Topic: Offering Pet services/division at Costco, just like Petsmart and Petco


The project would be a plan to expand the current organization (Costco’s New Pet Services) 

Please write one pages(single spaced) to cover/answer the following questions (Last Part) of Business Plan using Strategic Management theory and in essay format. Do not include any introduction, statement etc. of company, this paper only cover last part of the Business Plan similar to the conclusion.

Exit Strategy: 

  •   What aspects of the plan are most likely to change and what are the effects?
  •   What is the company’s stated exit strategy?
  •   Would this company be able to issue a public offering, why and if yes, when?
  •   Would your company be an attractive acquisition for a large company, why and when?
  •   What milestones would this company have to meet to achieve either exit form?

Five-Years Cost Estimates and Revenue Projections

Years

1st yr.

2nd yr.

3rd yr.

4th yr.

5th yr.

Income Statement

Net sales

$43,300

$67,900

$77,300

$80,200

$88,100

Cost of goods sold

$24,100

$24,600

$20,800

$21,900

$39,500

Net Operating Income

$19,200

$43,300

$56,500

$58,300

$48,600

Operating expenses

$3,500

$3,900

$2,100

$3,000

$3,600

Net Income

$15,700

$39,400

$54,400

$55,300

$45,000

Cash Flow Statement

Beginning balance

$14,500

$13,300

$15,500

$18,000

$20,000

Cash inflow

$7,000

$7,600

$9,400

$9,900

$7,000

Cash outflow

($8,200)

($5,400)

($6,900)

($7,900)

($8,900)

Net Cash Balance

$13,300

$15,500

$18,000

$20,000

$18,100

Balance Sheet

Cash

$13,300

$15,500

$18,000

$20,000

$18,100

Accounts receivable

$17,600

$13,800

$19,800

$19,500

$21,800

Inventory

$6,300

$8,200

$9,300

$9,400

$11,200

Prepaid expenses

$5,700

$6,300

$5,800

$3,200

$2,700

Total Current Assets

$42,900

$43,800

$52,900

$52,100

$53,800

Fixed assets

$28,000

$30,500

$45,000

$43,000

$41,000

Total Assets

$70,900

$74,300

$97,900

$95,100

$94,800

Accounts payable

$6,400

$6,200

$9,800

$7,600

$8,200

Short-term notes

$5,700

$5,500

$4,800

$5,400

$7,700

Accrued & other liabilities

$2,300

$2,300

$3,000

$2,900

$2,700

Total Current Liabilities

$14,400

$14,000

$17,600

$15,900

$18,600

Long-term debt

$22,100

$23,700

$22,600

$21,800

$22,400

Other long-term liabilities

$1,400

$1,800

$1,400

$1,000

$1,700

Total Long-term Liabilities

$23,500

$25,500

$24,000

$22,800

$24,100

Shareholders' equity

$33,000

$34,800

$56,300

$56,400

$52,100

Total Liabilities and Equity

$70,900

$74,300

$97,900

$95,100

$94,800

Discussion

The above financial projections are based on various assumptions especially the market demand, general expenses and labor costs. The forecast in this investment’s operations for the next five years assumes that the number of customers will increase constantly in the subsequent years. This means that in the first three years, the cost of sales will be maintained at close to the same value whereas the resultant overall operating income increases proportionately. It is noteworthy to mention that all the investments and expenses made and incurred during the first two years will be absorbed by the positive cash flow produced and well as the shareholder’s capital. Consequently, the decreased costs may also be attributed to increased learning curve thereby resulting in a significant increase in the net operating income. In the first year of the business operations, the company operating income starts form a low $19,200 which almost doubles to $43,300 in the second year. This is followed by a substantial increase in the third year of $56,500 and $58,300 in the fourth year. In regard to the cash flow statement, the company earns net cash balance of $13,300 in the first year and this increase to $15500, $18000 and $20000 in the second, third and fourth years respectively. This indicates the potential worth of the business considering the significant and steady growth of the cash inflow throughout the investment period. In the five-year projected balance sheet, it is evident that the company’s only total assets amounting to $70,900 are being supported by the capital invested as well as long-term liabilities. Furthermore, the total net value of the company’s assets is expected to increase up to $94800 from $70,000. However, it worth noting that between the third and fourth year, fluctuations of current assets largely determines the net value of the company’s fixed assets. Finally, the value of total assets held by the company at the end of the fifth year will be supported by the amount of retained earnings, ongoing investments and as well as the capital injected.

It can be assumed that the initial investment of this project is $50,000 in year 1 with revenues received being $13300, $15500, $18000 and $20000 in the subsequent years at the 10% discount rate. In this case the internal rate for this project will be 11.781% meaning that the project is worth investing in considering that IRR is greater than the cost of capital.  On the other hand, financial ratios would be applicable in evaluating the worthiness of the project.

