BestBuy Ent

1.0 Executive Summary Bestbuy Enterprise has come up with two rare but highly regarded products that could only be found in the deep interior of the Sarawak Highlands. Bario Rice and Salt offers a unique taste and are organically produced and harvested to meet the high expectation and standards of our customers. Bario rice is planted in the Kelabit Highlands by the Kelabit community in the north east of Sarawak, East Malaysia which is very close to the international border with Indonesian Kalimantan. The Bario rice is planted at an elevation of 3240 feet or 1000 meters above sea level which gives the area of cultivation a cool climate with an average temperature of 20 degree Celsius. The location has given a unique and distinct taste for the Bario rice since it is planted far away from the city and supplied by fresh water from streams of the Bario Mountains. According to Sarawak Tourism Board, Bario rice “has long been regarded as one of the finest rice grains of the world. It is famous for its soft texture, fine and elongated grains with mild aromas and splendid taste. The rice is a home-grown, laboriously planted and harvested by hands using age-old traditional methods. In the planting of the Bario rice, there is no usage of pesticides and chemical fertilizers. It has all the attributes of organic rice with an added flavor and unique taste as a result of the cool, pristine and unpolluted environments where it is grown. It is perfect for health conscious consumers.” The Bario Salt is also found just hours away from Bario near the village called Pa’Umor. The salt is collected from Lubang Garam Pa’Umor which is the bestknown Bario salt springs. The spring water, containing brine from lubang Garam Pa Umor, is boiled for 24 hours before the salt is extracted. The Bario salt spring looks just like an ordinary spring. The only difference is the water from the spring is salty. The salty water is boiled until all the water is evaporated, leaving the salt at the bottom of the “kawang” (big cooking utensil). The remaining water is completely dripped from the salt before it was put in bamboo pipes to be burnt in the fire. This is to harden the salt, which is later wrapped in big leaves to be kept in dry and safe places. Bestbuy ensures that its customers are acquiring the best there is around in terms of rice and salt products. In 2002, Bario Rice was accorded an International Presedia Award by Slow Food Foundation of Italy through the effort of the Department of Agriculture, Sarawak and Padiberas Nasional Berhad (BERNAS). The benefit of Bario salt is it is naturally and not over processed 1

(bleached) hence it’s naturally brownish colour. It is less salty than the commercial salt that we normally get in supermarkets and it contains more natural minerals. Therefore, we feel privilege as a medium to let the rest of the world sample one of the finest rice in Sarawak and to discover the unique taste of the Bario Salt. 1.1 The Market The price of our products in the market is high because of the way it is produced and transported. Therefore, our main customers are mainly high-end customers who have the purchasing power which means that there are our initial target markets. We will be promoting our products especially to high-end restaurants, hotels, souvenir shops and supermarkets. Besides that, our products would be beneficial to our customers who are health conscious since our products are organically produced and harvested in a traditional manner. Last but not least, we are also expecting buyers who are rice lovers and food goers especially those who are curious about Bario rice and salt. 1.2 The Enterprise Bestbuy Enterprises boast a strong founding team and experienced board of advisors. Our primary advisor, Azra Tilai brings in 10 years of industry experience and networked relationships to accelerate the market penetration of the products line. Bestbuy function only as a wholesaler by responding to inquiries on the products and making the transaction once the customer are fully informed and also once agreeing to the terms and agreement. We would first target two major cities in Sarawak which are Miri and Kuching. Miri would be our base of operation. Bestbuy Enterprise will follow three concise strategies to achieve our desired growth: 

Offering unique and rare products, which are highly in demand in the market.



Develop a strong branding campaign to build awareness, positive perception and sales of our products within our target markets.



Continue to develop new products to satisfy an ever growing set of market.

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1.3 Mission Our mission is to let the rest of the world experience the finest Rice in Sarawak and discover the unique taste of the Spring Salt through our product. 1.4 Key to Success Selling products which are highly demanded in the market. Less competition Complementary relationship with high-end restaurants, hotels, supermarkets or souvenir shops that are interested in using or selling our products into their business. 1.5 Objectives Branch network to interested high-end customers in Miri and Kuching by the 1st year. Become the leading wholesaler for Bario Rice and Salt in Sarawak by the 2nd year. Achieve sales of by the 6th year.

