Case_12_Schoolhouse_Lanes_Estates_TN

Case_12_Schoolhouse_Lanes_Estates_TN - Teaching Note Case...

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Teaching Note: Case 12 – Schoolhouse Lane Estates Case Objectives 1. To evaluate growth and expansion options for a medium-sized firm in a highly competitive industry with poor growth prospects. 2. To discuss the degree to which financial or accounting tools can affect corporate decision-making. Chapter Use Key Concepts Additional Readings or Exercises 2: External Environment External environmental forces, Porter’s five forces model; SWOT 3: Internal Analysis Tangible, intangible resources 4: Intellectual Assets Human capital; intellectual capital 5: Business- Level Strategy Generic strategies 6: Corporate- Level Strategy Corporate strategy; growth options See ADDITIONAL FINANCIAL ASSESSMENTS Case Synopsis In 1989, Janess (Jan) Thaw had converted the family-owned farm on the North Shore of Long Island, NY into a vineyard. Her first harvest in 1994 yielded 5,000 bottles of wine, which sold out to local restaurants, catering firms and businesses within six months, creating $250,000 in revenue. In 1996 Jan had purchased a neighboring winery to be able to bottle her wine. By expanding its acreage, producing quality grapes, and using grape purchases from other vineyards, the renamed Schoolhouse Lane Estates generated just over $1.5 million in revenue in fiscal year 1998. Since then, Schoolhouse Lane Estates had experienced greater than industry average growth in net revenues. Although heavily leveraged through loans from a local bank, the firm had developed premium wines that were being accepted by the consuming public. The firm currently had expansion plans that included purchasing grape growing land, expanding the winery and increasing its retail operations. Making wine was a capital- intensive business, making it necessary to have access to working capital. Winery owners typically sought to fund continuing operations as well as business and inventory growth from limited retained earnings and bank debt. However, business risks were substantial, due to either crop failure or fluctuating consumer demand, and any investment in the bottling facility stood idle at least 10 months of the year, waiting for the yearly crop to mature. Jan quickly realized that private equity funding or venture capital were her only
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options for funding growth, and was evaluating her position at the winery from both an owner and manager perspective. If she went with private equity, it meant she would have to give up a percentage of her current 100% ownership in the firm. Jan approached her brother Nick, a Manhattan financial consultant, for help locating potential investors. Nick decided to pursue investment in Schoolhouse Lane Estates himself, anticipating it would fit nicely into his portfolio as a “buy-and-hold” property. He anticipated a current return of 6 percent, with a total expected annual return of 20 percent over at least a five-year holding period. Given the current financial climate, his only hope of monetizing his investment in the next five years would be to sell shares back to Jan at a reasonable value or try to find another private investor. With the cost of equity
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