Beautiful Legs by Post

Class vote

• How many of you would invest in this venture?

• Would invest

• Wouldn’t invest

Career choices

Measure New venture Job

Salary now Small $60-70k

Salary 5 years Depends on success $100-150k

Long-term rewards Capital gain Stock options

Work hours 7 days a week 5 days a week

Experience ? ?

Stakeholders and Goals

• Who are the stakeholders in this case and what are their goals?

• Elizabeth• Dickon• Supplier of tights• Department stores• Other upscale stores• Consumers

Opportunity

• What is the opportunity?

• Why did Elizabeth choose tights as the first product?

• Who in this class wore tights regularly as part of a dress code (official or unofficial)?

Opportunity Describe the opportunity that exists for BLBP in

terms of the 3 M’s• #1 Market demand

• Market share & growth potential = 20%+, 20% annual growth, and durable?• Is the customer reachable?• Customer payback < 1 year

• #2 Market size and structure• Emerging and/or fragmented• Proprietary barriers to entry

• #3 Margin analysis helps differentiate an opportunity from an idea

• Low cost provider? (40% gross margin)• Low capital requirement versus the comp.?• Break-even in 1-2 years?• Value added increase of overall P/E?

Entrepreneurs

• Is Elizabeth the right entrepreneur to pursue this opportunity?

• Is Dickon the right entrepreneur to pursue this opportunity?

• Are Elizabeth and Dickon as a team the right entrepreneurs to pursue this opportunity?

Resources

• How much money does the team need in the next 30 days?• 110,000 Pounds

• Is this the right amount?• How urgent is their need for capital?

Resources

• Would a venture capitalist be interested in this project?– Strong skills, none in mail order = not an A

team– Venture will not get big enough to interest VC– Industry segment not one that attracts seed-

stage VC– Unlikely to acquire money in 30 days

Resources

• Will a bank loan any money to this venture?– Company has no assets to secure debt– Bank will require personal guarantees from

Elizabeth and Dickon, and even then probably would not be eager to make this loan

Resources

• Would a strategic partner invest in Beautiful Legs by Post?

– Beautiful Legs by Post has no track record– In this type of industry, strategic partners invest in

companies with proven track records. In the rare event that they do provide seed-stage capital, it is to a founder with a track record of success in the industry

– It will take several months to attract such interest even if it were possible

Evaluating business plans

• Important skills because it makes you more critical of your own business plans

• What would you look at?

• Would you view the business plan in any specific order?

Evaluating business plans

• Order in which external reviewers read a business plan:– Resumes/CVs– Executive Summary– Opportunity– Entrepreneurs– Resources

Evaluating business plans

• Do my financials matter?

– You must have financials - demonstrates your perspective of the business model

– However, investors will most likely want the financials reworked to address their concerns

– Investors tell the entrepreneurs how much money is required

Evaluating business plans

• Let’s take a look at the Beautiful Legs by Post business plan

• Is this a good plan?• What aspects of this plan are particularly

strong?• What if anything is missing?

Evaluating business plans

• What is the entry strategy for Beautiful Legs by Post?

• Does this strategy make sense?• Compare this strategy to the entry strategy

for Fax International.

Financial Highlights

• 40% Gross Margins• Ł195,811EBIT YR 3• Exit @7x Earnings• ROI for Investors of 60% (Ł80,000 for 20%

equity + Ł30,000 note)

What are the Critical Assumptions?

• Response rate (1.5%)• Average order (4 pairs/Ł30)• Customer retention rate• Friend of a friend rate

Sensitivity Analysis

Hit Rate 1.50%Customer Order Size 4Retention Rate 95%Friend of Friend Rate 1.50%P/E 7x

Sensitivity Analysis: BasisP&L 8/31/1996 8/31/1997 8/31/1998Revenue 342213 1063111 1582760Postage Charges 21273 67121 101341Net Revenue 363486 1130232 1684101

Cost of Tights 209073 646130 961411Packaging 2807 8370 12389Catalogue 3579 10675 15800Ack Insert 960 2862 4235Inducement repeat 5808 7586 11489Inducement new 2152 7991 9738Postage UK 6347 16826 21792Postage Europe 846 5048 11207Packers and Warehouse 18772 55983 82862Operating Costs 250344 761471 1130923

