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    Compare Better Brew to Perfect Blend. Which company would you buy, and why?

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    Perking Up Profits at Better Brew and Perfect Blend

    After years of dreaming about owning your own business, you decided that owning a coffee shop would be perfect. Rather than start from scratch, however, you and your partners decide to look at two existing establishments, Better Brew and Perfect Blend. The two are for sale at the same price, and they are located in equally attractive areas. You manage to get enough financial data to compare the year-end condition of the two companies, as shown below. Study the numbers carefully; your livelihood depends on choosing wisely between the two establishments.

    Better Brew Perfect Blend
    Cash $10,000 $25,000
    Accounts receivable 2,000 4,000
    Coffee equipment 50,000 80,000
    Supplies 11,000 18,000
    Other assets 22,000 34,000
    TOTAL ASSETS $95,000 $161,000

    Liabilities and Owners' Equity

    Accounts payable $21,000 $38,000
    Bank loans payable 49,000 68,000
    Owner's equity 25,000 55,000


    Other data
    Personal withdrawls from cash during 2003 $40,000 $38,000
    Owners' investments in business during 2003 $16,000 $32,000
    Capital balances for each business on January 1, 2003 $30,000 $12,000

    December 31, 2003, year end balance sheets

    1: What factors should you consider before deciding which company to buy? What additional data might be helpful to you? (Note that net income is implied).

    2: What questions should you ask about the methods used to record revenues and expenses?

    3: On the basis of the data provided, which company would you purchase? Detail the process you used to make your decision.

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    Solution Preview

    1: What factors should you consider before deciding which company to buy? What additional data might be helpful to you? (Note that net income is implied).

    Obviously, financial ones:

    - Important factors such revenue and income generated every year (especially recent 3 to 5 years)
    - Liquidity ratio (especially if involved a considerable amount of bank loans etc - repayments)
    - Existing banking relationship (very important for financing!)
    - Value of the assets (and depreciation schedules) as machines like coffee machines are vital to a coffee shop
    - Aged listing of AR and AP
    - Asset-to-debt ratio

    Besides financial one you also want some more, such as:

    - How does the business compare with others in the same industry?

    - Who or what makes up the company's immediate market?

    - How is the company's market divided or segmented?

    - What are the company's service and/or product position in the market?

    - What, if anything, makes the company's service or product unique in the market?

    - Does the product or service have a cost advantage in its present targeted market?

    - Who is the company's immediate competition?

    - How does the company make sales? Why do they make them in this manner?

    - Who are the company's major customers?

    - Will I have a problem establishing a relationship with these customers?

    - What are the demographics of the customer base?

    - Relationship with existing ...

    Solution Summary

    The solution presents a qualitative and a quantitative approach to analyzing two similar businesses. The 988 word solution shows a good list of qualitative questions to ask, but also explains the type of financial analysis a prospective buyer would perform.