CASE STUDY: Turning Around a Kopltlam Business a) b) Background of the Company Kedai Kopi Malaya (KKSB) is involved in the food and beverage business and has 4 outlets i.e. 3 kopitiam outlets at Mid Valley, KL Gateway and Damansara Utama (in a shop lot), and a bakery outlet in Genting Highland. It also has a Central Kitchen in Subang industrial area. The Central Kitchen is fully equipped with 5 sections i.e. store. preparation, cooking. packing and resting areas. It also has complete set of equipment and a walk in freezer and chiller on the ground oor (space of approximately of 2.000 sq ft). The rst oor has space of approximatley 600 sq ft currently used for storage of furniture from another 2 outlets which were closed in year 2019. The Central Kitchen is however not in use and all outlets' cooking preparation activities are done at the Damansara Utama outlet which has a small kitchen. The corporate ofce is at a rented space at Oval Damansara where the Senior Administer responsible for all purchases, payment and human resource functions of KKSB is placed. The outlet in Genting has ceased operations since June 2020 due to the effect of M00. The operations of the other outlets of KKSB are run by a Manager who has no experience in F&B and was previously a DJ in a night club. He has poor management skills and is regularly missing from work most of the time. There are CCTVs at 2 of the outlets i.e. in Mid Valley and Damansara Utama. All outlets use an application called storehub as a point of sales system to capture sales and cash register. It also has a other functionalities such as wastage reporting, food costing etc but not being used currently. The accounting function is outsourced to an accounting rm. Key issuesfprobloms The nancial due diligence and legal due diligence reorts of KKSB by the PE rm revealed the following: 1. The company made huge losses in the last 3 years; 2. The cashow is negative and there is insufcient cash to pay salary going forward. In addition. suppliers are chasing for payments and some are planning to commence legal proceedings for non payments of creditors: 3. The original owner who invested RM1.0 million and led the operations in the first year (2018:2019) sold 80% of his shareholdings to a high network individual (\"the new owner') and left after having arguments with the new owner; 4. The new owner did not have any food and beverage experience or a team to run the kopitiam business hence decided to sell after investing RM2.4million in a short time; 5. Some of the workers are illegal and do not have proper working permits; 6. There is insufficient workers to operate all the outlets resulting in poor customer service; 7. There are allegations of misappropriation of funds involving the original owner including payment done to directors although the contracts of employment was signed at later date. 8. There has been cases where the outlets were not opened on certain days hence the mall operator has issued warning letters and in one case issued a termination notice; 9. Payment of salary to certain staff are done in cash through the Manager where money is transferred to him and he then pays the staff; 10. All recruitment of staff was done by the Manager; 11. Rental has not been paid for a few months and the Damansara outlet and the Central Kitchen owners have issued a legal notice to vacate the premises. Rental has also not being paid for the 2 outlets in the Malls for a few months; 12. There is very low sales in Damansara outlet and does not even cover its basic cost of salary and food cost let alone the cost of utilities and rental; 13. The tenancy agreements have expired for all outlets and the Central Kitchen; 14. There is no fixed asset listing kept for all equipment and outlet items; 15. The reviews on google are generally negative giving a bad image to KKSB; and 16. Online sales are minimum with Grab Food and the online menu is very limited. c) Purchase by a PE Firm A PE firm has on 1 February 2021 acquired 90% shareholding in KKSB at a purchase consideration of RM0.6 million. The PE firm has further committed to invest another RM0.4 million for working capital purposes based on the weak cash flow and financial statements (see key financial of KKSB in item "d" below). The PE firm immediately removed all the existing directors, CEO and CFO of KKSB and appointed an Executive Director who has vast experience in financial management and restructuring having worked with a few Multinational Companies (MNC). The Executive Director is a qualified accountant and has attended the Executive Harvard Management Programme. In addition, the PE firm appointed a Chief Operating Officer, a former Head of Operations of a large international franchise chain of European-style cafe restaurants operating in Malaysia to run the day to day opeartions of KKSB. The COO comes with over 20 years experience in F&B mainly in cafe business and is a hands-on person.d) Key Financials of KKSB 12 Months 12 Months 18 Months Remarks 30/6/2018 30/6/2019 31/12/2020 Income Statement Revenue 770 1,753 The losses in Jan & Feb 2021 amounted to RM61k Cost of Sales 996 2,156 and RM71k respectively. Gross Loss 226 -403 Expenses 48 1,179 1,179 Net Loss 48 1,405 .1,582 Balance Sheet Plant & Equipment 446 845 580 The original cost of plant and equipment is RM1.2 m Current Assets 219 553 176 Cash balance as at 28.02.2021 is RM10k Total Asset 665 1,398 856 Share Capital 100 1,800 1,800 Accumulate losses -48 -1,455 -3,034 Total Equity 52 345 -1,234 Liability 613 1,053 2,090 There is a loan of RM1.6m payable to the new owner Total Equity & Liability 665 1,398 856 The food purchase cost in the last few months of 2020 has reached an average of 45% of total revenue. Assignment The PE firm has now engaged you to carry out a high level risk assessment of KKSB including identifying key strategic risks and advise on the key strategies to manage the key risks. Participants are to study the above case in detail and prepare a presentation for the following: i. Identification of key strategic risks and other high risks facing KSB; ii. Identification of key strategies to manage these risks; and iii. Decision on whether the PE firm should continue with the operations or exit the business to reduce its losses in its investment