2.0 Company Summary Bestbuy Enterprise was founded in Kuching, Sarawak. Bestbuy is selling premium Bario Highland rice and salt because of its unique taste and health benefits. The base of operation would be in Miri because Miri is nearer to Bario compared to Kuching. The enterprise would initially be based near to the airport to reduce transportation fee. 2.1 Company Ownership The executive team will retain 100% of the equity in the company. 2.2 Start-Up Summary Total funding to get the business started is estimated at RM 150,000, which RM 100,000 come from the executive team investment and acquire loan of RM 50,000 from Agrobank.

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Start-Up 200

Expenses

RM ('000)

150

Assets Investment

100

Loans 50

0

Start Up Requirements Start-up Expenses

RM

Insurance

400

Stationary etc.

1,800

Rent

600

Website Development

11,500

Research and Development

35,000

Other

12,800

Total Start-up Expenses

62,100

Start-up Assets Cash Required

30,000

Start-Up Inventory

57,900

Other Current Assets

0

Long-Term Assets 0 Total Assets

87,900

Total Requirements

150,000 4

Start-Up Funding Start-up Expenses to Fund

62,100

Start-up Assets to Fund

87,900

Total Funding Required

150,000

Assets Non-cash Assets from Start-up

57,900

Cash Requirements from Start-up Additional Cash Raised

30,000

Cash Balance on Starting Date

0 30,000

Total Assets

87,900

Liabilities and Capital Loan (AgroBank)

50,000

Total Liabilities

50,000

Capital Planned Investment 

Azra Tilai

40,000



Ernaflovia Datip

20,000



Farazilla Binti Effendy

20,000



Elzwin Balai

20,000

Additional Investment Requirement

0

Total Planned Investment

100,000

Loss at Start-up (Start-up Expenses)

(62,100)

Total Capital

37,900

Total Capital and Liabilities

87,900

Total Funding

150,000

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2.3 Company Locations and Facilities The management team of Bestbuy Enterprise will initially use a shoplot building in Miri opposite the airport to run operation. 3.0 Products Bestbuy product line offer a unique type of rice and salt which could be fine hardly anywhere else except in Bario itself. We have two basic products that is rice and salt from the Bario highlands. The Bario rice is unique because it has a soft texture, fine and elongated grains with mild aromas and splendid taste. The Bario salt is also unique as it comes from a spring which is salty and contains more natural mineral than sea salt. Both products are produced, harvested and processed organically and in the traditional Kelabit manner. Therefore, our products are essentially suitable for health conscious customers. 3.1 Product Description 

Bestbuy will sell the Bario rice and salt by under the name “Premium Bario Highland Rice” for the rice and “Natural Bario Highland Salt” for the salt.



For the Premium Bario Highland Rice the price for 1kg would be RM12.36 in Miri and RM14.50 in Kuching. The price for 500g of Natural Bario Highland Salt would be RM14.30 in Miri and RM15.40 in Kuching.



The Premium Bario Highland Rice would be sold in small packets of 2kg or the standard rice sack of 35kg. The Natural Bario Highland Salt would be sold at 500g per pack.



The packaging of our products will be equipped with the enterprise information and also the nutritional facts. \

3.2 Competitive Comparison Bestbuy make sure that the rice and salt are 100% Bario rice and salt meaning it is not mixed with other type of rice or salt to add up for the weight. Integrity and quality control will set us apart from our competitors. Bestbuy would only acquire Bario rice from trusted farmers in the Kelabit Highlands that produce the best quality rice. 6

Premium Bario Highland Rice and Natural Bario Highland Salt will provide eager food lovers to grab a chance in experiencing a rare and unique taste of rice and salt that could only be found 1000m above sea level deep in the heart of Borneo. As our enterprise grows, we would expand our product line and also expand our business to places where there are few or no products similar to ours. We have identified a few big companies such as Bernas and Jati who have ventured out into the global market such as Italy selling products similar to ours. Therefore, in the future we would take this opportunity as a platform for our product as it has already been established by them at the global stage. 3.3 Sales Literature In order to sell our product while creating familiarity and a positive brand image, it will be necessary to develop information about our company and the products that we are selling to our customers. This is because; we positioned our products at souvenir shops and supermarkets whereby the customers would be able to see our packaging. The clear and proper display of our product together with the nutritional facts would convince customers that Bestbuy offers the best quality rice and salt there is in the market. 3.4 Sourcing Bestbuy acquire the Bario rice and salt through farmers which had already processed these items into readily edible food. The farmers also had already packaged them into sacks which are readily transported into the cargo from Bario to Miri. In Miri, we would then acquire the local packaging service to print our enterprise information together with the nutritional facts on our product that they are packaging. The packets or sacks will be design by our own. Apart from that, we are also acquiring the halal certificate for our products from Jakim. 3.5 Future products Besides our current products, Bestbuy would like to venture in other famous local Sarawak products such as the Batang Lupar Rice, and the Simangang Rice. This will add variety to our rice product line and expand our possibilities of a wider set of target market. Other future products to add in our business are Ikan Terubuk Masin (Salted Terubuk Fish), Tuak (Sarawak Rice Wine) or Sarawak Kek Lapis. 7

