Entrepreneurial Finance

Final Project Flenchel Lampshade Company Case Group Members:

Raja Ali Cdr. Abdul Majid Syed ZohairHashmi

Submitted To:
Mr. Akbar Khan

Date of Submission:
04-01-2012

Flenchel Lampshade Company

Case Analysis
Summary
Steve and Michele Rogers heartiest wish was to own their own business, which they could see being true as they found a business about their choice, which was well appealing for them, according to its previous cash flows, and accounting history and market it was operating in. They wanted to buy Fenchel Lampshade Company which was managed by 65 year old Kenneth Fenchel whose father and uncle had founded the company in 1926. The company manufactured the premium price lampshades with total sales volume about $1million. Steve and Michele both were graduates from Harvard Business School, and were doing well in their respective jobs. Steve currently was consulting at Basin & Company in Boston, and Michele was in admissions office at Harvard Business School. Both of them will have to leave their respective jobs if they opt to own the Flenchel Lampshade Company. Fenchel Placed a $800,000 total value of the company and insisted that all money to be paid up front. For Steve and Michele this was an unacceptable demand, given the inevitable uncertainties associated with taking over any business and with out seller financing it might also be much more difficult to arrange other elements of the financing plan. Steve was convinced that he could get the Fenchel family to take a $75,000 note back for part of the agreed-upon $745,000 purchase price. He and Michele were prepared to invest $50,000 of their own money as a starting point. With respect to the other capital, there were a number of options. Steve could get Small Business Administration loan up to 85% of the principle amount. The city of Chicago had a program of debt financing from which Steve hoped to raise $100,000. $50,000 from State of Illinois loan program.

Steve was also hoping to get some amount through Equity-like financing. There was another possibility to go to a MESBIC (Minority Enterprise Small Business Investment Corporation). The MESBIC program was established for the purpose of providing long-term financing and management assistance to new ventures started by minorities.

Issues How much Michele and Steve should pay for Fenchel, how they should get access to the required capital, and what they should do if they were able to buy the company. Now it seemed that they were finally close. That was very exciting, but it was also slightly frightening. As Steve had discovered more than once during his search for a company to buy, being a Harvard MBA was not an automatic ticket to success. In his more cynical moments, he asked himself what he thought as not-nosed 31year old Harvard MBA knew about running a business. On the other hand, he was ready to find out.

Critical Analysis
Business Plan: The company has annual sales in excess of $1million with annual cashflow margins of 15% 30%. In 1986, the lampshade industry had total sales of $70million, a figure that has been growing at a rate of 5% since 1972. Fenchel's operates in the premium quality segment (approximately $20 million in 1986 volume) and sells to lamp specialty shops and upscale department stores. Fenchel sells hard back and fabric lampshades. All of the lampshades are hand made and have wholesale prices of $5$35. The company has 65 accounts. Marshall Field's is the company's largest customer accounting for10%ofsalesin1986. There are 34 lampshade manufacturers in the country; competition in the industry is generally restricted to geographical regions due to the extremely high cost of transportation. Most manufacturers are in New York or New Jersey. Steve will work as full-time owner/operator, and Michele will server as a consultant to the company, the old staff will work as same it was working before. The Company: Fenchel Lampshade Company is a manufacturer of premium quality rayon, acetate and hard back covered lampshades for the replacement market. All of the lampshades are made in response to customer orders, with delivery commitments ranging from 4-6 weeks. Fenchel's customers included department stores, independent lamp and shade retail stores, lighting showrooms, and a few (about2%) lamp manufacturers. Of the company's sales, 80% are made to customers in the Midwest. The name "Fenchel" is well regarded in the industry because of the company's strong reputation for high quality products.

