The Shoppes at Riverside.(Instructor's Note)

Carter, Fonda L. ; Heriot, Kirk

CASE DESCRIPTION

This case asks the students to recommend a decision to a group of individuals on whether or not to pursue purchasing The Shoppes at Riverside, even when the purchase price is minimal ($1). It is based on the actual experiences of one of the authors. The Shoppes at Riverside is a unique business located in a historic building in a downtown area. The store occupies approximately 5,500 square feet of space (leased from a local foundation) and subleases space to dealers selling upscale merchandise including art, antiques, home accessories, and gift items. The store charges a monthly rent to each dealer (based on their booth square footage) along with a 10% commission on sales. The students are given basic information provided by the present owner and are asked to evaluate the information given to project monthly cash flows and then to make a recommendation to the potential purchasers. They are also asked to evaluate and suggest other lines of business that might be added to the present business to increase the profitability of the store. This case is appropriate to use in an Intro to Small Business Class as the size of the business is ideal for any course that emphasizes entrepreneurs or small businesses. This assignment can be completely individually or as a group assignment.

CASE SYNOPSIS

The primary focus of the case is a purchase decision. The information given to the students to utilize in formulating their decision includes store sales by month for each of the last three years as well as operating expenses. From the information given, the students are asked to construct pro-forma cash flows for the year 2007 by month based on their assumptions regarding sales and occupancy levels. They are also asked to research other product lines the potential buyers could add to the store to complement the present merchandise presently being sold by dealers. Although the store does collect rental income, there is a cap on percentage rents at 10% of sales which in turn limits the total revenues of the store. The students are given some ideas on lines of business to research within the questions of the case. They may have others they would also like to research.

A second phase of the case analysis would be to break the case into group assignments and have each group research and prepare presentation on such topics as (1) the various type of advertising options and the related costs applicable to small retail businesses in order to develop and implement a marketing plan; (2) the type of business formation available to small businesses (i.e. Corporation, Sub-S Corporation, Partnership, LLP; (3) additional product lines to add to increase revenues of the business; and (4) the advantages and disadvantages of developing a website and selling "on-line" with this type of business. As a result of the individual and group projects, classroom discussions could be held based on the findings of the groups as well as other current issues faced by small businesses. The advantage of this case is that it presents students with a real-life purchase decision and presents relevant topics for in-class discussions.

INSTRUCTORS' NOTES

Discussion 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.

Students can interpret the information in a variety of ways and the results of the cash flow analysis depends on the students' projections of sales (to determine the percentage rents) and occupancy levels (to determine rental income and advertising income). While some of the expenses are fixed (rent and insurance), others are variable and assumptions have to be made as to their amounts. This question could be assigned to groups or individuals and then discussed in class. It would be interesting to see if the students were aggressive, conservative or somewhere in between in their projections. A sample of a projection is shown in Table One accompanying these teaching notes.

A second question asks the students to identify the advantages and disadvantage of purchasing the business. Some of these could include those advantages/disadvantages listed below. The students may come up with other insights.

Advantages

* The most obvious advantage is the purchase of a business for a nominal purchase fee. The only cash outlay is the initial cash investment in the business to supply cash flow.

* The store has been in operation for almost ten years and has a name and reputation in the community. It is in an established location in an attractive building modified for the specific purpose of selling through different vendors.

* The rent is actually below market value for other rents in the area.

* The majority of the store is sub-leased at the present and the rent from the vendors covers the rental payment for the building space.

* There are large employers in the area that can be target marketed. The store is also across the street from a large hotel and can target tourist traffic.

* One of the potential purchasers is a CPA and could lend accounting knowledge to the business. She also can prepare all of the business tax returns.

* The present manager states she would like to continue with the new owners. With present management continuing, there is no need for the new owners to be at the store on a day-to-day business. However, two of the three potential purchasers do not currently work and would have the time to spend at the business as needed.

* The potential purchasers have other sources of income so that any income from the business does not have to be their primary source of income.

Disadvantages

* A three-year lease is required to be signed on the building.

* None of the three potential purchasers have retail experience other than their present booth ownership.

* Sales have been on a decline since year 2004. The decline is blamed on the road construction in the area but the purchasers do not know if the store traffic will pick up once the construction is completed.

* Tenants are only required to sign a six-month lease. They can pull out given thirty days notice. There is no guarantee that the present tenants will continue with the new owners.

* The uptown/downtown area where the store is located does not have as much retail traffic as the north end of town.

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. Make a recommendation to the owners on your decision.

There is an abundance of readily available information for the students to research to examine the benefits from various forms of organization.