Perhaps the most promising future market opportunity for our future products would be the Ikan Terubuk Masin (Salted Terubuk Fish) and the Sarawak Kek Lapis. These two products are already well known and are especially famous among west Malaysians. This will be a top priority once the company develops the financial resources enough to mount a national advertising campaign and distribution system.

4.0 Market Analysis Summary There is tremendous potential for our product that provides our customers of the high quality of rice and natural salt. Considering the large scope of our potential markets, we feel it is imperative to focus our limited resources on a particular geographic region where we can establish demand for our product. After successful market penetration, we will begin implementation into the high-end restaurants, hotels, souvenir shops and supermarkets in other potential region. 4.1 Market Segmentation Premium Bario Highland Rice and Natural Bario Highland Salt were first introduced in Miri and Kuching. There are currently 3,409 retailers local and imported rice were supplied to some in Sarawak. After successful implementation in Sarawak, we will begin expansion in Peninsular Malaysia and Sabah. There are local and imported rice were supplied to some 41,637 retail outlets which 34,338 in Peninsular Malaysia and 3,237 retailers in Sabah. Successful penetration into the Premium Bario Highland Rice market will be followed by implementation into the highend restaurants, Hotel, Souvenir Shops and Supermarkets. 4.2 Industry Analysis The Industrial and Institutional rice and salt industry, of which we a part, is quite fragmented, but contains several well-known main competitors such as Jati Bario’s Rice, and Minera® Dead Sea Salts .The industry is stable and growing between 1998 and 2007 it grew by an average of 4% annually. Within the rice and salt sector there is fierce competition for market share among the existing popular rice and salt offering, leading to lean profit on rice and salt sales.

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4.3 Distribution Patterns Distribution in the rice and salt industry is provided by regional providers. These distribution usually serve a large portion of the market based on the respective size of the market, delivering to the organizations monthly of bi-monthly depending on demand and usage patterns. High-end restaurants and supermarket typically receives deliveries of rice and salt once in a weeks. Hotels typically have distribution system that operates on monthly deliveries of large quantities. While souvenir shops typically have a two month delivery schedule. 4.4 Competition and Buying Patterns High-end restaurants, hotel, souvenir shops and supermarket select rice and salt based on the quality and uniquely. Customers will typically select a product based on price, distributor availability, and convenience. Distributor will deliver a complete order of the rice and salt products to customers. Major competitors sell a variety of customers, including distributors like Tesco Hypermarket, who receive rice and salt from bulk producer, then repackage and deliver it along with other products it sells, utilizing same distribution systems. Main Competitors 

Jati Bario’s Rice Jati Bario Rice is the only rice grown in cool climates at elevation above 1200 meters. Cultivated by the natives or "Orang Ulu" in the highlands of Sarawak, Bario Rice has long been regarded as one of the finest rice grains of the world. Noted for its soft texture, fine and elongated grains, pleasant and mild aroma and exquisite taste, Bario Rice is truly the best rice money can buy. Bario Rice is not commercially produced. It is a homegrown rice, laboriously planted and harvested entirely by hands, using age-old traditional methods. Grown in the fertile valleys of the highlands at 1200 meters above the sea level and irrigated by the cool and clean mountain streams, Bario Rice is produced without the usage of pesticides and chemical fertilizers. Therefore Bario Rice has all the attributes of organic rice with the added flavor and distinguished taste derived from the cool, pristine and unpolluted environments where it is grown. Bario Rice is both for the connoisseurs and health conscious consumers, suitable for the whole family. Now, Bario Rice is specially air- flown out of the highlands from Bario and Bakelalan town by Serba Wangi 9

Sdn Bhd for the rest of Malaysians to sample the finest rice form the Land of the Hornbills. 