The Industry: The domestic lampshade industry has total annual volume of approximately $70million spread over 34 manufacturers. The lampshade industry is seasonal, with the slow season occurring during the summer. Less than 15% of all sales will be made during the months of June, July, and August. The best sales period occurs through the remaining nine months when people typically spend more time inside. The strongest months for sales are before holidays such as Thanksgiving, Christmas, and Easter. Product Description: Fenchel's products serve the premium quality segment of the market. Fenchel advertises it self as the industry leader of shadow free lampshades. All of these characteristics in one lampshade are very rare. Only two lampshade manufacturers, Silk-o-Lite and Diane in the New York/New Jersey are a, producer of lampshades of similar quality. Fenchel's lampshades can be divided into two categories; fabric and hardback. Fabric lampshades have historically accounted for 63% - 74% of the companys sales and 64% - 76% of the companys profits. Hard Back Shades have historically accounted for 26% - 37% of the companys sales and 24%- 36% of profits. The whole sale price range of Fenchel lampshades is $5 $35. The average selling price is $15. These shades will ultimately be sold by a retailer at prices from $20 $65. Fenchel's average wholesale price of $15 compares to $6 for a lampshade from a low/medium quality manufacturer such as Lampshades, Inc., which sells primarily to discount department stores. The Customers: Fenchel has a stable and loyal customer base. Over 60% of their annual sales are to upscale department stores such as Marshall Field's, headquartered in Chicago; the May

Company, headquartered in St.Louis; and Lazarus, headquartered in Indianapolis. The only lampshades sold by these stores are Fenchel's. Fenchel has 65 customer accounts, of which 50 are located in the Midwest. Some 45 customers account for 80% of total sales. The largest customer Is Marshall Field's, which operates 25 stores in metropolitan Chicago, Texas, and Wiscons in: this customer accounts for only 10% of total sales. Typical orders are $10,000$25,000 from independentretailstores. Fenchel's customers do not base their purchase decisions on price alone. These customers view product quality and delivery to be just asimportantasprice. The Competition: Silk-o-Lite, a 60-year-old New Jersey firm with sales in excess of $2million, is Fenchel's closest competitor. Fenchel's strong reputation for quality and service, combined with prohibitive shipping costs, make it very difficult for a competitor outside of the Midwest to take away any of Fenchel's market without engaging in predatory pricing. Marketing and Sales Plan: Fenchelhada1.3%compound annual growth rateinsalesfrom1983-1986. The business cash flow was approximately $140,000, without putting much effort. By taking a more aggressive approach in marketing and sales, the company can grow at $100,000 $500,000 annually. Steve strategy will include a continuation of Fenchel's present marketing practices such as the co-op advertising program with 20 department stores; the annual product catalog that is mailed to 200 prospective customers; attending the two annual lampshade trade shows. Steve will also continue the practice of employing manufacturing representatives, which is common through out the industry. Fenchel's representatives account for 33% of sales. from department stores and $400$2,000

Kenneth will visit each of the accounts with Steve for introductory purposes and to assure the customers that product quality and service will be maintained.

Changes which Steve would probably make are 1. Steve will do a thorough analysis of each form of advertising to gauge effectiveness. The data from this analysis will tell him where advertising dollars should be spent in order to achieve a higher return on investment. 2. Steve will hire and train more manufacturing representatives in an attempt to increase the number of customers in the independent lampshade retail stores and lighting showrooms. 3. The third change that Steve will make is to give a one-time bonus for new account orders. 4. Steve will personally market Fenchel's lampshades to the premium quality lamp manufacturers. Only two lamp manufacturers, Frederick Cooper and Stiffel, make their own lampshades while the others purchase them from an outside manufacturer. This industry, with sales in excess of $2 billion is too large to continue to ignore. 5. He will also seek to increase sales by pursuing untapped accounts in the midwest, such as Ehr's LampShade Shoppe in Waukesha, Wisconsin, who carry Silk-o-Lite, but not Fenchel lampshades. 6. Other opportunities will come from new kinds of customers not presently served by Fenchel. These potential customers include interior decorating companies, mail order catalogs, up-scale hotels, hospitals, colleges, up-scale convalescent homes, and the government. The Fenchel reputation for quality, service, and value will not be compromisedor sacrificedtoincreaseshort-termsalesthroughpricediscounting. Labor Force: Fenchel's labor force of 16 employees (14 production workers and 2 shipping clerks) has been unionized since 1952. There has never been a strike or any kind of work stoppage. The labor contract, which has usually been for two years, expires in June 1988. Kenneth will work with