Partnership--A partnership would probably be the easiest and least expensive type of organization to form. A partnership has to be owned by two or more individuals which fits the situation for the three potential purchasers. There are no formal partnership documents to file with any authorities. However, it is recommended that the partners outline the division of responsibilities and the division of profits in a partnership agreement. The partnership itself is not a taxable entity but does file an informational partnership return. The individual partners report their share of the profits by including a Schedule K in their individual returns. The primary disadvantage of a partnership is the liability issue. With corporations, the liability of the owners is limited to the corporate entity itself. With a partnership, the liability extends to the personal assets of the individual partners for debts of the partnership and negligent acts of the partners or employees on behalf of the business.

Limited Liability Partnership--The primary difference between a generally partnership and a limited liability partnership is the partners are not liable under an LLP for acts of negligence committed by the other partners or employees that are not under their supervision. Income is taxed the same as with a general partnership and is passed through to the owners. However, with a limited partnership the partners may lose their liability protection if they work in the day to day operations of the business. An annual fee is generally required to be paid to the applicable stated based on the number of partners. In some states, an LLP form of organization is only available for professional types of businesses such as law firms and accounting firms

Corporation--A regular "C" corporation form of organization primary advantage is that of limited liability. This means that the individual owners are not responsible for the debts of the business. Of course, many banks that open a line of credit for such a small business may have the owners also personally guarantee the debt. The corporation is a legal entity and incorporation documents have to be filed with the state in which the business intends to incorporate. State law governs the exact requirements for a corporation but most states require Articles of Incorporation, Bylaws, the issuing of stock certificates, and annual meetings of the board. One of the primary disadvantages of the corporation is the double taxation issue. The business itself pays income tax on the corporate income and then if any dividends are paid to the owners, the owners would then pay tax on the dividends resulting in "double taxation". The owners can get around this issue by paying themselves a salary instead of dividends. Of course with a salary, they would have to pay employment taxes. Since two of the potential purchasers are not currently employed, they may wish to have some salary in order to build up their social security base.

S Corporation--An "S" corporation is a standard corporation that files a special election with the IRS for special tax status. The liability protection is the same of a regular corporation but taxes are not paid at the corporate level on corporate income. Taxes are paid similar to a partnership in that the income is passed through to the owners and the owners include their share of profits on their individual tax returns. There are certain restrictions to obtaining Subchapter S status and they include a limit on the total number of shareholders (100); all shareholders have to be U.S. citizens; and S Corporations cannot be owned by most other forms of businesses including other S Corporations or C Corporations.

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 outsourced); 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.

With small business owners, the problem is sometimes where to start in obtaining information on the start-up costs for a line of business. Students may want to interview retailers to determine how they started their business and where they found their information to enable them to start-up the business. Most cities or states have small business development organizations that assist small businesses in this process. Another place to research is the Internet. An abundance of information exists on company websites.

In this particular assignment, the first step could be just to "Google" stationery. A list of online retailers will then appear. By going to individual online retailer's websites, card companies that appeal to the individual performing the search can be identified. It is always a good step to check out the competition or similar companies also and see what they are selling. The next step would be to locate the website for the card companies. Some of the card companies provide information on their website on how to become a dealer.

There are two primary types of card companies. The first is the company that prints personalized stationery, invitations, and cards in-house for their dealers or stores. Some of the more well known are Royal Imprints, Crane, and Embossed Graphics. To become a dealer you generally have to pay a start-up fee ($200) and then purchase individual albums which range from $50 to $250 each. The albums are used to display the samples in the store. The profit to the store is then typically 45% - 50% of the sale. Orders are generally placed by the store online with the use of a dealer number and password. Purchasing from this type of Card Company is advantageous in that there is no inventory to carry and no overhead other than the upfront costs of purchasing the albums.

The second type of company sells designed card stock that can be printed by the store or dealer based on the customer's specific information related to invitations to special events. There are many of these types of companies. Typically, a store can become a dealer just by purchasing a minimum opening order which usually runs from $250 to $300. Once a store purchases the minimum quantity, the card companies furnish sample and catalogs for orders. It is just a matter of how many lines of card stock a store wants to sell that determine the initial investment required. The store would also need a dedicated computer and a high quality color printer. Color printers with multiple ink wells are suggested and can run from $500-$600. There are computer programs that are specially designed for printing invitations. One recommended by multiple card companies is Mountain cow software. The professional version of this software costs approximately $1,000 for one computer.