Minera® Dead Sea Salts Minera® Dead Sea Salts harvested from the southern Dead Sea in Israel, where mineral content is at its highest.The Dead Sea is known for its therapeutic properties, and people have traveled to its shores for centuries to soak in the salty, majestic waters. The clean, unpolluted air and warm climate provide a healing environment that is unparalleled. Dead Sea salt is filled with natural healing elements that occur naturally in the consumer bodies but are often lost as the consumer go about theirs busy days. Dead Sea bath salts contain 21 minerals including magnesium, calcium, sulfur, bromide, iodine, sodium, zinc and potassium. These essential minerals naturally occur in our bodies but must be replenished, as they are depleted throughout the day. These Dead Sea minerals are known to treat, detoxify, and cleanse our bodies.

4.5 Industry Participants The rice and salt industry is highly fragmented. There are more than 80 percent different institutional rice and salts product that compete in the Malaysia Markets. In 2007, the movement of rice and rice-products along the supply chain can be detailed as follows: 

In 2007, there were 14 seed centers (both public and private), supplying seeds to approximately 138,000 farmers.



The marketed surplus produced by farmers was purchased by 231 mills [174 in Peninsular Malaysia and 57 mills in East Malaysia (28 mills in Sabah and 29 mills in Sarawak)].



The output from these mills were sold to some 1,239 wholesalers [927 in Peninsular Malaysia and 212 wholesalers in East Malaysia (144 wholesalers in Sabah and 168 wholesalers in Sarawak)]



Local and imported rice were supplied to some 44,637 retail outlets [34,338 in Peninsular Malaysia and 6,646 retailers in East Malaysia (3,237 retailers in Sabah and 3,409 retailers in Sarawak)]

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

27.17 million consumers were served in 2007 [21.7 million consumers in Peninsular Malaysia and 5.464 million consumers in East Malaysia (3.06 million consumers in Sabah and 2.404 million consumers in Sarawak)].

4.6 Target Market Segment Strategy Our initial rice and salt market will consist of the high-end restaurants, hotels, souvenir shops and supermarkets represent very attractive opportunities for our product. Organizations of this type are attractive because they are well managed, successful, health conscious and nationwide. Within these organizations we will target decision level managers with the power to implement use of our product in those locations. 4.7 Market Needs According to the study in Southeast Asia Regional Initiatives for Community Empowerment (SEARICE), rice is regarded as the most important crop in the food sub-sector in Malaysia. The government regards food security as an integral national policy objective for overall development and has stressed that food security is synonymous with rice security. Thus, Malaysia’s self-sufficiency program has consistently focused on rice, being the staple food of the vast majority of the population. In the 1960s, when rice imports from rice exporting countries were unstable and Malaysia’s paddy rice sector was still undeveloped, the government was driven to ensure food security through the Rice Self-Sufficiency policy. Rice imports in 2000 were valued at RM 500.7 million, but declined by 19 per cent in 2001 as a result of the increase in domestic rice output. The main suppliers of imported rice were Thailand and Vietnam followed by Pakistan, Australia and China. Despite the need for rice imports to meet domestic consumption, Malaysia managed to export rice in 1995 amounting to 2,430 tons, largely to Myanmar, as part of a bilateral barter arrangement (The public sector intervention in the rice industry in Malaysia). Therefore, the demand for rice in Malaysia is more than the supply provided in Malaysia. Health conscious Malaysians have become aware on the importance of eating a well balance diet. Due to this factor, consumers have gone to the distance choosing what food is good to spice up their daily meals to achieve healthy living. Mindful of this dynamics, Malaysians have also turned to consume organic vegetables which are free from pesticides especially organic Bario rice. 11

4.7 Market Trends Market trends are significant changes to our market to ensure that, we will easier for us to plans for any changes in futures. Besides that, by knowing the market trends, will allow us to take an advantages of positive changes at the same time by preventing the negatives changes. By knowing the markets trends for premium rice and salts in Malaysia, it also can help us to keep ahead of our competitors. The market trends for rice and salt in Malaysia change over the years. The economic factor is the main reason of this happen. As an example, the increasing of the price in the normally rice and salt in Malaysia is increasing over the year until the price it reach or same with the price of the premium rice and salt. Besides that, when the economic crises happen in Malaysia in early 2008 to 2009, the price in the customer good are increasing including the price of rice and salts. Therefore, most of the customer may prefer to buy the premium or high quality rice and salts. 4.8 Market Growth Over the years, organic Bario rice has been the preferred choice by affluent and health conscious citizen. Thus, the demand for premium rice and salt will continue to grow. As the high end customer such as high-end restaurant and high-end hotel expected to seek the high quality of rice and salts. As the high-end restaurant and high-end hotels, they need to maintain their food quality when their serves to their customer. The average daily rate (ADR) will increase by 5.5percent, while the revenue per available room will increase by 6.9 percent. These numbers indicate that the luxury consumer is planning to travel more, in all markets by 34 percent expect that products and services should be customized to their needs and desire (www.fourseasons.com/content/.../2012_TRD_Report_FINAL.pdf). Most of their customers are from the high income and expected to demand for high quality food without care about the prices they need to pay. Therefore, there is a potential growth in our product and services.

