Answer each question with a max of 100 words. Dot points can be used and any references as well. Answer questions from the case study
CASE STUDY nxt2U Bars Pty Ltd
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This case study will assist you in developing a practical understanding of theory covered in workshops in lectures. By critically analysing and understanding the issues facing nxt2U and its owners, you will be able to formulate:
1) Your reason for choosing self-employment
2) Your choice of industries- retail goods, wholesale goods and services
3) Your choice of participating in business- buy an existing business, buy shares in an
existing business, and establish a new business
4) Your choice of channel to market- physical, on-line and omni
5) Your choice of business models- Independent business, franchising, licensing, co-
operative, and distributorship
6) Your choice of legal structure- sole trader, partnership, company, and trust
7) Your decision regarding contracts and agreements, tax registrations, insurance, human
resource, corporate image, marketing, digital presence/SEO, licenses, and banking
8) Your choice of financing the business
9) Your revenue and cost budget
10) Your plans for resource management, staff training & incentive and customer relationship
11) Your key performance indicators (KPI) to monitor business performance
12) Your local area marketing, advertising and promotion and resourcing plans
13) Your plan to manage your supply chain, your capacity and to grow intellectual property
14) Your plan to exit the business
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1) Definition and evolution of entrepreneurship
2) Economic and behavioural profile of an entrepreneur
3) Role of entrepreneurship in economic development and growth
4) Definition of a small business
5) Economic profile of a small business
6) Role of small businesses in economic development and growth
7) Risk v reward model for entrepreneurship and small business
8) Motivations for self-employment
9) Risk v reward model for self-employment and employment
10) Opportunities for self-employment
11) Options of business ownership models and the relational, legal, and financial risks
12) Factors affecting channel choice- industry, product, target audience and capital
13) Relational, legal, financial, operational, structural theoretical and practical framework of
being in business as a principal or an agent
14) Personal liability, asset protection and taxation issues associated with various legal
15) Regulatory compliance before, during and after business participation
16) Advertising, marketing, and promoting the business during various phases of its life-cycle
17) Digital presence and optimising social media strategies
18) Legal, financial, relational, and operational risks associated with the business prior to
commencement, during and at the end of ownership.
19) Key points of investigation in Business Sale Agreements, Franchise Agreements and
20) Equity and debt financing
21) Bank finance, leasing, chattel mortgage, factoring, crowd-funding, peer-2-peer lenders,
angel investors, private equity, venture capital, government grants, factoring, initial public
offerings, and warrants
22) Cash-flow modelling, revenue, and expense forecasting
23) Finance applications and information memorandum
24) Designing staff incentives and profit share arrangements
25) Customer relationship management systems and strategies
26) Designing and interpreting KPIs to improve profitability
27) Challenges of the franchisor/franchisee relationship
28) Local area marketing constraints
29) Resourcing challenges
30) Control and management of tangible and intangible resources
31) Protecting and growing intellectual property assets
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John Smith is a qualified Electronic Engineer who has worked at BHP Billiton for the last fifteen years. During his tenure, John has enjoyed a portfolio of senior roles across the organisation which ranged from marketing to finance to logistics. While his self-confidence and charisma earnt him the respect of his peers, his willingness to take social risks and be disagreeable often created conflict with his superiors.
John is 46 years old. He is married with a 24-year-old daughter (Pip) and a 15-year-old son (Zac) who is not performing well at high school. Pip is completing her final year of a Business/Law degree. She has accepted an internship at PWC in the Corporate Advisory
department. She is very keen to own a business in the future.
Following a restructure of BHP’s chemical division, John was offered a redundancy package of $1.1ml net of tax. Like his daughter, John is very entrepreneurial and has a passion for business. His father owned a business for most of his adult life where John worked and developed his appetite for self-employment. That business had an annual turnover of $2.5ml and employed 14
adults. It also offered short term apprenticeships to dozens of young people from the local community.
John and his wife (Kara) spent many long hours discussing his future as he was the family’s main income earner. The prospect of him going back to employment disturbed him. John explained his motivations for self-employment… “I want to create a legacy for Pip and Zac and their children by creating an enduring income-producing asset that they can either operate for themselves and by themselves or by someone else. Specifically, I want to take control of my
employment so that I can’t be forced in redundancy again. It’s not a good feeling to be told that you are no longer needed when you know you still a lot of value to add”. He also emphasised that “the independence of being one’s own boss will allow me more flexibility to balance work and family”.
While Kara understood, and shared his motivations, she cautioned him of the risks of going into a small business and pointed out these potential issues:
1) He may be trading off the regularity of pay cheque especially during the initial stages of building the business. 2) They will be risking personal financial capital with no guarantee of a return. She was particularly concerned about the family home and stressed that professional advice must be sought before they proceed.
