You are one of five partners in the Amari Group, an international team of entrepreneurs and...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You are one of five partners in the Amari Group, an international team of entrepreneurs and investors with expertise in hospitality and franchise management in the Middle East. While only about a decade old, Amari has started building a track record of successfully bringing global brands into the region, with special focus on the Persian Gulf Arab States, including Bahrain, Qatar, and the United Arab Emirates. Amari generally works behind the scenes, partnering with brand name companies that have limited experience with the area. Typically, Amari acquires the rights to use a particular brand in a given area and then builds out a presence with the same standards and feel that the brand has around the world. In recent years, Amari has opened a half-dozen luxury hotels and high-end restaurants in the Persian Gulf region. Amari's momentum is strong and growing. Recently, you and several other Amari partners have come into talks with the leadership team of US-based Signature Hospitality, the private company behind some of the most financially successful and critically celebrated restaurants in New York, San Francisco, Los Angeles, and other cities. Most Signature restaurants are one of a kind establishments, some of them featuring “celebrity" chefs. About five years ago, Signature opened a small restaurant adjacent to a park in New York City named Park Bar that served simple fare, including burgers, salads, and juice drinks. The concept was straightforward: comfort food made from incredibly high quality ingredients, served at a fraction of the price of high-end restaurants. With limited seating, most diners get their Park Bar food to go, making for enviable profit margins. Park Bar has since slowly grown to a dozen locations in the United States, capturing rave reviews and generating a tremendous amount of buzz. Food lovers and writers often publicly obsess about where the next Park Bar location might be. The owners have resisted pressure to expand quickly, instead focusing on quality and reliably choosing locations that have proven to be hugely successful. Some observers believe Signature Hospitality is planning to ramp up development of Park Bar locations in the United States. A few months back, you and several Amari partners began discussions with Signature about the possibility of Amari owning and running Park Bar restaurants in the Middle East, an area that Signature has never entered before. Your discussions with Signature have revolved around Amari acquiring the rights to open 10 Park Bar locations in the Persian Gulf Arab States, including sites such as Abu Dhabi in the United Arab Emirates and Doha in Qatar. The conversations have moved quickly and you feel that you may be on the verge of a deal. Today, you're meeting with a member of Signature's leadership team and hoping to finalize arrangements. If you can close and deliver on this deal, it could take Amari's profile and reputation to the next level, establishing a leadership position in the region and paving the way for more work with Signature and other partners. It could also yield a handsome profit. A critical final issue to resolve in today's discussion is the licensing fee. Both sides have signaled an objective of finding a single, one-time price covering all 10 locations. Your thinking has been shaped by the research of your finance and operations teams. They estimated the likelihood of different daily customer rates, the key driver of profitability. As more customers come through a given location each day, you expect profitability to go up. Given local customs and laws, you'd expect to be open about 300 days a year on average. Based on your knowledge of these markets, your team's best guess is a little over 800 customers per day per location for the foreseeable future. According to your team's model, 800 daily customers would yield about $8 million in net present value for the 10 sites, the current value of the stream of operating profits you'd expect to receive. Each 100 additional daily customers per location would increase or decrease this by about a million dollars (your financial valuations and decisions are based on these eventual running rates for each location, setting aside launch and start up periods). Of course, you cannot be certain how many daily customers you would have, though you and Signature have already agreed that you would have a third- party auditor assess daily customer traffic a year after launch to gauge how the restaurants are faring. Following vour instructions to be somewhat conservative, your team expects there is a 20% chance of 700 customers a day at the low end. They expect a 10% chance each of three higher end. outcomes: 900, 1000, or 1100 customers per day per location. Your estimates of likely daily customers per location are reflected in the table below: Daily customers per location 700 800 900 1,000 1,100 Estimated likelihood 20% 50% 10% 10% 10% Total valuation for all 10 sites $7,000,000 $8,000,000 $9,000,000 $10,000,000 $11,000,000 On the basis of this, you attach an $8.4 million net present value to the operating profits for this deal (i.e.. a 20% chance of $7 million, a 50% chance of $8 million, a 10% change of $9 million, and so forth). Based on Amari's financial analysis of its budget, the partners have agreed that you can pay out no more than $6,000,000 (an average of $600,000 per site) for the licensing fee. The partners have urged you to abide by this limit even if the payments are made over time in order to have a good chance of earning a healthy return. You have a hard time imagining that the rights would go for less than $3,000,000. Another matter to be finalized is the launch schedule for the 10 sites. Amari hopes to open all 10 sites across the region on the same day in a single "wave." Signature has expressed some concern about this and you need to finalize this issue for the sale to proceed. They asked you to consider other scenarios, ranging up to opening the restaurants across five different spaced out days (i.e., 5 waves). They may worry about your ability to handle the launch but you know that opening all 10 locations on the same day would be an incredible event, drawing a tremendous amount of positive attention not only to the restaurants but also to Amari as a major player in the hospitality industry. This kind of launch would unambiguously show that "Amari has arrived." Your team has discussed slower launch pace options and concluded that opening the locations on different days would lead to major political headaches. The leaders and government figures in many of the cities and countries involved can be very sensitive about how they are treated compared to their neighbors in the region. If some feel that they are receiving lesser treatment by not being in the first wave, there could be unwanted backlash that would complicate future projects for you. For this reason. you attach great value to launching all at once, allowing everyone to feel that they are "first." The public relations value of a one-wave launch would be huge for Amari. Launching in two waves would be far less appealing but feasible and you could find some face-saving reason for launching in two rounds. But launching in three waves would be even less attractive, damaging some of your relationships. Your team has agreed that you should not agree to a deal with any more than three waves and you should strive for a single wave launch. Your team has attached values to each of these possible outcomes, as shown in the table below: Launch timing 1 wave 2 waves 3 waves Over 3 waves Adjustment to total valuation $950,000 $0 ($750,000) Unacceptable Launching in a single wave would create goodwill and tremendous positive publicity, leading your team to value that at $950,000 (a single sum you can add to the overall value of the deal for Amari). Two waves would not meaningfully add or detract any value to the deal. Three waves would lead you to subtract $750.000 from the value of any deal. You do not pect that launch timing would have effect on the eventual "running rate" of daily customers per location. Another issue concerns payment timing. Although the licensing agreement is for a one-time fee. the payments may be spread out over multiple years. Signature may be eager to have payment up front or as early as possible. Amari, of course, would like to defer payment, and conserve cash, as long ast possible. Your finance team has provided a way to quantify the savings of delaying payment, as shown in the table that follows. For instance, if you were to pay $2,000,000 in Year 2, you would count that as spending only $1,600,000 now (i.e., a 20% reduction). If you were to pay $2,000,000 in Year 5, you would count that as spending only $1,000,000 now (1.e., a 50% reduction). Timing Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 You save ... 0% (i.e., money paid up front counts at face value) 10% (i.e., reduce the amount paid in Year 1 by 10% to compute its present value) 20% (i.e., reduce the amount paid in Year 2 by 20% to compute its present value) 30% (i.e., reduce the amount paid in Year 3 by 30% to compute its present value) 40% (i.e., reduce the amount paid in Year 4 by 40% to compute its present value) 50% (i.e., reduce the amount paid in Year 5 by 50% to compute its present value) Amari would like to defer payments for a number of these restaurants means reasons. Building out additional outlays of money before any revenues come in. Among other expenses, Amari will need to conserve some capital to procure branded items (signage, fixtures, uniforms, and serving ware). which its vendor in the region estimates will cost $200,000 up front per location, an amount that has already been factored into your net present value of the deal. Amari has an alternative for the resources it would put into the Park Bar deal: a hotel project that would likely yield a total net value of about $3 million. This deal is not exactly comparable to the arrangement. with Signature, but it has helped your team set a hurdle for this project. The Amari leadership will evaluate the Signature deal by the extent to which its value exceeds a $3 million hurdle. If the value is not. above this hurdle (i.e., if the value is not over $3 million), you cannot agree to the deal. You will soon meet with a member of the Signature Hospitality leadership team to see if you can fashion a final agreement. Be prepared to assess the value of any given deal. One approach would be to prepare a worksheet or computer model that you could consult during the conversation. Regardless of how you structure your valuation approach, your computation of the deal's value should include the following: 1. Expected operating profitability. Start with your base assumption of $8.4 million in profitability and make any necessarily adjustments. 2. Licensing costs. Subtract the amount paid to Signature for the rights to the 10 locations. 3. Payment savings. Discount the value of future payments (made in Years 1-5) based on the table shown earlier. 4. 