Sunnyside Corp. has approached your firm for $1.2 million in funding. You have been asked to evaluate their request and make recommendations.
Sunnyside produces high precision valves used by customers as the components in the manufacture of high quality, high value industrial machinery. Sunnyside enjoys a strong reputation for quality in the industry and has a solid performance track record. Growth has been steady but controlled and the firm produces a steady, stable, and reasonably sufficient internally-generated cash flow.
Sunnyside’s production is capital intense, with high fixed costs. Its technology is continually updated and changes are needed to stay ahead of competitors and meet continuing customer needs. Orders tend to be large and periodic with an approximate 1 month lead time. Products are “quasi-customized” and produced to order. The firm typically produces a “core” product and then customizes it (adding features) for the particular order.
Sunnyside markets using direct sales and has a very stable customer base of about 60 customers. It relies on repeat business and has not aggressively added new customers. Of its customers, two account for about 60% of the business and their needs have been important drivers of the business and solid sources of cash flows.
The firm anticipates increasing growth over the next 4 years. However, its production facilities, which are highly efficient and a source of material cash flow, are very close to capacity. And its plant space is already fully utilized. While the firm periodically uses increased shifts to respond to order flow, it anticipates the needs for a production expansion – thus the funding request.
Prepare an evaluation of the strengths & weaknesses of the firm; and specify the concerns and considerations for any investment.
Based on the case, the strengths of the Sunnyside Corp are:
- Strong reputation
- Solid performance track record
- Steady, stable, and reasonably sufficient internal cash-flow
- Steady growth
- Direct sales
- Stable customer base
- Highly efficient production facilities
Their weaknesses are:
- Controlled growth
- No aggressive addition of new customers
- Reliance on repeat business
- Most of the business (~60%) comes from only two clients
Despite all the strengths, the company suffers from the lack of new clients and reliance on just two clients, which are the biggest concerns. Additionally the growth has been limited, in spite of company's track record and reputation. Considering the strengths and weaknesses, the following considerations are important while determining the investment:
- Total scale of business: What is the total scale of the business, in relation to the funding sought? If the scale is at least few times the funding requested, then funding can be considered.
- Plans to get new clients or new business: A key consideration is how the company is planning to get new clients or more business from existing ones. Without a proper plan for such activities, funding cannot be justified.
- Current and projected cash flow: What is the current cash flow and what sort of cash flow is projected after funding infusion? Unless there is a significant increase in cash flow, funding infusion cannot be justified.
- Return on investment: Based on the scale of current business and cash flows, negotiate the best possible return on investment, whether its through interest on the loan or a share in the company.
Hope this helps.