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5.0 Strategy and Implementation Summary The key element in our initial strategy is to sell the premium rice and salt. Our executive team will build loyalty for our products with decision-level managers of the organization in the target markets, and create awareness and support of the benefits of the innovative for our premium rice and salts. 5.1 Strategy Pyramid Our ultimate strategy is to build the high quality product into the standard of the high-end customer, first regionally and eventually nationally. Our tactics to increase compliance through the use of our product include continual and progressive expansion into new markets and a strong branding campaign in coordination with promotional contracts with the government and possibility private companies. 5.2 Competitive Edge Through the successful branding, first-mover advantage, excellent distribution and proprietary position of the company, high quality, our company will develop brand recognition beyond any competitor. As a small company, we are aware of the disadvantage we have in legal settings, should we face larger, more resourceful competitors. However, a patent for our unique product will provide us with a degree of protection beyond a first-mover advantage by creating an additional barrier to entry. As the market is quickly penetrated, we may have to consider selling the production and licensing rights outright to an established company, should their tactics pose a direct threat to the survival of the company. 5.3 Marketing Strategy For our initial target market of the high quality of rice and salts, the company will implement three parallel marketing efforts, aimed respectively at the high-end restaurant’s kitchen manager, high-end hotel’s food and beverage manager and the most popular souvenir shops. We will create a push factor by effectively convincing the decision-level managers within the organizations that our product provides an ideal solution to increase and maintain the high quality and services. A "first to mind" branding campaign will build “Premium Bario Highland Rice” as the leader in increasing high quality rice in Malaysia. 13

5.4 Positioning Statement “Premium Bario Highland Rice” and “Natural Bario Highland Salt” is valuable to the our manager who need effective control solution to ensure the high quality and to maintain the natural of our product. No other product on the market serves the high quality and natural salts especially form Bario. Unlike the other rice and salts, our products are blessed with fertile soil condition, excellent weather, good system of irrigation and adequate water supply. 5.5 Pricing Strategy Firstly, our company needs to buy the rice and salt from the farmer and manufacturing from Bario. After that, our company will transport the rice and salt from Bario to Miri and Bario to Kuching by bus. Below is the pricing strategy for our product. Premium Bario Highland Rice in Miri In Bario, the rice is selling at RM30 per 3.5 kg. Therefore, to get the price 1kg for rice in Bario, is RM30 divided by 3.5 kg which equal to RM8.57 per kg (rounding at two decimal points). Generally, 35kg equal to one sack of rice. Thus, one sack of rice in Bario is selling at RM299.95 (35kg x RM8.75). There are two alternative that our company may take to transfer our product from Bario to Miri are either by land or by flight. However, if our company will transfer our product by land, the cost is generally high and also high risk. Therefore to avoid such thing, our company decided to transfer our product by flight. Maswing Airline is the only airline company operational in Bario. Generally, Maswing will allow using their service by maximum 105kg of any commodity such as rice and salt per way. The charge is as below: Types of charge

Amount (RM)

Cargo fee

0.70(105kg)

Document fee

2.00

Agent fee

10.00

Airport fee

15.00

Total charges per 105 kg

100.50

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From the table above, the total fixed cost charge by the Maswing is RM100.50 per 105kg of rice. Therefore, the cost of 1kg of rice is RM0.96 (RM100.50/ 105kg). The price of the 1kg of rice in Miri before the interest of profit we will take is as below:

Details

Amount (RM)

Price from Bario (Farmer)

8.57

Transportation fee (Flight)

0.96

Price per kg before interest of profit

9.53

Our company decided to transfer maximum 3 sacks of rice per flight because it’s easier for our company to measure the costs that will be charge by Maswings. The three sacks of rice would equal to 105kg and the cost involve is as below:

Details

Amount (RM)

Prices for 3 sack a

899.85

Transportation fee b

100.50

Total charges per 3 sacks

1000.35

a.