3) They will be relying of the cash-flow of other people. If customers don’t have the money to spend on their products, the business will not be able to pay its debts when they fall due and This would not only impact the family’s budget but may also create issues for them as Directors under Corporations Law.
4) While he will have control over certain aspects of his income generation activities, he will not be able to control changing customer preferences and tastes.
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5) Attracting, employing, training, managing, and retaining employees of a small business is a very challenging task and is he ready to take this on.
6) The work/life balance he believes he will attain by owning his own business may not become a reality for many years.
7) He may miss the interaction with other senior executives and the intellectual stimulation that he so much enjoys.
Acknowledging Kara’s concerns, John argued that the potential rewards far outweigh these risks. He spoke convincingly about his ability to manage small teams, care for customers, maintain supplier relationships and implement processes to ensure quality control always, which he said were “the key drivers for success in a small business”.
Kara was tasked with researching the options for going into business which she summarised for John as follows.
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Following several hours of analysis and discussion, they identified two options for self- employment. Option 1: Buy an existing business with positive cash-flows (which Kara preferred) or Option 2: Start a new-to-market concept of combining a cold-pressed juice bar with a healthy wrap offering. The wraps would be sold by inches filled with fresh ingredients- nothing fried, and calorie controlled. She liked the idea of a healthy offering and the industry, however being a professional project manager, Kara insisted that John undertakes a full feasibility study before proceeding. After several weeks of research John presented a report containing a SWOT analysis of the start-up, a three-year sales, labour, inventory, operating cost, and cash-flow budget detailing capital (initial and ongoing) requirements and financing options. He even supported his sales budget with a detailed Market Entry Plan comprising strategy for price, product, promotion, place, people, process, and physical evidence. Convinced of his due diligence investigation and the potential financial returns offered by the business, Kara agreed to discuss their financing options with their neighbour (Susan) who is a franchise owner of one of Australia’s leading finance brokerage brands.
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Susan cautioned them that obtaining finance for either acquiring a business or for working capital is not easy. She insisted that “it’s a process that requires a deep understanding of how lenders think, and that information should be precisely presented to give the loan application the maximum chance of success”. Upon further questioning, Susan detailed that lenders would be expecting the following:
1) Profile of business being acquired.
2) Profile of the principal of the business.
3) Profile of the corporate entity, which will own the business.
4) Details of the acquisition cost and proposed funding mix.
5) Summary of the investment required and the funding mix.
6) Summary of business and personal debts to be financed.
7) Historical balance sheet extract, and profit and loss.
8) Budgeted balance sheet at the end of three years.
9) 3-year budgeted cash flow statement.
10) 3-year budgeted profit and loss statement.
11) 1-year budgeted profit and loss statement.
12) Budgeted gross revenue and gross margin
13) Budgeted fixed cost schedule.
14) Budgeted labour cost schedule.
15) Budgeted controllable cost schedule.
17) Budgeted financing cost schedule.
18) Budgeted principal’s personal expenditure
19) Statement of personal assets.
20) Statement of personal liabilities.
21) Statement of security available for the loan.
22) Details on freehold and leasehold contacts.
23) 3-Year marketing plan.
Being well-informed about what to do next, Kara and John met with an experienced business accountant to discuss the next steps in setting up the business. Specifically, the accountant
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was instructed to prepare the financing plan in line with Susan’s advice and provide advice on as to the most efficient legal structure to achieve the business’ growth ambitions, asset protection and tax minimisation.
Several days following the meeting, the accountant advised that Kara and John would need a total of $1.6ml to fund the establishment of the business and meet its ongoing working capital requirements. He reminded them that their combined net assets amount to $3,177,500 which comprise the following:
Asset & Liability
Investment residential property Cash at bank
Cars and household furniture Less Liabilities
$1,550,000 $550,000 $1,250,000 $125,000
$12,500 $285,000 $3,177,500
He discussed a financing plan that included a mix of debt and equity, which effectively meant that Kara and John would need to use all or some of their cash holdings together with borrowings to finance the business. He pointed out that there are three issues to consider when seeking finance are (1) Fund-provider’s perspective: – whether funding should be debt, equity, or a combination, (2) Timeframe perspective: – short or long term and (3) Business life stages: – early stage or expansion. When queried further by Kara, the accountant explained that there are two primary sources of finance, comprising Debt finance: – Funding which is borrowed from an outside party (major banks, non-banks, P2P, and mutual) and Equity finance: – Funding provided by the owner(s) of a business venture. He also cautioned that going into debt implies having an obligation or outstanding liability to an outside party and that small businesses often fail to obtain finance mainly because of insufficient security, payback term is too long and track record of performance is lacking.
He further added that a lender would require real estate security as collateral for loans to the business. When queried further about other security measures that a lender would require, the accountant took time to explain the implications of giving personal and directors’ guarantees. Having agreed on the funding amount and the mix of debt and equity together with the type of security and guarantees that John and Kara are prepared to offer to a lender, he discussed at length the merits of different types of legal structures.
