An Analysis of Three Business Plans in Regards to their Riskiness
This paper will examine three separate business plans and rate these plans based on the level of risk and the cost of capital that should be awarded to these plans. Of the three plans considered, a plan for an expansion of a coffee production facility in South America carries the least risk. An investment opportunity for a truck stop in Texas was estimated to carry slightly more risk but to be a relatively solid investment. Finally, an investment opportunity in a marketing company that targets high-tech firms and provides marketing services for firms who wish to enter foreign markets was recognized as the riskiest investment although it also has the highest potential rewards.
Acme Consulting involves a proposed business that specializes in a fairly focused niche (Palo Alto, N.d.). The organization will focus on the marketing of high-tech products in foreign markets. This niche is not well developed and many organizations do not have the internal resources available to actively market their products in international markets. The company intends to specialize in the European and Latin American markets and will be based in Silicon Valley. Their target market is intended to be small and medium size enterprises (SMEs) as well as larger corporations. The company believes that it can earn revenues of $159,000 its first year and grow them to $289,000 by year three of operations.
Despite the opportunities that may lie in this business plan, there is significant risk to this proposal primarily due to the fact that the company is untested, based on professional service, and is intending to operate with a relatively slim net profit margin. Therefore, any deviation from the original business plan could result in financial hardship for the company. However, at the same time there is also significant potential to generate huge returns on investment. This seems to be a high risk and high reward strategy that should be pursued with a cost of capital rate of roughly fifteen percent.
Interstate Travel Center
Interstate Travel Center will represent a major travel center in Dallas, TX (Bplans, N.d.). The truck stop will target NAFTA trade as well as the local Dallas market. The management team will consist of a married couple who have business experience but lack any relevant industry experience. The startup costs are projected to be 2.75 million and the company expects to receive a healthy profit margin within the first three years.
The risks associated with this investment are considered to be low to medium. They would be deemed more on the medium end of the spectrum because the management team has limited experience in the business’s particular industry. However, these specific challenges can be overcome and more experienced managers can be brought in to mitigate these risks. Furthermore consultants can also be used to set up the initial operating procedures. Therefore, it is recommended that the cost of capital in this particular investment be set at the eight percent range.
Coffee Export Business
Silvera & Sons prepares green Arabica coffee beans grown in Brazil for exportation to American specialty roasters and sells to wholesalers on the Brazilian market. We will expand production capacity from 72,000/60kg bags per year to 120-160,000/60kg per year. Our coffee stands out from that of the competition (Bplans, N.d.). This business plan represents an expansion plan due to the fact that the business is already in existence. Much of the business model has already been tested and management has a good knowledge of the international coffee trade.
The company has a history of stabile revenues and a gross margin that hovers around fifteen percent. Of the three business plans reviewed, this plan carries the least risk. Management already has a track record of good performance in this industry and the business also has a contacts and distribution channels in place to provide easy access to the expansion efforts. With this in mind, it is recommended that the cost of capital for this expansion plan to be placed at six percent based on its relatively low level of risk.
Bplans. (N.d.). Coffee Export Business Plan. Retrieved from Bplans: http://www.bplans.com/coffee_export_business_plan/executive_summary_fc.cfm#.UFCjnI1lSBo
Bplans. (N.d.). Truck Stop Business Plan. Retrieved from Bplans: http://www.bplans.com/truck_stop_business_plan/executive_summary_fc.cfm#.UFCjko1lSBo
Palo Alto. (N.d.). Acme Consulting. Retrieved from Palo Alto: http://www.paloalto.com/sampleplans/bpp7/enu/live/acmeconsulting_live.pdf
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