Fred Needs( FN)
Tim Fred runs a family-owned mini supermarket called
Fred Needs (FN) in Mumbai. FN sells a wide range of products for everyday
household needs, with fresh and organic fruits, vegetables, and groceries being
the top sellers, along with other items like clothing and utensils. The
supermarket has been performing well, with sales revenues steadily increasing,
achieving an annual growth rate of around 8% between 2022 and 2023.
To capitalize on FN's strong brand and the growing
market demand, Tim is planning to expand the supermarket. The proposed
expansion includes adding more product lines, hiring additional sales staff,
and opening a dedicated section for home appliances.
However, this expansion requires substantial financial
investment, which FN currently lacks despite its success. According to Tim's
business consultant, there are two potential growth options to secure the necessary
funding:
Option 1: Bring in Jack Joe, Tim's college friend, as
a business partner. Jack owns multiple businesses and has a strong financial
and management background.
Option 2: Convert FN into a private limited company,
allowing Tim to raise capital by selling shares to friends and family members.
Questions:
a) Define the term ‘ private limited company [2]
b) Explain one internal and one external challenge that
Tim would have faced during the early years of his business start-up [4]
c) Identify and explain two benefits of Tim being the
sole trader [4]
d) Evaluate two growth options mentioned in the stimulus and recommend the best option for Tim [10]
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Suggested answers
(a) Define the term ‘ private limited company [2]
A private limited company (privately held company) is
an incorporated business with a separate legal entity that is owned by a
limited number of shareholders who have limited liability, and its shares are not
publicly traded on a stock exchange.
(b) Explain one internal and one external challenge that Tim would have faced during the early years of his business start-up [4]
Internal Challenge
(Cash flow)
One internal challenge
Tim may have faced during the early years of his business start-up is managing cash
flow effectively. New businesses often struggle with maintaining sufficient
cash flow to cover operational expenses, such as inventory purchases, rent,
utilities, and employee salaries, while also dealing with unpredictable revenue
streams. This could have required Tim to carefully plan and monitor his
finances to ensure that the business could meet its obligations without running
into liquidity problems.
External Challenge (Competition)
An external challenge
Tim likely encountered is competition from established supermarkets and
local stores. Competing against businesses with established customer bases,
supplier relationships, and economies of scale can be difficult for a new
entrant. Tim would have needed to differentiate FN by offering unique products
or superior customer service to attract customers and build a loyal client base
in a competitive market.
(c) Identify and explain two benefits of Tim being the sole trader [4]
Full control over decision-making:
As a sole trader, Tim has complete control over all business decisions
without needing to consult with partners or shareholders. This autonomy allows
him to quickly make decisions, implement strategies, and adapt to changes in
the market, providing flexibility and speed in responding to business
challenges.
For instance, he can decide on
important matters, such as expanding product lines, hiring staff, or opening a
new section for home appliances, without needing approval from partners or
shareholders. This flexibility allows Tim to adapt quickly to market trends and
customer demands, such as increasing the stock of fresh and organic products
when they are in high demand, ensuring FN remains competitive and responsive to
the needs of its customers in Mumbai.
Retain all profits:
Tim, as the sole owner, is entitled to keep all the profits generated by
the business after expenses. This can be a significant financial incentive,
as there is no need to share the profits with partners or shareholders,
allowing him to reinvest more funds back into the business or enjoy the
financial rewards of his hard work. Tim can enjoy the financial rewards of his
hard work, using the profits for personal financial goals
(d) Evaluate two growth options mentioned in the stimulus and recommend the best option for Tim [10]
Business growth is crucial for increasing market
share, boosting revenues, and enhancing competitiveness in a dynamic market. It
enables business like Fred Needs to scale operations, attract talent, and
innovate, ensuring long-term sustainability and success.
In this response two growth options of Tim evaluated and
the best option is recommended.
Option 1: Bringing in Jack Joe as a Business Partner. This option brings the following benefits:
Access to immediate capital: By bringing in Jack Joe as a partner, FN can gain access to the
necessary funds for expansion quickly, as Jack has a strong financial
background and owns multiple businesses.
Management expertise: Jack’s experience in managing multiple businesses can provide
valuable strategic insights and operational expertise, helping FN to grow more
effectively.
Shared risk: The financial
burden and risks associated with the expansion will be shared between Tim
and Jack, reducing Tim's personal financial exposure.
However, bringing in a partner means that Tim would have to share decision-making authority ( Loss of sole control).This could lead to conflicts if Tim and Jack have different visions or management styles.
Profit sharing:
Tim will need to share the profits with Jack, which could reduce his earnings
from the business in the long term.
Dependence on a partner: The success of this option would be highly dependent on Jack’s
commitment and the nature of their partnership agreement. If Jack decides to
exit the partnership in the future, it could disrupt the business.
Option 2: Converting FN into a Private Limited Company and Raising
Capital Through Share Sales. This option brings the following benefits
Access to capital without debt: By converting FN into a private limited company, Tim can raise capital
by selling shares to friends and family, providing the necessary funds for
expansion without incurring debt.
Retained control:
Tim can maintain control over the business by ensuring that he retains the
majority of shares. This allows him to make strategic decisions without needing
approval from external investors.
Limited liability:
As a private limited company, FN would offer limited liability protection to
Tim and the new shareholders, meaning their personal assets would not be at
risk if the business faces financial difficulties.
Potential for future growth: Converting to a private limited company can provide more structured
governance and make it easier to raise additional funds in the future, possibly
even considering institutional investors or an IPO.
However, complexity and costs: Converting to a private limited
company involves legal, regulatory, and administrative costs. There is also
ongoing compliance and reporting that can increase administrative overhead.
Dilution of ownership: Selling shares to friends and family will dilute Tim’s ownership in the
business, even if he maintains a majority stake.
To evaluate both the options, while
bringing Jack Joe as a partner (Option 1) offers the advantage of immediate
capital and management expertise, it also comes with the risk of losing some
control over the business and potential conflicts in decision-making. Option 2
provides a balanced approach to raising capital while maintaining control and
preparing FN for long-term growth and future opportunities.
Hence, considering the two options, Option 2: Converting FN into a Private Limited company and raising capital through share sales is the better option for Tim, as Tim can retain majority ownership and decision-making control, which is crucial for steering the business according to his vision, addition to this, the second option option provides limited liability protection, reducing personal financial risk to Tim and new shareholders.
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