Sole Proprietorship Distinguishing characteristics
Ease of formation
Low establishment/maintenance cost Few regulations
Unlimited liability Limited resources Lack of continuity Low tax minimisation
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Ease of formation and operation Distinct existence
Combined resources and direct rewards
Private Company Distinguishing characteristics
Perpetual existence Limited liability
Rights of a natural person
Tax rate lower than top marginal rate for individuals
Income splitting Capital gains tax Control
Not disclosed to public
Unlimited joint liability Potential conflicts Lack of continuity
High set up and maintenance costs
Risk transfer to directors in privately held companies
Attracts greater scrutiny by regulators
In Australia, there are five main types of trust that a family or small business may consider, discretionary, fixed, hybrid, unit and bare
Generally, not well understood Divorce and death
Expensive to set up & administer Legislative risk
Difficult to get to assets
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Income splitting Generally, not well understood
After much discussion about their tax, asset protection and business needs, the accountant recommended the following structure. Kara and John agreed to be the directors and equal shareholders in a newly established company called nxt2U Bars Pty Ltd. The accountant agreed to be the Settlor, John’s older brother as Appointor and Zac and Pic were named as specified beneficiaries. He also registered the business name nxt2U Bars.
Before establishing the new company, the accountant took time to remind John and Kara that they would be subject to onerous obligations under the Corporations Act in their capacity as directors. He handed them a one-page document that summarised these obligations as follows:
1) s180 Care and diligence – Directors must act with the degree of care and diligence that a reasonable person might be expected to show in the role.
2) s181 Good faith – Directors must act in good faith in the best interests of the company and for a proper purpose, including avoiding conflicts of interest, and reveal and manage conflicts if they arise. This is both a duty of fidelity and trust, known as a ‘fiduciary duty’ imposed by general law and a duty required in legislation.
3) s182 Improper use of position – Directors must not improperly use their position to gain an advantage for themselves or someone else or to the detriment to the company.
4) s183 Improper use of information – Directors must not improperly use the information they gained whilst performing their directors’ duties to gain an advantage for themselves or someone else or to the detriment to the company.
5) s558G Insolvency – Directors have a positive duty to prevent the company trading whilst insolvent. A company is insolvent if it is unable to pay all its debts when they are due.
6) s286 Financial records – Directors must ensure that the company keeps adequate financial
records to correctly reflect and explain transactions and the company’s financial position and performance.
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The accountant was officially retained to administer the bookkeeping and compliance requirements of the Company and Trust and to provide taxation advice to John and Kara when required. Having completed the legal structuring and attended to the necessary registrations with ASIC, ATO and WorkCover, the accountant recommended an experienced Commercial Lawyer to John and Kara for advice on trademark and patent registration. John was keen to protect his invention (the machine to produce five different custom-sized flavoured wraps on- site), trademark the business name and logo, or even protect the unique packaging of his wraps and juices. He reminded Kara of the value of protecting and growing intellectual property in readiness for franchising in a few years. After several months and an investment of $28,000.00, he was successful in securing the following:
Trademark Business name Company name Domain name Patent
nxt2U Bars Pty Ltd
Machine process of making and sizing flavoured wraps The shape of his product packaging
nxt2U Operations manual
It took a while to find the right premises for the business, due to the specific physical infrastructure required such as size, structure (internal & external), facilities & staff amenities, location, zoning, configuration, and parking (on-site or close-by). However, with the assistance of a competent real estate advocate a site was secured and renovations commenced to accommodate their new business.
Whilst the premises were being fitted, John took time to undertake a detailed labour resource planning. He began with a job-analysis, which entailed required him to determine the duties and skill requirements of each job. The two main components were (1) job description which is a written statement of what a job entails, how it is done and under what conditions and (2) the job specification which detailed the personal traits and experience required to do the job effectively. He had to strictly adhere to his accountant’s budget when structuring the remuneration and rewards plan for his staff. He needed to factor in that remuneration rates for many jobs are set by regulations or industrial bodies. However, most job pay rates are determined by market mechanisms which are usually structured as a wage where employees are paid at a set hourly rate and a salary where receive a fixed ‘total pay’ package regardless of the hours worked. In some industries, performance or commission-based remuneration is used instead.
The labour resource planning process culminated with a meeting with a specialist lawyer in Industrial Relations to evaluate the different ways in which employment relationships can be contracted. While John and Kara understood that industrial awards set standard minimum conditions of employment in their industry,
they wanted to understand more about the benefits of individual written contracts that are negotiated directly between the company and employees and informal contracts which can be unwritten and can create problems if a dispute occurs. Much information was shared during
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the meeting which covered such issues as occupational health and safety rules, workers’ compensation insurance, PAYG tax system, equal employment opportunity, retirement and superannuation funds and record keeping.
