Greg Mazur and the Purchase of Great Eastern Premium Pet foods Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Introduction

Greg Mazur wants to buy a small business which is easy to understand so that he can increase the profitability of the business. In late December 1998, he was considering whether to finalize the purchase of Great Eastern Premium Pet Foods Inc. This business has met the requirements he set for the business he would like to purchase. He had many businesses and financial plans for the business which are marked by many assumptions. Therefore, if he goes for the business, this could be a very risky investment.

Why is Mazur considering buying Great Eastern Premium Pet Foods? Do you think it is a good business? What do you have to do to succeed in this business?

He is able to negotiate $1,236,000 as the purchase price of Great Eastern Premium Pet foods from the seller. He had set the target price of the business he would purchase to be between $1 million and $2 million. He would bring $500,000 and the remaining requirement will be met through borrowings. The operations of this business are easy to understand and do not involve any complexities. As this business includes various sales people which form a significant part of the operations, the business is not dependent on any one key employee. Furthermore, the business had sufficient scope for improvements which he was able to identify. It had its warehouse in Boston according to the requirements of Boston.

The sales of the business have risen from 6.6 million to 7.6 million and may rise in future. The gross profit has also risen from 17.5% to 19.4%. However, the net profits are considerably low in 1996 which have risen sharply to $139,637. The net profit may have risen due to manipulation to negotiate a high price. The current ratio has also improved from 1.7 to 2 showing a good liquidity position. The financial risk in this business is very low as debt is a small portion of total assets.

The company operates in a very competitive market. Furthermore, this business has high dependency on only one manufacturer which is very risky strategy. It pays for the inventory as a requirement of the company. In my opinion, this business does not seem viable and shows a large scope for improvements.

The dependency on one manufacturer should be removed by making agreements with other manufacturer. This business has potential to save costs. As Mazur will be the CEO of the business, it would save $66,000 and $50,000 annually by eliminating the general manager’s position and the company’s controller. The sales people should be asked to increase sales and the commission on sales based structure should be established. Unprofitable brands can be eliminated and the free resources can be invested in profitable brands. Marketing strategies should be developed to create the brand image of the product.

Are the cost savings Exhibit 3 and the projections in Exhibit 4 reasonable?

The costs savings of the owners’ salary, owner’s benefits and general manager’s salary seem to be reasonable as their position would be handled by the Greg Mazur himself. However, it is difficult to determine the rationale for the savings in relation to owner personal spending, SBT Service Contract and Outside Admin Contractor.

The growth rate of Sales seems to be too high as the business operates in a very competitive environment. The bargaining power of the manufacturer is high as it is dependent on only one manufactures. Therefore, the Cost of Sales of 80.5% seems reasonable, however, there is no evidence that it would decrease as shown in the projection. If inflation is taken into account, it has to increase. In the projection, the depreciation is decreasing. This is unrealistic as the increase in sales would result into high usage of fixed assets leading to high depreciation costs for the business.Greg Mazur and the Purchase of Great Eastern Premium Pet foods Case Solution

Finally, the cost of capital is the weighted average of the different elements of the costs. This business would include debt and equity. The calculation of this cost of capital has not been shown. Mazur should justify the cost of capital of 15% in this risky business.

Why is there an earn-out and a personal guarantee as part of this transaction?

The owner considers this business of high potential for growth. The earn-out in this business agreement of 1% is the factor which has brought these two parties to agree on this business sale. It has enabled Mazur to bargain a lower purchase price. Moreover, as the earn-out is dependent on sales, it would benefit the seller as it has bargained the lower price initially. On the other hand, if sales do not increase, the cash flows of Mazur will improve as the payments are not made initially...................

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