PROFITABILITY RATIO

Profit Margin=Net Income/Sales

Return on Asset=Net Income/Total Asset

The above two financial ratios measures the success of the firm in terms of profit generation. Return on asset measures how efficiently profits are being generated from the asset employed in the business In year 1 ROA is hypothetically at 22% and gradually increase to 53% and 55% in the subsequent two years respectively. Return on equity ratio tells the owner whether or not the effort put into business has been worthwhile. In addition, the profit margin of the company increases from 65% in the first year up to 160% and 261% in the second and third years respectively. This indicates the project is worth being invested in as the indication of consistent company earnings. Positive profit margin translates into positive investment quality (Horne and Wachowicz 50-100).

Exit Strategy

Considering the above assumptions in the market as well as the cash inflows, the investment is worth taking and it will thus attract. Besides, the five year plan facilitates the business in paying back all the monies invested in and therefore, the exit strategy. In addition to sales forecast, of this undertaking would attract other investors. In this case, the exit strategy of this business is based on any of the following four ways; IPO, business acquisition, business merger and/or business buyout. In the first case, after the end of the five years, all things remaining constant and the performance of the business as per the forecast, initial Public Offering would be the best option to allow the public own a stake in the company. This will largely boost the company capital structure and thus enable it expand the business empire. Though IPO an expensive activity, it would be necessary to provide investors with an additional means to own the company through business acquisition. In this case the company would focus on practicing ethical business activities to enable it become sustainable. Besides, the image of the company in the corporate market would be maintained by employing highly qualified team of managers and also building its credit worthiness. Third option of acquiring the company at the end of the five year period is through merging the company with other competitors in the same market-line. Finally, another option in the company’s exit strategy is through business buyout which largely depends on the passion for entrepreneurship by the owners of the company. In order to achieve this exit strategy, the company requires providing forecast of when it can buyout the share capital from potential investors and at what rate of interest. This will on the other hand depend on the level of risk. However, the most important thing to take into account is to make sure that either of the strategy adopted by the business is realistic and feasible .   

Exit Strategy: Costco Pet Services Business Plan

One of the aspects of Costco’s business plan is to expand its services by offering pet services that is likely to change is the financial plan. During the start-up phase, the organization may incur some expenses that were not initially included in the business plan. Some emergency needs may come up and the organization would have to meet these needs, thus incurring more money than expected. In addition, some unforeseen liabilities may occur. Another cause of changes in the financial plan is change in the economic conditions. For example, occurrence of unpredicted recession may cause rapid changes of the price levels. The cost of materials necessary for the planned expansion may go up beyond the inflation adjustment provided in the financial plan. This situation may cause substantial changes in the financial plan. One of the likely effects of such changes is that the organization could be forced to seek more financial resources to implement the proposed plan. In addition, such changes are likely to affect the business plan’s merchandise plan. This is because the organization may need to revise its sales plan in order to accommodate the financial changes.

The best exit strategy for Costco, just incase the business proves to be uneconomical, would be the acquisition. Acquisition would entail looking for another business, which would be interested in buying Costco’s pet services business section. One of the advantages of this exit strategy is that the business owner may get far more than the business is worth, especially when the business is of strategic value to the acquirer. In addition, since Costco is one of the biggest competitors in the retail store industry, an acquisition offer may attract several parties, especially the top players in the industry, thus allowing Costco to negotiate a higher acquisition price with the interested acquirers.

An IPO would a viable exist strategy for this business. However, for Costco to exit from its pet services business, it would have to operate the section for at least fives years and ensure that the annual sales of the five years are at least US$50 million. This is because for a company to be allowed to offer an IPO, the business on sale must show revenue records of at least US$50 million per annum for the last five years of its operation. 

As earlier mentioned, Costco is among the biggest competitors in the retail store industry. Therefore, it is likely to be an attractive acquisition for a large company. It is likely to attract the other big competitors in the industry who offer pet services as well. This is so because by acquiring Costco’s pet services business section, the competitor would be able to reduce its level of competition in this specific section of the industry. A combination of its market share and that of Costco in the pet services’ segment would certainly increase its market share, thus gaining a competitive advantage over the other competitors in the segment. Costco’s pet services business is likely to be attractive to large companies after it has successful gone through the establishment phase and heading towards the growth phase.

One of the milestones that Costco must meet in order to achieve either form of exit is to establish values during the establishment phase. That is, Costco should ensure that it establishes a strong distribution channel with the suppliers of raw materials and create customers’ loyalty by offering high-value services: in order to establish a strong market share. These will add value to its business, thus making it attractive to competitors as well as other interested parties in the market.

Order now

Related essays