Analysis of the market and financial basis for a pizza franchise chain in Arizona

The estimated number we have chosen is $40 000. The value was arrived at after analysis of the current weekly revenue amounts for senior franchisee locations in Arizona. Since the market is similar to these specific franchisees, who are currently making a value of $38 700, the estimated revenue amount needs to be a similar value. The weekly sales for nearly half of the restaurants that perform less than the average mean of $50 000, have an averaged value of $40 000. Despite this, the main basis for the $40 000 estimate is the revenues earned from the Arizona facilities.

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The nine stores located in Arizona make an average of $41 400 per week, in which three of these facilities that were formed under a Senior Franchise agreement, generate nearly $3000 less in revenues. Since approximately one half of the company’s growth over the next few years is expected to come from Senior Franchise agreements, the value of revenues earned from these sources are an important indicator for determining a single point estimate. The value that was determined needed to incorporate a combination of the revenues of the nine Arizona stores and the revenues of the three Senior Franchisee stores within the area.

Although the three Senior Franchisee stores are the best indicator for weekly revenue, the value needed to be higher to incorporate the poor performance of the Arizona stores. Management believes that their performance will be improved based on corporate marketing efforts and new management, allowing for slight revenue growth. Despite this, there is no reason to believe that new restaurants in this market will be any different that other stores already in the system. When deciding on a single point estimate, we must also analyze the total revenue numbers for the pizza industry as a whole.

Average weekly revenues for 2007 within the U. S. s $11 506, which is considerably lower than the average amounts dealt with in Arizona. 1 Since the U. S. pizza industry is significantly fragmented, this is not as significant of a benchmark for comparison use but does provide a more descriptive picture for the auditor. In comparison to similar companies, Papa John’s based their discounted cash flow analysis on a percentage growth rate of three percent while Yum! Brands used a similar long-term growth percentage. These values alongside a 2. 39% average growth percentage for the top ten U. S. pizza companies, allow for a credible benchmark to help base the company’s future weekly revenues.

Based on current projections, aggregate sales of pizza chains are to increase this year. The value is of the U. S. Pizza industry is expected to grow by 0. 2 billion in 2010, despite a large decrease in the pizza segment in 2008. A recent industry analysis has suggested that annual sales growth for firms within this industry was approximately 4. 3% in 2006. The U. S. Pizza market is a mature industry that is nearly fully developed and as such, is highly competitive internally.

This will create problems with profitability for franchise owners since competition will force prices to be kept low. In addition, real GDP is expected to grow substantially at a rate of 1. 2% due to economic expansion and a higher amount of overall spending. 2 Furthermore, despite some expected growth, Arizona is not a primary growth market for the industry leading company since no major expansion is planned, which may further suggest that this market is completely mature.

Roman Holiday has based their annual growth on the schedules stated in the Senior Franchisee contracts that were acquired. Since there is no expected increase in company-owned restaurants, all growth is based upon franchise restaurants with approximately half of the company’s growth based upon Senior Franchise agreements. Management has no reason to believe that expectations will not be met in this situation. Also, analysts generally believe that the company’s growth will slow in the next few years but will still exceed the industry average of 4. 3%.

Much of the company’s growth in recent years is based upon acquisitions of franchise rights and existing restaurants. This may prove to be of concern since it suggests that company growth is only very lightly based upon real growth in the franchise. Despite this, during the next few years the company has created a growth plan which focuses on branching out through Senior Franchise agreements. Since the rate of new restaurants opened at year end is needed to determine the present value of net cash flows, assumptions need to be made regarding the company store growth.

There are currently three Senior Franchises in the Arizona territory, and the company’s extensive strategic growth plan during the next few years should be questioned. A concern arises regarding whether or not the company has done sufficient research to ensure minimum demand is met to meet quantitative revenue targets. According to the client prepared impairment analysis given in exhibit six, the annual growth in number of restaurants to be opened in the market is assumed to be three. As such, we have determined the relevant range to be between two and four new openings each year.

The basis for this range is that management believes there is no reason for this schedule to not be met in this situation. We should be concerned regarding estimation uncertainty since the growth rate in the company’s impairment analysis remains constant for fourteen years, which may be considered unreasonable. Aside from this, considering relative historical information, these growth schedules, which portray an incremental increase of four new restaurants each year, have been met seventy percent of the time, allowing us to determine an appropriate upper end limit of four openings.

Additionally, growth was approximately one-half of the scheduled amounts for the other thirty percent, creating a lower end of the range equal to two openings per year. Furthermore, in both situations, the maximum number of restaurants opened is eventually met. Expense Ratios The company’s fixed costs can be ignored since they are assumed to be applied to all operations and will be incurred either way. The variable costs, on the other hand, will need to be examined in depth since they make up the majority of the company’s expenses.

Operating expenses, which contribute to the majority of variable costs, have increased mainly in relation to the increase in the amount of sales. The annual growth in Roman Holiday restaurants will be fully based around franchise restaurants since no new company-owned restaurants are being built. This will allow the corporation to continue incremental expansion without the liabilities associated due to an increase in incoming franchise fees. Additionally, since the only restaurants being opened are franchised, the operating costs that should be analyzed need to be based around the 986 franchise operations currently operating.

The fixed portion of the operating expenses for franchise operations are approximately 40%, leaving the remaining percentage for associated variable costs. After discovering that variable costs for 2007 were just over fifteen thousand, the value found is divided by the franchise related revenues to find a variable cost percentage. These calculations, which are shown below, form a variable cost percentage of approximately 20% of revenue. Coincidentally, the projected expenses are similarly equal to twenty percent of total projected revenues as shown in the projected net cash flow for the company.