Marketing Costs 96202 173332 190684Free Tight Costs 3179 1382 1382Marketing an Promo 99381 174714 192066

Admin 66149 154106 165301EBIT -52388 39941 195811

Hit Rate -25%P&L 8/31/96 8/31/97 8/31/97Revenue 256659.8 797333.3 1187070Postage Charges 15954.75 50340.75 76005.75Net Revenue 272614.5 847674 1263076

Cost of Tights 153995.9 478400 712242Packaging 2105.25 6277.5 9291.75Catalogue 2684.25 8006.25 11850Ack Insert 720 2146.5 3176.25Inducement repeat 4356 5689.5 8616.75Inducement new 1614 5993.25 7303.5Postage UK 4760.25 12619.5 16344Postage Europe 634.5 3786 8405.25Packers and Warehouse 14079 41987.25 62146.5Operating Costs 184949.1 564905.7 839376

Marketing Costs 96202 173332 190684Free Tight Costs 3179 1382 1382Marketing an Promo 99381 174714 192066

Admin 66149 154106 165301EBIT -77864.6 -46051.7 66332.75

Critical Assumptions: Influence Factor

Hit Rate 1.13% 75%Order Size 4 100%Retention Rate 95% 100%Friend of Friend Rate 1.50% 100%

Hit Rate +25% P&L 8/31/96 8/31/97 8/31/97Revenue 427766.3 1328889 1978450Postage Charges 26591.25 83901.25 126676.3Net Revenue 454357.5 1412790 2105126

Cost of Tights 261341.3 807662.5 1201764Packaging 3508.75 10462.5 15486.25Catalogue 4473.75 13343.75 19750Ack Insert 1200 3577.5 5293.75Inducement repeat 7260 9482.5 14361.25Inducement new 2690 9988.75 12172.5Postage UK 7933.75 21032.5 27240Postage Europe 1057.5 6310 14008.75Packers and Warehouse 23465 69978.75 103577.5Operating Costs 312930 951838.8 1413654

Marketing Costs 96202 173332 190684Free Tight Costs 3179 1382 1382Marketing an Promo 99381 174714 192066

Admin 66149 154106 165301EBIT -24102.5 132131.3 334105.5

Critical Assumptions: Hit Rate Influence Factor

Hit Rate 1.88% 125%Order Size 4 100%Retention Rate 95% 100%Friend of Friend Rate 1.50% 100%

Order Size -25%P&L 8/31/96 8/31/97 8/31/97Revenue 256659.75 797333.3 1187070Postage Charges 15954.75 50340.75 76005.75Net Revenue 272614.5 847674 1263076

Cost of Tights 156804.75 484597.5 721058.3Packaging 2105.25 6277.5 9291.75Catalogue 3579 10675 15800Ack Insert 960 2862 4235Inducement repeat 5808 7586 11489Inducement new 2152 7991 9738Postage UK 4760.25 12619.5 16344Postage Europe 634.5 3786 8405.25Packers and Warehouse 18772 55983 82862Operating Costs 195575.75 592377.5 879223.3

Marketing Costs 96202 173332 190684Free Tight Costs 3179 1382 1382Marketing an Promo 99381 174714 192066

Admin 66149 154106 165301EBIT -88491.25 -73523.5 26485.5

Critical Assumptions: Order Size Influence Factor

Hit Rate 1.50% 100%Customer Order Size 3 75%Retention Rate 95% 100%Friend of Friend rate 1.50% 100%

Order Size +25%P&L 8/31/96 8/31/97 8/31/97Revenue 427766.25 1328889 1978450Postage Charges 26591.25 83901.25 126676.3Net Revenue 454357.5 1412790 2105126

Cost of Tights 261341.25 807662.5 1201764Packaging 3508.75 10462.5 15486.25Catalogue 3579 10675 15800Ack Insert 960 2862 4235Inducement repeat 5808 7586 11489Inducement new 2152 7991 9738Postage UK 7933.75 21032.5 27240Postage Europe 1057.5 6310 14008.75Packers and Warehouse 18772 55983 82862Operating Costs 305112.25 930564.5 1382623

