Miami Car Wash

PROBLEM STATEMENT

Mr. Richard McKinnon, President of Miami Car Care has requested a loan from our organization (Business Development Bank of Canada) for the sum of one million dollars to finance expansion of his company. Our organization must determine whether credit should be granted to Miami Car Care by evaluating the inherent risks of foreclosure against the potential rewards if successful. Furthermore, if credit is granted, will the company require an extended line of credit to meet the obligations of a second location?

COMPANY OVERVIEW

In the spring of 2004, Mr. McKinnon, a longtime car enthusiast with an extensive business management and technology career, undertook the risks of becoming an entrepreneur. He established Miami Car Care in an attempt to fulfill his dreams of a family run car care business. The company enlisted the assistance of his wife, daughter and son into the business venture. The philosophy of the company is to meet or exceed customer expectations and provide premium products for use in their car wash facilities. The company, while still in its infancy, already wishes to expand to another geographic area of London, Ontario. This expansion will enable the business to capitalize on its short-term reputation and its premium facilities, in an area that they consider remains an underrepresented market. We are therefore forced to base our decision on one year's financial statement and his limited entrepreneurial experience.

INDUSTRY ANALYSIS

The North American Car Wash Industry has annual revenues of 272.7 million dollars with 2040 businesses in operation. The profitability is highly dependent on weather conditions, location and the quality of the facility. The Canadian Car Wash Association forecasts industry growth levels at 6.19 % over the next few years. As a new location, generating higher than average sales, we used 8% growth for Miami Car Care for the purpose of the financial statements. The Car Wash industry is cyclical in nature due to poor weather conditions such as rain, snow and very cold weather. These conditions are detrimental to the company's revenue and profitability. The Car Wash Industry was plateauing within a mature period of its life cycle; however, technological advances enable the car wash industry to rejuvenate. The advances in technology changed the industry from being labor-intensive to being primarily capital-intensive.

Statistics Canada, reports that London, Ontario is the tenth largest city in Canada with a population of 464 300. Cars, trucks and vans are used as a mode of transportation for 86% of London's population. YellowPages indicates that there are 27 car-washing facilities in London, Ontario.

This industry attracts entrepreneurs as they have low barriers for entry, such as limited overhead costs and a relatively simple business structure. While this allows easy access into this market, it increases the potential number of competitors over other industries. The car wash market is divided into two segments, the automatic car washes and the self-service car washes. As both bear advantages and disadvantages, they remain strong product substitutes for one another. As the time restrictions affect the population, one must ask if this will impact the number of people choosing the self-service options. According to the statistics provided in the text, "Miami Car Care Center Inc" prepared by the Richard Ivey School of Business, the city of London, Ontario is able to support greater than the thirty locations presently operating. However, we perceive the intensity of rivalry among competitors to increase as they attempt to gain market share. As the level of competition increases, profit margins will adjust to reflect these changes within the market. The accompanying financial statements indicate Miami Car Care's inability to remain competitive.

CREDIT GRANTING

It is estimated that approximately 80 percent of all start-ups fail within the first five years of operation. Therefore, careful analysis must be placed when granting credit to start-up enterprises.

* CHARACTER

Mr. McKinnon is an experienced individual with over 23 years of business management experience with Accuride Canada. His enthusiasm for cars, aspirations to become an entrepreneur, couples with his personal financial commitment to the organization indicate a loyalty to the organization. A major concern to BDC is the fact that he has a full time commitment to his present employer Accuride, while overseeing one car wash operation and now seeking funding for a second facility. As both operations are in their infancy, this further complicates the issue. We question whether he has the capacity to devote the time and financial commitment for this new venture.

While we admire Mr. McKinnon's enthusiasm, we are nonetheless apprehensive in that it appears that there has been limited time devoted to consolidate his first business prior to his decision to establish a second location. This hasty decision for expansion may call into question how carefully he has explored the implications of this choice.

* CAPITAL

Mr. McKinnon has committed a substantial amount of time and financial resources to starting his enterprise. He personally contributed 250,000$ for the development of the first car wash and intends to finance an additional 450,000$ for the second location. While this indicates a strong financial commitment to the company, it may impede his ability to repay the company's debt and his ability to generate further capital financing. We would investigate the sacrifices he and his family would have to make in order to secure this level of financing.

* CAPACITY

Presently, Mr. McKinnon has an outstanding Bank loan of 596,662$. The loan is in good standing, as all payments are up-to-date for the year of operations. The company will finance the expansion primarily through debt, which will increase the annual interest payments by 40,000$. The cost of servicing the debt will increase and this will impede its chance of viability during the seasonal periods within the car wash industry. The company's current line of credit may be insufficient to meet their financial obligations during the slower sales periods of November to February. Therefore, the company may also require an increased line of credit, which may prove beneficial in meeting short-term obligations but