Students may come up with a multiple of amounts for an initial investment. The advantage of such a start up business such as this is that the store can gradually add lines of stationery to the inventory once they get established. The important part of this exercise is that it teaches student how to do research on starting or adding of business. Often the small business institute in the area can assist them with financial information; it is how to go about learning "what" to sell that is more difficult. In reality, it is also nice to be able to visit the merchandise marts with showrooms. In this particular case, the invitation line of business was added to the store once purchased. A wealth of information was obtained from just talking with the representatives of the card companies during a visit to the Atlanta Merchandise Mart. One showroom or rep group may represent between ten and twenty lines of cards. In visiting a showroom, dealers can pick out the lines they like and order an assortment of cards. Showroom representatives are a very useful source of information

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.

Some of the advantages and disadvantages identified by the authors are listed below. Some of the students may have experience in the restaurant industry and may have other insights.

Advantages

* The primary advantages would be a draw to bring additional customers into the store.

* A restaurant would bring an additional source of direct income to the store.

* Space is available for the opening of the lunch time restaurant, although the space is limited.

* No additional overhead from the store as the store is already open for retail sales.

Disadvantages

* In order to prepare food at the store, it would require renovation of the kitchen area to adapt it to a commercial kitchen. The alternative would be to bring in food on a daily basis from a restaurant. If the food is brought to the store, then there is the problem of having enough food and the right kind of food ordered on any given day. It would be possible to run out of food or be left with too much food.

* An additional employee(s) would have to be hired for the lunch time traffic as the employees in the store would not be able to handle the restaurant and the store traffic also.

* The store would now be subject to regulations of the Food Administration.

* The store would lose the space that could be devoted to retail items and possible rented to vendors with a guaranteed rental amount.

* There is already a Quiznos restaurant below the store and the lunch time restaurant would be in competition with the Quiznos.

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 EBay). Research the options available and the advantages and disadvantages of selling such merchandise on-line.

Again, this is a case that requires the student to research the options available. Since the store already has a website and a domain name, they have a start in developing a website. The next step should be to develop a basic layout or site map for the website. Students may have several different ideas on how to plan the website. For example, the home page may have links to individual booths and a web page on each booth. Another alternative would be to group like vendors into one space (i.e. antiques, art, gift items, etc..) with a link from the home page to each sub-grouping. If they are directed by the instructor to include a more detailed plan, it should include design features, more specific content, and the type of graphics to include.

Once the basic design is completed, students can then research pricing and how to develop the design. The price of hosting is typically about $10-$12 a month and there are a multiple of providers including ATT, Yahoo, and AOL. Once a host is selected, the next step in the process is deciding who will actually develop the website design and publish it to the Internet. This can be done internally by the store if someone has the expertise or it can be outsourced. From the authors' experience, the least expensive method would be to utilize some type of site building product such as Yahoo Site Builder Software. This software can be downloaded free if the store utilizes Yahoo for web site hosting. The software is simple to use and does not require any coding. However, it does not have as many bells and whistles as other more developed software. It may be a good inexpensive start for a startup website. It is as easy to use as any publishing software.

A second alternative would be to utilize some type of more advanced software such as Microsoft Expression Studio. The full version costs approximately $699. This is a user friendly program that does not require knowledge of coding html. However, students will have to design some type of navigation map for the website.

An alternative would be to outsource the website design to a free lance designer. It is the authors' experience that the initial develop of a website can average from $2000 for basic develop to $3000 for a website including ecommerce. The advantage of outsourcing would be more advanced website design and the fact an outside designer should have the knowledge necessary to properly test the website for different browsers. The disadvantages would include the higher costs and the additional factor that any changes to the already designed web pages have to be sent back to the designer for completion. However, some designers have an add-on package to allow the client to edit the web pages once completed.

Once the website is published, there is the challenge of developing a plan to drive internet traffic to the website. The students should research the different search engines (i.e. Google and Yahoo) available as well as their relative cost. They may also include in their plan a way to advertise their website link campaigns. Outside designers allow have plans to assist companies in marketing their website. One was developed for this actual company at $215 per month.

The question of selling such merchandise on-line is challenging. There are two basic avenues of selling on-line. The store can develop their own on-line presence through their own website utilizing or they can create an EBay store. Student could research both EBay and similar companies' website to obtain ideas on how this could be accomplished. Because the merchandise is unique, it presents a unique challenge to selling online.

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.

This question might be utilized in a more advanced course as it requires the student to research the available advertising in the area and then to develop an advertising budget. It is a relevant question to small businesses as they have to identify the available advertising and the relative costs before they can begin to budget their advertising dollars.