Marketing Costs 96202 173332 190684Free Tight Costs 3179 1382 1382Marketing an Promo 99381 174714 192066

Admin 66149 154106 165301EBIT -16284.75 153405.5 365136.5

Critical Assumptions: Order Size Influence Factor

Hit Rate 1.50% 100%Customer Order Size 5 125%Retention Rate 95% 100%Friend of Friend rate 1.50% 100%

Sensitivity Analysis Results

EBIT 1996 1997 1998 Exit@7xBasis -55,388 39,941 195,811 £1,370,677.00Order Size +25% -16,284 153,405 365,136 £2,555,952.00Order Size -25% -88,491 -73,523 26485 £185,395.00Hit Rate +25% -24,102 132,131 334,105 £2,338,735.00Hit Rate -25% -77,864 -46,051 66,332 £464,324.00

Implications of Sensitivity Analysis

• Results are extremely sensitive to response rate, order size, and retention rate

• 25% drop in any factor creates disastrous results

• What does this mean for Elizabeth and Dickon?

1. Beautiful Legs by Post

 

2.2 Directors' Compensation and Share of Ownership

During the three moth test phase both directors are forgoing all compensation. On

completion of the first round of financing the directors will each be paid a basic salary of

£25,000 per annum with no benefits-in-kind. This is significantly lower than the market

level which INSEAD graduates command.

 

Until the first round of financing, each director will own 50% of Beautiful Legs by post,

having each made an equity investment of £5,000.

 

As a potential investor is there anything which might be a red flag in this passage?

 

 

__________________________________________________________________

 

__________________________________________________________________

 

2. Beautiful Legs by Post

 

1.6 Competitive Advantage

 

We will have the advantage of being the first mover. We will be the first to locate the

buyers of high quality tights and will be able to keep them by offering an efficient

and reliable service through a Monthly Order Program. For a new entrant, since many

potential customers will be our customers, their "hit-rates" will be reduced. This

means that the cost of acquiring clients becomes prohibitive. New entrants cannot

gain market share through price reductions since quality is perceived to be reflected

in price.

 

Identify three things should concern an investor in this passage (there are more than three)?

“1.9 Exit Strategy

We seek to have a saleable business by the end of the third year. The potential purchaser

is likely to be a trade buyer, either from the hosiery or mail-order business. Hosiery

companies are currently fighting for market share and this would give them another

distribution channel closer to the customer. A mail-order house would be interested in

our client base since it will contain names of active purchasers of a quality item. These

names could be used to launch new products.”

 

What would concern you about this statement as a potential investor?

“1.10 Proposed Offering

The offering will comprise of Ordinary Salaries (1 pound par value) and short-term

debenture stock. Under the business plan's assumptions, there will be one round of

financing. We are asking outside investors to purchase 20% of the company for 80,000

pounds, and to loan 30,000 pounds in the form of debenture stock that will be repayable

in six months.”

 

What, if anything, seems wrong with this offer from the perspective of potential investors? Keep in mind that half the class said they would invest.

6. Beautiful Legs; Direct Marketing Letter (see also section 4.2 if necessary, p 12)

 

We have chosen a well-known French hosiery company founded in 1829 called Dore

Dore to be our supplier. They have a number of advantages compared to the others that

we considered. They are willing to supply marketing material, such as samples and discounted

product.

- They are able to supply goods in small lot sizes. Production runs with special packaging require a minimum order of 2,000 units as opposed to the industry average of 24,000 units.

- They have an excellent reputation for quality, especially in France

- They are willing to supply us on a weekly basis.

- Lead times are short. They can deliver within 5 working days of receiving an order, and the transportation time is less than 24 hours

- They wish to enter the British fine gauge hosiery market. They are established as high quality suppliers of men's and children's socks

- We have negotiated credit terms of 60 days, with a discount of 2.75% for payment within 30 days.

- They supply socks to other mail-order companies and thus have experience of our industry.

 

 

Thinking strategically (ie Porter), what concerns, if any, would you have with their choice of supplier and why? (be specific with the framework language)