Ice Delights Case Study
1. Evaluate the “Deal” as it is presented in the case
As outlined below, ICEDELIGHTS is willing to provide an acceptable option to the franchisees due to their inability to commit to the venture immediately. The revisions to the deal allow the franchisees flexibility in their timeline for raising capital and financing the deal. Regardless of the timeline, the situation presents a concern with the franchisees ability to raise the amount of capital required to open their first three stores in a timely manner.
• ICEDELIGHTS did not want to be legally bound to the Florida franchise because they felt they might not have sufficient resources to accommodate the franchisees. • A deal was proposed that would provide the franchisee and franchisor security o Pay $200,000 up front for development fees and franchise fees for the first five stores o Pay $20,000 per store opened after the first five stores o Pay a 5% royalty on sales
• ICEDELIGHTS would then allow the franchisees to use their brand name and product, would train the franchisees and one manager per store, and would provide support for finding locations and construction of the stores. • The deal would come with an option because of ICEDELIGHTS inability to commit to the Florida franchise up front o The franchisees would make a deposit of $75,000 up front o The remaining $125,000 up front charge would not be owed until ICEDELIGHTS provided one acceptable location and the lease was signed o The franchisee would have the opportunity to build a production facility if ICEDELIGHTS was unable to provide the product to the new stores • The franchisees have two weeks to make a decision on the deal • Compared to other franchise opportunities, ICEDELIGHTS seemed expensive for an unproven concept • The profitability of the concept appeared to be very enticing to the franchisees • The franchisees would have to raise approximately $750,000 of outside financing to fund the venture
2. Evaluate the positive and negative features of the business opportunity
• Provides the potential entrepreneurs a business opportunity in a timely manner o They would be involved in the franchise before they had a lot to lose • Franchisees believe that they have the skill set to run a food franchise o The idea also seemed fun and financially rewarding
• The management team at ICEDELIGHTS impressed the franchisees • The product, systems, and management were standardized by the franchisor • The franchisees could leverage the ICEDELIGHTS brand, product, training capabilities, and real estate experience once ICEDELIGHTS could provide the support • Franchisees could obtain rights to the entire state of Florida
• The franchise was new and not yet proven in the industry or the potential market • It took approximately one year between signing the rights and opening a store • ICEDELIGHTS could not commit to supporting the franchisees because their resources were at capacity o They were interested in “slow, quality growth”
• The “homemade” product was actually produced off-site, frozen, and shipped to the locations • The product, systems, and management were standardized by the franchisor • The franchisees had no previous experience in the food industry • A tremendous amount of capital had to be raised to be successful • The franchisees would have to give up more than 25% of their company to investors o Investors had stringent requirements for control and repayment • The market had not been thoroughly researched or understood o Franchisees were not aware of the potential for this product in Florida • If ICEDELIGHTS could not provide the necessary support to the franchisees in the future, they would be left with little experience, a need to build a production facility, and a need to research their own locations • The franchisees would have tosign the agreement before visiting the market and determining the potential for business
3. What do you think of the case’s discussion of the different paths to “having your own business?
It seems that the case simplifies the opportunities for being a business owner and omits several options:
• Developing your own business idea and implementing it • Joining a partnership already in existence
• Inheriting a firm from family or friends ready to retire • Starting a business in your own area of expertise
• Go work for an SBA division of a bank to learn the trade • Go work for a property development firm to learn the trade
The case appears to outline options for developing a business that have already been developed by others in the past. The writer does not consider starting a business from the ground-up with a fresh idea and market potential. The different paths outlined in the case revolve around doing something that people have already done—learn an existing industry, get into the deal flow, and find a company to manage. In my opinion and experience, there are possibilities for business ownership far beyond the scope of relying on someone else’s ideas.
4. What are the key factors for success?
• Store location
o Ease of entry, visibility, market potential, traffic flow, etc. • Steady and consistent demand for the product
o Customers must value this product over the others in the market • Cash flow
o Franchisees must secure financing to have the ability to run the stores efficiently and effectively • Customer service
o Customers must feel that they are receiving value in their experience in addition to the product being sold • Customer loyalty
• Appropriate and responsible staff
• Consistent product quality
• Expense management
5. What are the key risk elements?
• Commitment from ICEDELIGHTS
o the franchisees need their product, brand name, and experience with real estate to be successful in this franchise • Securing adequate financing from outside investors
• Lack of knowledge of the market potential
• Management synergies, or lack thereof
• Lack of demand for the product
• Additional expenditures for potentially building production facility • ICEDELIGHTS’ conservative approach to growth
o The franchisees are looking to grow the business rapidly to turn a profit but, without the support of ICEDELIGHTS, this will not be a reality • Lack of food service management know-how among the management team • No experience with franchising in Florida
o Risk of health and other code discrepancies, zoning issues, etc.
6. Did they do a good job of obtaining required capital?
In short, no, they did not do a good job of obtaining required capital. They only sought funding from a small group of potential investors who were associated with their families. After approaching all of the contacts provided by their families, they were still $400,000 short of their goal. Throughout the process of obtaining funds, the team did not gain commitment from investors in writing, instead relying on their word. This caused fluctuations in the amount of capital raised to date. They did not research potential investment sources outside of their families and one venture capital firm. They could have investigated alternative approaches for financing the firm such as:
• SBA lending from a financial institution
• Industry investors looking to finance another food service deal • Gaining references from those investors already committed • Financing with more equity in spite of of the tax consequences
Their process for obtaining capital did not seem grounded because investors generally look for the ability to execute the business plan. In this circumstance, the ability to execute the plan entails a significant amount of risk because the franchisor has not yet committed its resources to the franchisees. The process of obtaining the required capital was not sound because the team only looked toward family friends for investment, they did not gain written commitment from several of these family friends, they did not research other avenues for financing the firm, and they did not have a foundation for executing their business plan since they could not rely on the franchisor for up to nine months into the venture.
7. Did they pull together a good management team?
Listed below are several reasons why the management team would not suffice in this industry:
• The management team has no prior food service management experience • They have no understanding of the production process for the product • They have no experience with locating real estate prospects • There is very little leadership experience among the members • They have very little experience with the culture and economics of the market • They are considering signing a deal without having visited the market • The members of the team have different and conflicting levels of risk aversion • The synergies among the team members are already eroding • The members have no production experience if the need arises
8. Were they successful? Why?
In this situation, I believe that the risks outweighed the potential returns. Much of the data that the profit potential was based upon was never been proven in the Florida market. I would argue that the team was not successful in this venture due to several weaknesses which outweighed thepotential strengths.
• ICEDELIGHTS would not be able to commit to the growth pattern that the franchisees deemed necessary for survival. o ICEDELIGHTS’ inability to commit would force the franchisees to build a production facility and, thus incur more and greater costs • The franchisees had no previous experience in the food industry o Although it is not rocket science, there is significant room for failure without the know-how of the industry in my experience • A tremendous amount of capital had to be raised to be successful o The team did not appear to have much success in raising capital thus far • The franchisees hadn’t even visited the market prior to signing the deal o Franchisees were not aware of the potential for this product in Florida o Similar franchises were, in fact, having difficulty in the market • Competition was increasing as two new gelato franchises were being introduced • There were considerable concerns with the disagreements among the management team • There is a glaring lack of experience with franchising in Florida • If the team members salaries were collected from the “management salary,” and only two stores were open in the first year, the third management member would not collect an income until the following year o It seems unlikely that these franchisees would be willing to live a year or longer without an income after business school