Health Nut Case

Q1. What is the primary issue that Bregmann and Bury are facing?

Ans. They were unable to generate enough cash from their business, Health Nut, to fund its day-to-
day operations and draw income from business for themselves. Even after generating a small profit
in FY 2005, they continued to burn through capital to survive and were left with a cash runway of
only 4 weeks. Essentially, they were facing liquidity issue because they were unable to meet the
projected targets.

Q2. What was the DD process used by them while buying the business?

Ans. They performed an evaluation of the target business to ascertain its viability via following steps.

 Used the online tools from Canada Business Services like business start-up checklists and
business planning guidelines
 Met with Sarnia Lambton Business Development Corp. (SLBDC) for advice on the acquisition
 Used the historical financial data like Income Statement from the owners to make financial
projections such as forecasts for cash flow, sales and expenses
 Developed business plan for presenting to potential lenders for investment
 Negotiated the acquisition price for the business to arrive at a final figure of $22,000 based
on inventory count

Q3. What is the financial status of the firm?

Ans. The capital structure of the company is as follows-

 $27,000 of equity investment by the founders and $40,000 of bank loan

Although the sales were increasing year-on-year, the firm was burning through cash. Even after
making a small profit in FY 2005, they were unable to generate enough cash. There is Asset Liability
mismatch due to high cash burn because of which the owner’s equity is negative. There is significant
withdrawal by the founders from the company’s equity share. Hence, it could be concluded that the
business is not in good shape and lacks proper financial management.

Q4. What are some of the factors that contributed to current situation?

Ans. Following are some of the factors:

 Inability to meet the targets from operations as projected in their business plan
 Writing down of their first stock inventory worth $1600 due to it getting expired
 Seasonality of the business – Slow-down of sales in the Jan-March quarter
 Expanding their store size causing significant increase in their rent payable receipts
 Setting up a treatment room for therapy sessions but not generating returns from it
Q5. What role does emotion play in decision making for business owners?

Ans. Given that the Health Nut business was set up by the owners by spending considerable time,
money and effort, they tend to be emotionally attached to their business. This can lead to taking
certain decisions that may not be favourable to the firm in the long run.

For example, their Cash & Bank Balance is significantly negative in FY 2005 and Inventory has been
consistently high. Renting additional space for starting therapy sessions which turned out to be
unviable was an economically unsound decision. Also, the founders were drawing significant amount
of money leading to negative equity value.

Also, at the end of 2003, they found that sales were half of the projected figure in their business
plan. Bury realised that things may not work, but did not discuss with Bregmann as she was very
excited about the business.

Q6. What are the alternatives available?

Ans. Following are the alternatives they are considering:

 Equity investment offer from a silent partner

 Give up additional office and treatment room space being rented to save $300, but have to
wait till May for the lease period to end
 Try the “Healthy Living” parties model of Tupperware to increase sales
 Internet mail-order setup to enable online purchase and delivery, but need $2000 to setup
and $1200-$2000 per year of AMC
 Sell the business, but need to do valuation and find a prospective buyer
 Close down the business, or better, declare bankruptcy in order to help pay off the liabilities
and ensure the debt holders get their dues

Q7. What are your recommendations?

Ans. From the alternatives presented above, we recommend that they should sell off their business
to a prospective buyer at the right valuation. This is because the business is unviable with limited
growth potential (forecasted annual growth rate of ~1.6%). The founders lack the management
capability to run the operations as can be inferred from their decisions.