Dive into the first in our series of management consultancy practice case studies:
A friend asked me if I wanted to buy his coffee shop for $100,000. Do you think I should do it?
Read this information well before you give the case. Share this information in each bullet only if the candidate asks for it in a clear and deliberate way.
The coffee shop is in Vail, Colorado
Cup of coffee, $4.00
Bottled Water, $2.00
All products have a 50% margin
The shop serves mostly locals, not tourists, so demand is consistent throughout the year
Rent was $500 per month
Utilities and insurance = $1,500 per year
Wages (for 2 employees) were $8.00 per hour.
The shop is open 12 hours a day, six days a week
Tell the candidate that he can assume that the coffee shop will bring in consistent profits.
This is a valuation question. So to get the value of the coffee shop we need first to get the profitability.
Estimate market size.
Assume that the coffee shop gets 10 customers per hour in slow hour and 20 customers per hour in a busy hour. The first and last 2 hours of the day are busy hours. So the coffee shop gets 20x4 + 10x8 = 160 customers/day.
If we assume all the hours as busy hours on Saturday, then we have 20x12=240 customers on Saturday.
Number of customers / week = 160 x 5 + 240 x 1 = 1,040
Number of customers / year = 1040 x 50 = 50,200 (round to 50,000 customers per year)
Assume 60% of customers order coffee, 30% order pastry, and 10% order a bottle of water, then the spend is:
50,000 x 60% x 4 + 50,000 x 30% x 3 + 50,000 x 10% x 2 = $175,000
Rent = 500 x 12 = $6,000
Wages = $8 x 12 x 6 x 50 = $30,000
Utilities and insurance = $1,500
Profits = 175,000 x 50% - 30,000 - 6,000 - 1,500 = $50,000
Assume a 40% tax rate:
Profits after tax = 50,000 x (1-40%) = $30,000
If we assume that the coffee shop is in operation for 5 years and we use a 10% WACC, then its value would be:
Value = 30,000 + 30,000/ 1.1 + 30,000/1.1^2 + 30,000/1.1^3 + 30,000/1.1^4 = $125,096
As long as the sales would be consistent for the rest of the 5 years, it would be profitable to buy the coffee shop. Further analysis could be done on the management experience and the competition to ensure that sales would be consistent.