Unless small businesses utilize some type of advertising agency, the business is on their own to decide the best avenue of advertising. It is to the small business manager's advantage to develop some type of advertising budget. Businesses receive calls on almost a daily basis from newspaper, radio, magazine, and television sales people all trying to get the business to advertise with them. When students study marketing and advertising, they are typically given the information in a problem. This case suggests they actually do the footwork to find out the local advertising options and rates in their area. The results from this question depend largely on whether the school is in a small town or a large metropolitan area. For example, in the town where the store in this case is located, there is one local daily newspaper, three cable television carriers, three local network television stations, two bimonthly upscale magazines targeted for the area, several radio stations, and an Army magazine for the local army base. Advertising rates can be very expensive depending on the advertising median. Other advertising options include direct mail, billboards and internet advertising. The case provides for useful advertising research that can lead to classroom discussion on how information on advertising and advertising rates is obtained.

AUTHORS' NOTE

Certain names and facts have been disguised in this case.

Fonda L. Carter, Columbus State University

Kirk Heriot, Columbus State University Table 1: Sample of Projected Cash Flows Jan. Feb. March April May Projected Sales (1) 20867 24592 33300 24240 31491 Rental Income(2) 9119 9119 9119 9119 9119 Percent Rents (3) 2087 2459 3330 2424 3149 Adv. Revenue (4) 6100 Total Revenues 11206 11578 18549 11543 12268 Expenses Rent 4322 4322 4322 4322 4322 Utilities 800 800 800 800 1000 Payroll (5) 3084 3084 3084 3084 4626 Insurance 183 183 183 183 183 Janitorial Service 350 350 350 350 350 Telephone 300 300 300 300 300 Advertising 600 600 600 600 600 Operating Expenses 200 200 200 200 200 Wrapping Products 417 492 666 485 630 Payroll Taxes (6) 236 236 236 235 354 Gross Receipts Tax 162 73 100 73 95 Total Expenses 12247 12233 12433 12224 14133 Proj. Net Income -1041 -654 6116 -681 -1865 June July Aug. Sept. Oct. Projected Sales (1) 25477 24081 21173 26462 27529 Rental Income(2) 9119 9119 9119 9119 9119 Percent Rents (3) 2548 2408 2117 2646 2753 Adv. Revenue (4) 6100 Total Revenues 11667 11527 11236 11765 17972 Expenses Rent 4322 4322 4322 4322 4322 Utilities 1000 1000 1000 800 800 Payroll (5) 3084 3084 4626 3084 3084 Insurance 183 183 183 183 183 Janitorial Service 350 350 350 350 350 Telephone 300 300 300 300 300 Advertising 600 600 600 600 600 Operating Expenses 200 200 200 200 200 Wrapping Products 510 482 423 529 551 Payroll Taxes (6) 236 236 354 236 236 Gross Receipts Tax 76 72 63 79 83 Total Expenses 12453 12421 13896 12276 12300 Proj. Net Income -786 -894 -2660 -510 5672 Nov. Dec. Total Projected Sales (1) 47857 81253 388322 Rental Income(2) 9119 9119 109428 Percent Rents (3) 4786 8125 38832 Adv. Revenue (4) 11800 Total Revenues 13905 17244 160060 Expenses Rent 4322 4322 51864 Utilities 800 800 10400 Payroll (5) 3084 2646 39654 Insurance 183 183 2196 Janitorial Service 350 350 4200 Telephone 300 300 3600 Advertising 600 600 7200 Operating Expenses 200 200 2400 Wrapping Products 957 1625 7766 Payroll Taxes (6) 236 1267 4099 Gross Receipts Tax 144 244 1165 Total Expenses 12768 14191 135544 Proj. Net Income 1137 3054 24216 (1) Projected Sales based on average sales for the past 3 years (2) Rental Income based on current occupancy levels (3) Percentage rents @ 10% of sales (4) Advertising rates based on current occupancy (5) Payroll Expense Manager Employee 32 10 $320 (Monday--Thurs @ 8 hours a day) Employee #2 16 8 $128 (Two days during the week @ 8 hours a day) Employees 3 and 4 30.5 7.5 $229 (Remaining two days during the week thru Thursday @ 8 hours a day) Remaining 14.5 6.5 $94 (Two employees for employees Friday for 8 hours & 2 employees for Sat. @ 6.50 hours) Total est. weekly * There are 3 weeks payroll of payroll falling in May, Aug. & Nov. for the year 2007 Total esti. bi-weekly payroll $1,542 for 2 wks (6) Unemp. Taxes FUTA of $244 is computed for the first $7000 (. 8%) of the manager's annual salary and then for all of the remaining salaries as no other I workers meet the maximums