Question

Marcie Overstreet had begun her specialty vitamin-manufacturing firm 7 years ago, before the craze over supplements began. She developed her multi-vitamin based upon her regimen for fitness competitions in which she had been a highly celebrated champion for many years. Her startup was modest, producing revenues of $125,000 ($70,000 net profit) in the first year. She decided to expand rapidly using debt and cash flows to grow to revenues of $10,000,000 ($4,500,000 net profit) by her 6^th year. While her firm could be considered highly leveraged, the cash flows more than covered the interest and she enjoyed the autonomy that debt financing kept in place. By the end of the 6^th year her debt in the firm was $10,000,000 ($2,000,000 long-term). The book value of $12,000,000 is deceiving in that most of her equipment was listed as fully depreciated. She has 75 employees (50 full time and 25 part time). At this time her production capabilities have been maxed out and she has backlogged orders that would indicate a 20% increase in production capacity would be needed to adequately meet the demand. In order to accomplish this, another round of financing will be needed to expand to the “next level”. In addition, she believes that the company could be quite successful in the healthy foods arena if given proper level of financing for production equipment and market entry advertising. At age 55, Marcie really isn’t sure that she wants to continue the pace that she has been keeping for the past 7 years. Her children, one 25 and the other 23, have no interest in the business other than enjoying the lifestyle it provides them. The overall market has been expanding at an annualized rate of 16% over the period with last year’s rate at an all time high of 22%. She wants to be certain that she doesn’t regret getting out of the industry at the wrong time and missing a profit opportunity, however, she wants to enjoy the fruits of her labor while she is still relatively young.   Discuss her situation…what are her options? Which would you advise her to select and why?

Answer 1

The situation that Marcie Overstreet is in right now is something which comes from poor forecasting of expenses and she was not really aware of what was actually going on. Her thought process was that if she expands her business she will double or triple revenue from what it was right at the start. Therefore, she pumped in money for expansion which inturn increased her debts and finally she was in a situation where she had to pump in more money to stabilise the business. The irony is that the stage at which she is in such a position is the growing stage of that market and it is the time to capitalise on the growing market.

In this case, there are two options left for Marice.

She can either take the risk of pumping in more money which would be adequate to suffice the current production levels as well as rotate the money that she is earning from the delivered orders atleast till the time she reaches a break even. If she can do the rotation in a way where she spends amount only on certain factors like production material, sufficient labor required to do the job or even reduce the labor without which she can manage the show. By doing this, she would reduce her cost and tehreby her chances of getting into break even would be much quicker.

The second option would be merger. This is an option in which she can partner herself with another investor who would want to be associated in this business. Since her sons are not interested in the business, its better if she ropes in someone who has the money and the business sense to make complete use of this growing market. By doing this, her risk of getting into debt reduces, of course, her profit levels also decreases but that will come only after she clears her debts. Overall, she will be able to overcome the situation a little earlier than the time she would take to overcome if she is alone.