Beanos Case Study

Beano’s Case Study

ENTR 3401

Austin Detmer

Smith’s perspective

1. Upon basic revision of the case, it is obvious that Harris’s proposal is not fair to Smith.  Harris’s original proposal is very different to the one that Smith had expected.  The original agreement was that Smith would still own 67% of the company, only having to repay the bank loan of $120,000.  The revised offer of giving Harris 49% of the company is not only unfair but also makes Harris a questionable partner.  Even though the original proposal was a spoken deal, there were agreements between both parties and Harris’s change ultimately shows that he is trying to take advantage of Smith.  Smith would be losing almost half the company while also incurring debt of $95,000 dollars.  On top of the debt, he is expected to pay a premium interest rate.  So in summary he would have to repay the bank loan and Harris ($120,000 bank loan and $95,000 Harris loan) over a five-year period.  If we look at the numbers, his 321,800-dollar distribution (41,000 + 48,300 + 65,700 + 83,800 + 83,000) over the first five years would reduce to 106,800 when taking the loans into account.  Additionally, he would only own 51 percent of the company and is left with 54,468, which ultimately means less than $11,000 per year the first 5 years.   The original proposal was infinitely better and Smith would be smart to approach Harris with caution.

1. Smith has made a mistake leaving his 60,000 a year corporate job in exchange for a deal with Harris.  The deal, as discussed above, is very unfavorable and he would not gain anywhere near the amount that he once earned at his old job.  With his old job, he has security and a constant income without having to worry about constant sales and other entrepreneurial duties.  He has less risk factors and he is taking the risk that the company could go bankrupt and he would be left with nothing.  Having the debt over the companies (essentially his) head also has an additional stress factor.  After 5 years it could possibly be more profitable if more franchises are opened and are all equally successful, and with a 5% failure rate, this could be possible.  In the short term it was not wise for him to do this and he would’ve enjoyed much more security if he had stayed at his job.

1. If I were to advise Smith, I would tell him to stay clear from Harris.  It is clear that he is trying to take advantage of him and that there is no upside to this deal.  He could attempt to renegotiate and make a better counter offer but if I were in his place, the changing of the deal would leave a bad taste in my mouth.  Harris’s projections were unfair and Smith would be left taking the risks while Harris would be reaping the benefits.  It would not take much for him to gain a return on his investment for a measly 5,000-dollar value.  On top of that he would also be gain profit off the interest from the loan.  Smith would also lose control which is not what any entrepreneur wants.