Steve on the new contract. The workforce is extremely diverse with respect to ethnicity and experience. The ethnic makeup of the employees is 13 Blacks, 2 Hispanics, and 1 Asian. Two of the employees are male. The employees have worked for Fenchel from 1 22 years and their ages range from 20 70 years old. Ideal place for Employees: Employees find Fenchel an attractive place to work because they are treated well and have a very good compensation package. The average hourly wage is $5, with $4.30 per hour as the starting wage. The company's non contributory benefit plan begins 90 days after a new employee's starting date. Fenchel pays $21 per month for each employee to a pension fund. Each employee also receives $10,000 worth of life insurance and $1million worth of major medical insurance coverage. The employees also have disability and work man's compensation. The total cost of these benefits is approximately $1.50 per hour. Potential Risks: The threat of department store consolidation is quite prevalent today. Thus, there is a

chance that Fenchel could lose an account such as the May Company if they were purchased by another department store who wanted to stock their stores with lampshades from a company other than Fenchel. To minimize this risk Steve will continue to keep the customer base diversified and not become too dependent on department stores, in general, or any store, specifically. Steve believes it is safe to have the largest customer account for no more than 15% of total sales. Another risk is the threat of a competitor locating in Chicago or the Midwest. Steve will maintain close relationships with customers to ensure that Fenchel's lampshades completely meet their quality and delivery expectations. He will also manage costs in order to provide the customer with a product that is competitively priced without discounting. Therefore, Fenchel will be able to maintain and grow market share by emphasizing customer service as it relates to quality, delivery, and costs.

Points to Ponder Should Steve buy the Flenchel Lampshade Company?

According to given statistics Steve should surely avail this opportunity of buying the Flenchel Lampshade Company, because this offer is an attractive one. Entry barriers are high, competition is low, the company has a strong reputation and brand name in the market, customers have been loyal to the company and most importantly the company historical record shows the company has been operating in profit and also has the potential to generate more profits than making at the moment.

Can Steve Harvard graduate, handle ones own business? Is he capable of doing this?
The first thing to do anything is to have a dream and vision of doing, which Steve has. He had been dreaming and striving hard to own his own business. His past records show that he has been a hard worker with good skills in hand, which are probably the entry ticket to any business, so he has that. Now talking about the specific Flenchel Lampshade Company Steve is a kind of perfect for this because of all the data available the majority goes on his side, like he had previously also managed a team of unionized people and here also the scenario is somehow same just amount of workers is a but more. Secondly he has the know-how of dealing with people, consulting them and knows how to get the work done. The benefit he is getting is the loyal workforce, and the good thing on his part he is doing is, he is not firing or chaining the position of people working, instead all would be working as they had been, so for them there wont be any change majorly. Another very good thing which makes this opportunity perfect for Steve is of involvement of technology in work, as he would implant personal computer for his office manager with the help of which the management would be easy as well as professional. So Steve is capable of handling and doing his own business even is capable of generating profits which he intends to.

Threat of competitor?
As the entry barriers are high because of the industry is generally restricted to

geographical regions due to extremely high cost of transportation, so the threat is minimal. This thing can also be taken into consideration when talking about the potential risk of competitors that Flenchel has very strong reputation in the market, customers have been extreme loyal to them as Marshall Fields has been a loyal customer since 20 years. They have customer like these so it is very difficult to cut down the market of Flenchel. On the other hand if Steve works on his plan and put downs his efforts in marketing and getting more clients even those who are being served by other lampshades companies then for sure Flenchels market share can increase because of their past record and strong brand name. Steve also intends to maintain close relationships with customers to ensure that Fenchels Lampshades completely meet their quality and delivery expectations. He will also manage cost in order to provide the customer with a product that is competitively priced without discounting. So Flenchel will be able to maintain and grow by emphasizing on customer relationship and service as it relates to quality, delivery and cost.