Christine Wilde is considering opening a frozen yogourt store. One option is to purchase an existing independent store that is available for sale. The seller, Mark Preradovic, has operated the store for three years and has assured Christine that his location, although smaller than the average store, is an above-average performer for the industry. Mark has provided the financial data shown below for his store.

Christine has approached you to help her decide. You find the following information on the website of Yogourt Yogourt, a franchisor of similar outlets:

• The average store is 1,500 square feet (140 square metres) and contains six yogourt machines, a topping bar, and seating for 20.
• Sales average $400,000 for stores in their first year and $650,000 for a mature store. It usually takes three years for a store to mature.
• Gross margins on start-up average 70% and normally increase to 75% for established locations.
• Operating costs start at 50% and drop to 43% of sales for mature stores as the fixed costs are spread out.
• The initial investment for a 1,500-square-foot store is $350,000 for machines, franchise fees, and other capital costs, plus $50,000 for liquid assets including inventory.
• Franchisees are expected to invest two-thirds of the required investment in equity and arrange to borrow the remaining one-third.

You recall that in retail, a key statistic is sales per square foot, and you make a note to yourself to factor the different store sizes into your analysis.
Mark is asking $400,000 for his store and explained to Christine: “I am offering you a great deal by just asking for the carrying value of the total assets. I just want to recoup my initial investment plus a little bit more for the time and sweat equity I have put in. I have done all the hard work getting the store established; it should be easy for you now.”

Required

a. Use financial statement analysis to evaluate the performance of Mark’s store compared with the average Yogourt Yogourt franchise.

b. Based on Mark’s most recent financial results and Christine’s investment, if she pays Mark’s asking price, what would be her ROA and ROE compared with a start-up franchise?

c. What other factors would you want to consider before buying the store? 

d. Do you recommend Christine purchase Mark’s store? Why or why not?

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MARK'S YOGOURT PLUS STORE Selected Financial Results Year 1 Year 2 Year 3 Store size: 1,200 square feet (110 square metres) Sales $240,000 $280,000 $330,000 Gross margin 231,000 168,000 196,000 Other expenses 160,000 180,000 200,000 $ 8,000 $ 16,000 $ 31,000 Net income