RM299.95 x 3 sacks = RM899.85

b.

RM100.50

From the tables above, the total costs for 3 sacks of rice is RM1000.35 which the price for 1kg of rice is same as before at RM9.53 per kg of the rice (RM1000.35/105kg). The rice will arrive at Miri Airport and therefore to transfer our product to our warehouse that is located in Miri, we need to transfer using our own transport. Therefore, we forecast the fixed costs will involve for transportation fuel (car) is RM10 per 1 sack. Since, 1 sack equal to 35kg, the cost for transportation fuel (car) per 1kg is RM0.29 (RM10/35kg). When our company decided to take

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25% of the interest profit for any 1kg of rice, the price per 1kg for Premium Bario Highland Rice is shown below: Details

Amount (RM)

Price before interest profit

9.53

Transportation fuel(car)

0.29

Total price before interest profit

9.82

Interest profit (25%)

2.45

Price after interest profit / per kg

12.27

Natural Bario Highland Salt in Miri In Bario, the salt is selling at RM20 per 1 kg. Generally, 5kg equal to one sack of salt in Bario. Thus, one sack of salt in Bario was selling at RM100.00 (5kg x RM20.00). As the rice, our company decided to transfer salt by flight. Generally, Maswing will allow using their service by maximum 105kg of any commodity such as rice and salt per one ways. The charge that the Maswing charge is as below: Types of charge

Amount (RM)

Cargo fee

0.70(105kg)

Document fee

2.00

Agent fee

10.00

Airport fee

15.00

Total charges per 105 kg

100.50

From the table above, the total fixed cost charge by the Maswing is RM100.50 per 105kg of salt. Therefore, the cost of 1kg of salt is RM0.96 (RM100.50/ 105kg). The price of the 1kg of salt in Miri before the interest of profit we will take is as below:

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Details

Amount (RM)

Price from Bario (Farmer)

20.00

Transportation fee (Flight)

0.96

Price per kg before interest of profit

20.96

Our company decided to transfer minimum 21 sacks of salt per one flight because it’s easier for our company to measure the costs that will be charge by Maswings. The twenty one sacks of salt are equal to 105kg and the cost involve is as below:

Details

Amount (RM)

Prices for 21 sack a

2,100.00

Transportation fee b

100.50

Total charges per 21 sacks

2,200.50

a.

RM100x 21 sacks = RM2,100.00

b.

RM 100.50

From the tables above, the total costs for 21 sacks of salt is RM2, 200.50 which the price for 1kg is same as before at RM20.96 per kg of the salt (RM2, 200.50/105kg). The salt will arrive at the Miri Airport and therefore to transfer our product to our warehouse that is located in Miri, we need to transfer it using our own transport. Therefore, we forecast the fixed costs would involve for transportation fuel (car) is RM10 per 1 sack. Since, 1 sack equal to 5kg, the cost for transportation fuel (car) per 1kg is RM0.29 (RM1.45/5kg). When our company decided to take 25% of the interest profit for any 1kg of salt, the price per 1kg for Natural Bario Highland Salt is shown below: Details

Amount (RM)

Price before interest profit

20.96

Transportation fuel(car)

0.29

Total price before interest profit

21.25

Interest profit (25%)

5.31

Price after interest profit / per kg

26.56 17

Premium Bario Highland Rice in Kuching In Bario, the rice was selling at RM30 per 3.5 kg. Therefore, to get the price 1kg for rice in Bario, is RM30 divided by 3.5 kg which equal to RM8.57 per kg (rounding at two decimal points). Generally, 35kg equal to one sack of rice in Bario. Thus, one sack of rice in Bario is selling at RM299.95 (35kg x RM8.75). There are two alternatives that our company might take to transfer our product from Bario to Miri that is either by land or flight. However, if our company will transfer our product by land, the cost is generally high and high risk. Therefore to avoid such thing, our company decided to transfer our product by flight to Miri. Upon reaching Miri, the rice sacks would be then transferred to Kuching by land using bus. Maswing Airline is the only airline company that is operating in Bario. Generally, Maswing will allow using their service by a maximum of 105kg of any commodity such as rice and salt per one way. On the other hand, the price per kg for transportation fee by any bus companies form Miri to Kuching is fixed at a rate of RM1.The charge is as below: Types of charge

