable), radio, billboards, internet and direct mail for The Shoppes at Riverside.

AUTHORS' NOTE

The names in this case have been disguised.

Fonda L. Carter, Columbus State University

Kirk Heriot, Columbus State University

Table 1: Sales by Month

Month           2004       2005       2006

January      $29,044    $20,115    $13,441
February     $26,807    $26,863    $20,107
March        $55,987    $23,742    $20,170
April        $32,554    $19,304    $20,863
May          $33,069    $31,246    $30,158
June         $30,853    $23,255    $22,322
July         $31,715    $18,881    $21,646
August       $21,600    $19,451   *$22,468
September    $22,029    $27,199   *$30,158
October      $27,446    $22,690   *$32,450
November     $53,884    $40,408   *$49,278
December     $81,744    $76,684   *$85,332
Totals      $446,732   $349,838   $368,393

* Projected as the initial decision process started in August 2006.

Table 2: Rental Space and Rates

Space                       Description of Vendor                Rental
                                                                 Amount

Booth 1     A Beau          Antiques, Silver frames, silver       $360
            Collection      serving pieces, and other
                            decorative household items

Booth 2     Farm Friends    Homemade casseroles, pies and         $240
                            other food items along with
                            kitchen accessories

Booth 3     Just for Ewe    Reproduction furniture, lamps,        $540
& Wall 4                    decorative household items and
                            gift items

Wall 5      POP             Contemporary original artwork by      $60
                            local artist

Booth 6     Portebellos     English antiques, lamps and home      $490
And Wall                    accessories
30

Booth 7     AEW             Antique furniture and home            $300
                            accessories

Booth 8     ASLR            Antique furniture, lotions, soaps     $300
                            and food gift items

Booth 9     Wildwood        Antiques and lamps and interior       $375
            Antiques        design items from a local interior
                            designer

Walls                       Original artwork by young local       $50
10& 11                      artist

Booth 12    Market House    A smaller corner booth featuring      $140
                            home accessories and a new baby
                            gift selection

Booth 13    Vieux           Antiques, lamps and paintings with    $250
            Carre           a French flair

Wall 14     Jo              Original art by a local artist        $42

Booth 15    Fifty           A smaller booth featuring pottery     $100
            Fingers         from local artist

Booth 16    KRJ             English antiques, lamps, and china    $220
            Antiques
Wall 17                     Vacant                                $30

Booth 18    Martha's        Funky antiques and paintings from     $250
                            the collection of a local interior
                            designer

Wall 19     Helen           Local artwork from a local painter    $30

Booth 20    Envision It     Furniture, lamps and decorative       $250
                            accessories for the home

Booth 21    Our Friends     Furniture and home accessories        $490

Wall 22                     Original artwork by local artist      $50

Booth 23    A Beautiful     Gift items                            $270
            Touch

Booth 24    Blueberry       An extension of a local store in      $270
            Hill            the north area of town with small
                            furniture pieces, food items,
                            candles and other gifts

Wall 25                     Vacant                                $50

Wall 26     Spunky          Spunky bright colored gift items      $280
And         Skunk           including serving pieces, linen
Booth 27                    napkins and towels, and other
                            brightly colored gift items

Wall 29     JT's            Gift items hand made by the owner     $30
            Collectibles

Booth 30    Cottage         Soaps, lotions, and small home        $220
                            accessories

Wall 32                     Vacant                                $40

Booth 33                    Vacant                                $250

Booth 34    LOGO            Embroidery and monogramming items     $130

Wall 35     PCJ             A collection of elegant handbags      $42

Booth 36    Soiree          Local and state food delicacies       $300
                            and serving pieces

Booth 37    Collectibles    Collections of furniture, original    $300
            Unlimited       pottery and home accessories

Booth 38    Book Bugs       New and gently used book              $360
                            collection

Booth 39    NAF Interiors   Collections from the travels of a     $300
                            local interior designer

Booth 40    Vacant                                                $240

Booth 41    Nancy's         A collection of affordably priced     $240
            Jewels          jewelry

Booth 42    Miss Joni's     A collection of gift items            $360
                            including those with a collegiate
                            theme

Booth 42    Lyndee's        Original pearl jewelry designed       $480
                            and created by the owner along
                            with imported children's clothes

Booth 42    Erwin's         Antique furniture, lamps, antique     $390
                            book, and home accessories