Fenchel Lampshade

Topics: Corporate finance, Lampshade, Generally Accepted Accounting Principles Pages: 7 (911 words) Published: March 16, 2013
1) What is your assessment of the business of Fenchel Lampshade Co.? b. What is the Opportunity, People, Context, and Deal
c. What can go right? What can go wrong?
Steven Rogers (CEO)
-Business analysis
-Personnel management

John Smith (Production Supervisor)
-15 years on the job

Geri Wandall (Office Manager)
-5 years on the job

Production Workers
-67% of workforce is over 40 years old & 55% of workforce has limited experience (1-2 years)
Competitive Advantage
-Industry leader in shadow-free lampshades
-Reputation for quality and service

Market Characteristics
-Market size is 20 million
-Growth is 5% per year
-34 competitors (Low competition due to transport costs)
-Seasonal sales (Summers are slow / Holidays are good)

Product Characteristics
-Hand made
-Plenty of variety in shapes, materials, colors and trim
-Made to specifications
-Slow replacement interval

Manufacturing Characteristics
-Production is started with an order
-Made to specifications

Distribution Channel
-Department stores
-Independent retail stores

Importance of Scale Economies
-Only important for sourcing raw materials

Working Capital Profile
-Most of the sales are on credit
-Working capital as of 1987 was $139K

Plant & Equipment Requirements
-Machinery and furniture are currently $32K and are projected to increase to $50K
Potential Opportunities
-Increased cash flow due to lower owner salaries
-Selling lampshades to high quality lamp manufacturers
-Building retail outlets
-Taking advantage of minority incentive programs

-Computers were on early adopters phase
-Bonds and T-bills are at above average rates

What can go RIGHT?​​​​​​​​​​- The company can transition smoothly & Sales can increase dramatically if a deal is landed with Her’s Lamp Shade Shoppe in Wisconsin (Carry Silk-o-lite but not fenchel)​​- The lease is renewed at the same monthly cost and aggressive marketing efforts can increase brand awareness

What can go WRONG?​​​​​​​​​​- Fenchel can lose an account due to departmental consolidation & the threat of competitor locating in Chicago or Midwest. ​​​​​​​- Funding may not be approved & there may be a learning curve with the new personnel such as bringing technology into the workforce.

2) What are the elements that make this opportunity and this business financially attractive (or not), such as margins, cash flow, working capital characteristics, and other?
Basically, there is low competition, strong reputation, loyal customers, company has been operating at a profit. This opportunity is attractive given its gross (48%) and its net (16.5%) margins. Being that its production is made to order, its cash flows will not be as quick and constant as most companies who hold inventory, but it will decrease its risk in collections. Working capital would be the company’s main limitation as it has to produce, store and ship any size order before it is paid. As the company has much growth potential and high brand awareness, it can increase its sales to key target markets and continue to generate profits.

3) Does it make sense for Steve and Michele to buy Fenchel? Are they paying a reasonable price? (Please bring your analysis and valuation in your computer or a printout and be ready to present in class) 4) How do you assess the proposed financing plan from both a short-term and a long-term perspective? * Bank Loan

Principal: $300,000
Interest rate: 11%
Payment amount: $33,300 / $2,775 (Assuming 10 Years)
* City of Chicago
Principal: $100,000
Interest rate: 6.75%
Payment amount: $21,360 / $1,780
* State of Illinois
Principal: $50,000
Interest rate: 5%
Payment amount: $10,500 / $875
* Fenchel Family
Principal: $75,000
Interest rate: 4.5%
Payment amount: $19,110 / $1,592.5
Principal: $115,000
Interest rate: 9%
Payment amount: $7,800 / $650

The financing plan...
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