Amount (RM)

Cargo fee for flight

0.70(105kg)

Cargo fee for bus

1.00(105kg)

Document fee(flight)

2.00

Agent fee(flight)

10.00

Airport fee(flight)

15.00

Total charges per 105 kg

205.50

From the table above, the total fixed cost charge by the Maswing is RM100.50 per 105kg of rice. Therefore, the cost of 1kg of rice is RM0.96 (RM100.50/ 105kg). The total fixed cost charged by the bus is RM105.00 per 105kg of rice. Therefore, the cost of 1kg of rice is RM1.00 (RM105.00/105kg).The price of the 1kg of rice in Kuching before the interest of profit we will take is as below:

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Details

Amount (RM)

Price from Bario (Farmer)

8.57

Transportation fee (Flight)

0.96

Transportation fee (bus)

1.00

Price per kg before interest of 10.53

profit

Our company decided to transfer maximum of 3 sacks of rice per flight because it would be easier for our company to measure the costs that will be charge by Maswings and also 3 sacks when using bus. The three sacks of the rice is equal to 105kg and the cost involved is as shown below:

Amount (RM)

Details Prices for 3 sack

a

899.85

Transportation fee b

205.50

Total charges per 3 sacks

1,105.35

a. RM299.95 x 3 sacks = RM899.85 b. RM100.50 + RM105.00 = RM205.50

From the tables above, the total costs for 3 sacks of rice is RM1,105.35 which the price for 1kg of rice is same as before at RM10.53 per kg of the rice (RM1,105.35/105kg). The rice will arrived at Kuching Central and therefore to transfer our product from Miri International Airport tp Miri bus station, we need to transfer it using our own transport. Therefore, we forecast the fixed costs will involve for transportation fuel (car) is RM10 per 1 sack. Since, 1 sack equal to 35kg, the cost for transportation fuel (car) per 1kg is RM0.29 (RM10/35kg). When our company decided to take 25% of the interest profit for any 1kg of rice, the price per 1kg for Premium Bario Highland Rice is shown below:

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Details

Amount (RM)

Price before interest profit

10.53

Transportation fuel(car)

0.29

Total price before interest profit

11.78

Interest profit (25%)

2.63

Price after interest profit / per kg

14.41

Natural Bario Highland Salt in Kuching In Bario, the salt was selling at RM20 per 1 kg. Generally, 5kg equal to one sack of salt in Bario. Thus, one sack of salt in Bario was selling at RM100.00 (5kg x RM20.00). As the rice, our company decided to transfer salt by flight from Bario to Miri and then by bus from Miri to Bario. Generally, Maswing will allow using their service by minimum 105kg of any commodity such as rice and salt per one ways. The charge that the Maswing and the bus charge is as below: Types of charge

Amount (RM)

Cargo fee by flight

0.70(105kg)

Cargo fee by bus

1.00(105kg)

Document fee (flight)

2.00

Agent fee(flight)

10.00

Airport fee(flight)

15.00

Total charges per 105 kg

205.50

From the table above, the total fixed cost charge by the Maswing RM100.50 per 105kg of salt and the bus would be RM105.00 per 105kg. Added both transportation fees would be RM205.50 per 105kg. Therefore, the cost of 1kg of salt is RM1.96 (RM205.50/ 105kg). The price of the 1kg of salt in Kuching before the interest of profit we will take is as below:

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Details

Amount (RM)

Price from Bario (Farmer)

20.00

Transportation fee (Flight)

0.96

Transportation fee(Bus)

1.00

Price per kg before interest of 21.96

profit

Our company decided to transfer maximum of 21 sacks of salt per one flight because it would be easier for our company to measure the costs that will be charge by Maswings and the bus. The twenty one sacks of salt are equal to 105kg and the cost involve is as shown below:

Amount (RM)

Details Prices for 21 sack a Transportation fee

b

Total charges per 21 sacks

2,100.00 205.50 2,305.50

c.

RM100x 2 sacks = RM100.00

d.