John and Kara developed a local area marketing campaign that comprised only of letter-box drops and local sporting club memberships. They soon discovered they needed more depth and breadth in their efforts and consequently retained the local marketing agency to discuss various physical and digital branding and local area marketing strategies.
After several years of operating John and Kara sought the advice of a leading franchise consultant and rolled out an innovative franchise model. As a minimum, the model mandates that franchisees will adopt common branding and business image, common systems, and procedures, pay of an upfront fee, observe a prescribed product list, and enter performance guarantees.
At the time of offering their first franchise they had opened four bars within a 20 kms radius of each other. In preparation for a meeting with their first potential franchisee, they researched the type of questions that the right candidate ought to ask of them as part of their due diligence investigation. With their research in hand, they met with their newly appointed Franchise Relationship Manager, their daughter Pip to inform her of the following.
That she must ensure that the potential franchisee is getting what they think they are buying and what they are buying is worth what they are paying. And it is also important that understand legal, financial, commercial, relational, and operational risks associated with the business prior to commencement, during and at the end of ownership. This must be accompanied by a commitment to make informed decisions throughout the life of the business i.e. the due diligence process is ongoing as the business plan is revisited. John was resolute to point out that:
doctrine of caveat emptor and later
as seller caveat venditor.
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It was not long after successfully appointing their first franchisee that nxt2U expanded rapidly across Australia. With a footprint of 68 franchises, the company employs over 67 people at its head office and a further 380 people are employed by franchisees. A succession plan is in place for Kara and John to stand down in 10 years. Pip is being groomed to lead the company and Zac is thriving as the Operational Manager.
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Annexure 1 Disclosure document
Annexure 1 of Disc Doc
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Franchise Agreement Operative Framework (This is example only)
under a different corporate vehicle, discussions required)
Franchisee use the brand or trade mark
registering any aspect of the brand or trade mark
must conduct the franchise business under its own company name but as Agent of FRANCHISOR, and is licensed to trade under the FRANCHISOR brand
proprietary interest is created in favour of the Franchisee at any time during the
and Franchisee must implement and comply at own cost
staff, present and past
however Franchisees may be invited to provide constructive input
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legal fees associated with the franchise and other legal agreements, stamp duty, legal fees associated in enforcing the terms of the franchise and other legal agreement
electronic transfer into a nominated bank account on a fortnightly basis
against any financial obligations to Franchisee by it
system about GST requirements
marketing area covered by the three Spokes and the Hub
Franchisee responsible for payment all charges. Franchisee must only use
authorised numbers to promote the franchise business
programs in the franchise business, a fee may be levied by FRANCHISOR for the license and franchisee and staff must undergo initial and ongoing training at own cost
name of FRANCHISOR
franchise business, hours to be specified
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12.Licenses, Franchisee’s responsibility to obtain all permits, licenses, and local government authorisations to be able to conduct the franchise business, including any licensing obligations of its staff
prepared with 3 monthly targets, with structured reviews, coaching and training
mentoring, coaching, external consultants
notice, may include further training, may include replacement of staff, and may
comprising public liability, professional indemnity, fidelity guarantee and other
insurances required by statute such as workers’ compensation
and annually within 5 days of expiry thereafter
the Franchisee any documents to effect appropriate insurance cover and
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Franchisee is liable for all costs associated with this process 16. Training & Meetings
approved by FRANCHISOR
due to the Franchisee from FRANCHISOR
advertising (brand and product), business process, technology, site selection, site maintenance, business image, call centre referrals, customer education, technical product and technology support, computerised accounting packages, e-commerce, product training, and industry knowledge
externally audited annually
any given financial or calendar year and any expenditure from the fund, though
accountable to the Franchisees, is at the entire discretion of FRANCHISOR
remaining in the fund on winding up will be distributed on a pro rata basis to all
Franchisees based on cumulative contributions made during the term
products as set out in the product manual, at competitive prices, and delivered
communicated to Franchisee within a reasonable period by FRANCHISOR. Indemnity is provided to Franchisee by FRANCHISOR for any losses to Franchisees arising out failure to do so
shall be published by FRANCHISOR as often as required so that to allow
Franchisees to properly represent the range of product offerings
according to markets, seasons, and prevailing commercial circumstances
agreement within seven days of signing it, FRANCHISOR must then refund the Franchisee all payments made to date less any substantiated and reasonable
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Franchising Code of Conduct see below
severally observed by the Franchisee, the Franchise Principal, directors,
shareholders, and senior staff
be jointly and severally observed by the Franchisee, the Franchise Principal,
directors, shareholders, and senior staff for a predetermined period
dispute resolution process as laid down by the Code applies.
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