5. Other aspects of the deal. Add the net value (positive or negative) of any other components you have agreed to, including launch timing. Evaluate compared to hurdle. Compute the value of this deal above and beyond the value of the hurdle, which is $3 million. That is, take the raw value of the deal, as computed in items 1-4 above, and then subtract off $3 million to get the value of the deal above the hurdle rate. You are one of five partners in the Amari Group, an international team of entrepreneurs and investors with expertise in hospitality and franchise management in the Middle East. While only about a decade old, Amari has started building a track record of successfully bringing global brands into the region, with special focus on the Persian Gulf Arab States, including Bahrain, Qatar, and the United Arab Emirates. Amari generally works behind the scenes, partnering with brand name companies that have limited experience with the area. Typically, Amari acquires the rights to use a particular brand in a given area and then builds out a presence with the same standards and feel that the brand has around the world. In recent years, Amari has opened a half-dozen luxury hotels and high-end restaurants in the Persian Gulf region. Amari's momentum is strong and growing. Recently, you and several other Amari partners have come into talks with the leadership team of US-based Signature Hospitality, the private company behind some of the most financially successful and critically celebrated restaurants in New York, San Francisco, Los Angeles, and other cities. Most Signature restaurants are one of a kind establishments, some of them featuring “celebrity" chefs. About five years ago, Signature opened a small restaurant adjacent to a park in New York City named Park Bar that served simple fare, including burgers, salads, and juice drinks. The concept was straightforward: comfort food made from incredibly high quality ingredients, served at a fraction of the price of high-end restaurants. With limited seating, most diners get their Park Bar food to go, making for enviable profit margins. Park Bar has since slowly grown to a dozen locations in the United States, capturing rave reviews and generating a tremendous amount of buzz. Food lovers and writers often publicly obsess about where the next Park Bar location might be. The owners have resisted pressure to expand quickly, instead focusing on quality and reliably choosing locations that have proven to be hugely successful. Some observers believe Signature Hospitality is planning to ramp up development of Park Bar locations in the United States. A few months back, you and several Amari partners began discussions with Signature about the possibility of Amari owning and running Park Bar restaurants in the Middle East, an area that Signature has never entered before. Your discussions with Signature have revolved around Amari acquiring the rights to open 10 Park Bar locations in the Persian Gulf Arab States, including sites such as Abu Dhabi in the United Arab Emirates and Doha in Qatar. The conversations have moved quickly and you feel that you may be on the verge of a deal. Today, you're meeting with a member of Signature's leadership team and hoping to finalize arrangements. If you can close and deliver on this deal, it could take Amari's profile and reputation to the next level, establishing a leadership position in the region and paving the way for more work with Signature and other partners. It could also yield a handsome profit. A critical final issue to resolve in today's discussion is the licensing fee. Both sides have signaled an objective of finding a single, one-time price covering all 10 locations. Your thinking has been shaped by the research of your finance and operations teams. They estimated the likelihood of different daily customer rates, the key driver of profitability. As more customers come through a given location each day, you expect profitability to go up. Given local customs and laws, you'd expect to be open about 300 days a year on average. Based on your knowledge of these markets, your team's best guess is a little over 800 customers per day per location for the foreseeable future. According to your team's model, 800 daily customers would yield about $8 million in net present value for the 10 sites, the current value of the stream of operating profits you'd expect to receive. Each 100 additional daily customers per location would increase or decrease this by about a million dollars (your financial valuations and decisions are based on these eventual running rates for each location, setting aside launch and start up periods). Of course, you cannot be certain how many daily customers you would have, though you and Signature have already agreed that you would have a third- party auditor assess daily customer traffic a year after launch to gauge how the restaurants are faring. Following vour instructions to be somewhat conservative, your team expects there is a 20% chance of 700 customers a day at the low end. They expect a 10% chance each of three higher end. outcomes: 900, 1000, or 1100 customers per day per location. Your estimates of likely daily customers per location are reflected in the table below: Daily customers per location 700 800 900 1,000 1,100 Estimated likelihood 20% 50% 10% 10% 10% Total valuation for all 10 sites $7,000,000 $8,000,000 $9,000,000 $10,000,000 $11,000,000 On the basis of this, you attach an $8.4 million net present value to the operating profits for this deal (i.e.. a 20% chance of $7 million, a 50% chance of $8 million, a 10% change of $9 million, and so forth). Based on Amari's financial analysis of its budget, the partners have agreed that you can pay out no more than $6,000,000 (an average of $600,000 per site) for the licensing fee. The partners have urged you to abide by this limit even if the payments are made over time in order to have a good chance of earning a healthy return. You have a hard time imagining that the rights would go for less than $3,000,000. Another matter to be finalized is the launch schedule for the 