Beano Ice Cream Case
1) I do not think that Harris’s new proposal is fair. Harris proposal is the one that Smith would expect was very different. The main difference is first the fact that Harris is asking for an equity position 49% of the company. Even if Harris gives a loan of $95,000, the fact that he owns 49% give him too much power and will not let Smith to run his business as he wants.
Another reason that Harris proposal is not fair is that during the 5 first year Smith has to repay the bank loan and Harris (=$120,000 + $95,000), according to his objective 1.
So speaking mathematically:
41,000 + 48,300 + 65,700 + 83,800 + 83,000 = 321,800 (=his total distribution for the first 5 years.
Then he will have to deduct the loans
321,800 – (120,000 + 95,000) = 106.800
Moreover, Smith only has 51% of the company so he will get 51% of $106.800 he will earn $54,468 which means a bit less than $11,000 per year the first 5 years.
Whereas on his initial proposal, Smith will own 67% of the company and will only have to repay the bank loan of $120,000
So speaking mathematically
41,000 + 48,300 + 65,700 + 83,800 + 83,000 = 321,800 (=his total distribution for the first 5 years.
Then he will have to deduct the loan
321,800 – (120,000) = 201.800
And 67% of $201,800 is $135,206 for the five first year, which is more than the double of what he would get with Harris proposal
2) Financially speaking, with both loans Smith has to pay back, he is far away from the $60,000 (refer to question 1) he would earn in his corporate job on his first 5 years. Then even if he is doing well on his franchisee and we assume that the distribution will go up to $85,000 on year 6 and 7 it means that he would earn 51% of it which is $43,350 a year. (so less than $60,000)
Moreover, in his corporate job, he has less risk than opening a new franchise. By Opening a new franchisee, Smith is taking the risk that the company goes bankruptcy, which mean that he will have no revenue,...