10 sites. Amari hopes to open all 10 sites across the region on the same day in a single "wave." Signature has expressed some concern about this and you need to finalize this issue for the sale to proceed. They asked you to consider other scenarios, ranging up to opening the restaurants across five different spaced out days (i.e., 5 waves). They may worry about your ability to handle the launch but you know that opening all 10 locations on the same day would be an incredible event, drawing a tremendous amount of positive attention not only to the restaurants but also to Amari as a major player in the hospitality industry. This kind of launch would unambiguously show that "Amari has arrived." Your team has discussed slower launch pace options and concluded that opening the locations on different days would lead to major political headaches. The leaders and government figures in many of the cities and countries involved can be very sensitive about how they are treated compared to their neighbors in the region. If some feel that they are receiving lesser treatment by not being in the first wave, there could be unwanted backlash that would complicate future projects for you. For this reason. you attach great value to launching all at once, allowing everyone to feel that they are "first." The public relations value of a one-wave launch would be huge for Amari. Launching in two waves would be far less appealing but feasible and you could find some face-saving reason for launching in two rounds. But launching in three waves would be even less attractive, damaging some of your relationships. Your team has agreed that you should not agree to a deal with any more than three waves and you should strive for a single wave launch. Your team has attached values to each of these possible outcomes, as shown in the table below: Launch timing 1 wave 2 waves 3 waves Over 3 waves Adjustment to total valuation $950,000 $0 ($750,000) Unacceptable Launching in a single wave would create goodwill and tremendous positive publicity, leading your team to value that at $950,000 (a single sum you can add to the overall value of the deal for Amari). Two waves would not meaningfully add or detract any value to the deal. Three waves would lead you to subtract $750.000 from the value of any deal. You do not pect that launch timing would have effect on the eventual "running rate" of daily customers per location. Another issue concerns payment timing. Although the licensing agreement is for a one-time fee. the payments may be spread out over multiple years. Signature may be eager to have payment up front or as early as possible. Amari, of course, would like to defer payment, and conserve cash, as long ast possible. Your finance team has provided a way to quantify the savings of delaying payment, as shown in the table that follows. For instance, if you were to pay $2,000,000 in Year 2, you would count that as spending only $1,600,000 now (i.e., a 20% reduction). If you were to pay $2,000,000 in Year 5, you would count that as spending only $1,000,000 now (1.e., a 50% reduction). Timing Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 You save ... 0% (i.e., money paid up front counts at face value) 10% (i.e., reduce the amount paid in Year 1 by 10% to compute its present value) 20% (i.e., reduce the amount paid in Year 2 by 20% to compute its present value) 30% (i.e., reduce the amount paid in Year 3 by 30% to compute its present value) 40% (i.e., reduce the amount paid in Year 4 by 40% to compute its present value) 50% (i.e., reduce the amount paid in Year 5 by 50% to compute its present value) Amari would like to defer payments for a number of these restaurants means reasons. Building out additional outlays of money before any revenues come in. Among other expenses, Amari will need to conserve some capital to procure branded items (signage, fixtures, uniforms, and serving ware). which its vendor in the region estimates will cost $200,000 up front per location, an amount that has already been factored into your net present value of the deal. Amari has an alternative for the resources it would put into the Park Bar deal: a hotel project that would likely yield a total net value of about $3 million. This deal is not exactly comparable to the arrangement. with Signature, but it has helped your team set a hurdle for this project. The Amari leadership will evaluate the Signature deal by the extent to which its value exceeds a $3 million hurdle. If the value is not. above this hurdle (i.e., if the value is not over $3 million), you cannot agree to the deal. You will soon meet with a member of the Signature Hospitality leadership team to see if you can fashion a final agreement. Be prepared to assess the value of any given deal. One approach would be to prepare a worksheet or computer model that you could consult during the conversation. Regardless of how you structure your valuation approach, your computation of the deal's value should include the following: 1. Expected operating profitability. Start with your base assumption of $8.4 million in profitability and make any necessarily adjustments. 2. Licensing costs. Subtract the amount paid to Signature for the rights to the 10 locations. 3. Payment savings. Discount the value of future payments (made in Years 1-5) based on the table shown earlier. 4. 5. Other aspects of the deal. Add the net value (positive or negative) of any other components you have agreed to, including launch timing. Evaluate compared to hurdle. Compute the value of this deal above and beyond the value of the hurdle, which is $3 million. That is, take the raw value of the deal, as computed in items 1-4 above, and then subtract off $3 million to get the value of the deal above the hurdle rate.
Expert Answer:
Answer rating: 100% (QA)
The image provided seems to contain a case study or hypothetical business scenario that requires the reader to assess various components of a deal and compute a valuation While I can offer guidance on ... View the full answer
Related Book For
Posted Date:
Students also viewed these organizational behavior questions
-
One of a Kind Designs is a custom dressmaker that specializes in wedding gowns. The following table contains events that occur in the manufacture and sale of gowns by One of a Kind Designs. Put the...
-
Some Middle East countries are described in Table 30. a. Identify the individuals. b. Identify the variables. c. Identify the data for each variable. d. Compute the ratio of 2012 military expenditure...
-
One area that fast food restaurants compete with one another is with the service time for the drive through window. The following data show the drive through service times, in minutes, for a random...
-
Let n=102 +r, where , re N, 0r9. A number a is chosen at random from the set {1, 2, 3, ..., n} and let pn denote the probability that (a 1) is divisible by 10. 70. If r = 0, then npn equals (a) 22...
-
A block of aluminum with a weight of 10 N is placed in a beaker of water filled to the brim. Water overflows. The same is done in another beaker with a 10-N block of lead. Does the lead displace...
-
The slender bar of weight W is supported by two cords AB and AC. If cord AC suddenly breaks, determine the initial angular acceleration of the bar and the tension in cord AB. Given: W = 150 lb 00 g...
-
The pressure rise, \(\Delta p\), across a pump can be expressed as \[ \Delta p=f(D, ho, \omega, Q) \] where \(D\) is the impeller diameter, \(ho\) the fluid density, \(\omega\) the rotational speed,...
-
Grant Film Productions wishes to expand and has borrowed $100,000. As a condition for making this loan, the bank requires that the business maintain a current ratio of at least 1.50. Business has...
-
Draw the shear force, bending moment diagram of a beam for the loading condition as shown in the figure. Determine the maximum bending moment, and shear force in the beam. Support reactions are pre-...
-
John and Sandy Ferguson got married eight years ago and have a seven-year-old daughter, Samantha. In 2020, John worked as a computer technician at a local university earning a salary of $152,000, and...
-
Consider the line -6x-9y=3. Find the equation of the line that is perpendicular to this line and passes through the point (-6,-4). Find the equation of the line that is parallel to this line and...
-
What are the main barriers to adopting investment appraisal techniques in business? In what ways can these problems be overcome in part/full?
-
- What's the difference between intention and motive in Canadian criminal law?
-
What is Crime, Criminal Law and Criminology and how are they different?
-
1. List the four written sources of American criminal law. 2. Discuss the primary goals of civil law and criminal law, and explain how these goals are realized. 3. List and briefly define the most...
-
Define and differentiate property law, tort law, family law, contract law, and criminal law. (200 words) ?
-
Can you help me reword and help organize this paragprah. The () are the comments and corrections that needs to be fixed. Addley, Esther. "'It's Tough for Parents': Should Young Children Have Their...
-
Data on weekday exercise time for 20 females, consistent with summary quantities given in the paper An Ecological Momentary Assessment of the Physical Activity and Sedentary Behaviour Patterns of...
-
The accountant for a subunit of Gutierrez Sports Company went on vacation before completing the subunit's monthly performance report. This is as far as she got: Requirements 1. Complete the...
-
Duncan Corporation uses the indirect method to prepare its statement of cash flows. Data related to cash activities for last year appears next. Net income....
-
QuickCo segments its company into four distinct divisions. The net revenues, operating profit, and total assets for these divisions are disclosed in the footnotes to QuickCo's consolidated financial...
-
The responses most likely to be associated with use of a force-coercion change strategy are best described as __________. (a) internalized commitment (b) temporary compliance (c) passive cooptation...
-
The assessment center approach to employee selection relies heavily on ____________ to evaluate a candidates job skills. (a) intelligence tests (b) simulations and experiential exercises (c) 360...
-
Which of the following questions can an interviewer legally ask a job candidate during a telephone interview? (a) Are you pregnant or planning to soon start a family? (b) What skills do you have that...
Study smarter with the SolutionInn App