RM100.50 + RM 105.50 = RM205.50

From the tables above, the total costs for 21 sacks of salt is RM2, 305.50 which the price of 1kg is the same as before at RM21.96 per kg of salt (RM2305.50/105kg). The rice will arrive at Kuching Central and therefore to be transfer to our product warehouse that would be located near Kuching Central. Therefore, we need to transfer using our own transport. We forecast the fixed costs will involve for transportation fuel (car) is RM1.45 per 1 sack. Since, 1 sack equal to 5kg, the cost for transportation fuel (car) per 1kg is RM0.29 (RM1.45/5kg). When our company decided to take 25% of the interest profit for any 1kg of salt, the price per 1kg for Natural Bario Highland Salt is shown below:

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Details

Amount (RM)

Price before interest profit

21.96

Transportation fuel(car)

0.29

Total price before interest profit

22.92

Interest profit (25%)

5.73

Price after interest profit / per kg

28.65

Packaging Bestbuy Enterprise would acquire the local packaging service to print our enterprise information together with the nutritional facts on our product that they are packaging. The packagings for the Premium Bario Highland Rice are in standard size rice sacks of 35kg and also 2kg. On the other hand, the packaging for the Natural Bario Highland Salt would be in the size of 500g. Therefore there would be fees charged for the packaging. The fees would then be added into the price after interest profit for the Premium Bario Highland Rice and the Natural Bario Highland Salt. The price of both products according to places and after added for packaging fees are shown in the tables below: Price of Premium Bario Highland Rice 35kg Details

Miri (RM)

Kuching (RM)

Price after interest profit / per kg

12.27

14.41

Price per 35 kg

429.45

504.35

Packaging Fees

3.05

3.15

Price after Packaging / 35kg

432.50

507.50

22

Price of Premium Bario highland Rice 2kg Details

Miri (RM)

Kuching (RM)

Price after interest profit / per kg

12.27

14.41

Price per 2 kg

24.54

28.82

Packaging Fees

1.06

1.08

Price after Packaging / 2kg

25.60

29.90

Details

Miri (RM)

Kuching (RM)

Price after interest profit / per kg

26.56

28.65

Price per 500g

13.28

14.33

Packaging Fees

1.02

1.07

Price after Packaging / 500g

14.30

15.40

Price of Natural Bario Highland Salt

5.6 Promotion Strategy One of the most important aspects of a successful launch is positive publicity for our product. We will develop an awareness campaign to promote our product through several avenues. Our management team will fiercely pursue positive public perception through government endorsements promoting the benefits of our products. We will also attempt to capitalize on the novelty of the solutions provided by our product by actively seeking local news and media coverage to help spread awareness. Besides that, we will be developed in social hubs by distributing samples to parties with potential interest. Parental support of the product will be garnered through free trials, demonstrations, and direct mailings to the high-end restaurants, high-end hotels and souvenir shop.

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5.7 Distribution Strategy Our initial distribution strategy will involve a combination of distributor and direct sales. Relationships with local distributors will be established to increase promotional reach and potential users. The first orders will be available immediately through direct delivery by our executive team. Outsourcing distribution entirely in the future will allow our product, to focus its efforts on marketing and expanding as quickly as possible. Distributors will pay for the inventory up-front, and although this cuts our profit margins it helps our company to maintain a more flexible structure. By the start of 2013, distribution will be entirely outsourced to distribution companies, and direct deliveries from the executive team will cease. 5.8 Marketing Programs Our most important marketing program is our branding program, aimed initially at regional chain and franchise managers. This program is intended to penetrate the target markets, and establish our products as the rice and salts of choice. Achievement should be measured against our projected 45% monthly sales growth rate for the first year. Emphasizing the risks associated with rice and salt non-compliance, our marketing program will employ the high quality rice and natural salts, the benefits of our product and government regulations extensively. 5.9 Sales Strategy Sales strategy will initially address local and regional managers with ordering authority for the establishments in that area. The prospective clients will be supplied with a professional product information packet and moved into the sales funnel to begin closing prospect, followed up with a direct mail brochure and a phone call. There will be no initial direct compensation or commission for closed sales. Proceeds from sales will be invested back into developing and expanding the business. As the company begins to increase its initial sales force, commissionbased incentive programs will be implemented.

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5.10 Strategic Alliances Our company will initially encourage critical strategic alliances in two distinct areas: 

Distributors The relationship between our product and the product distributors will be essential. A flexible distribution system will be critical to the success and growth of our product. Good distribution will allow our product to satisfy and flexibly expand to accommodate demand.



The Government By teaming up with government organizations, our company will be able to utilize existing high quality and natural salts programs to reach a much larger potential audience than could be directly contacted. Government endorsement of our product and the mention of its benefits in government brochures and written materials could be a major competitive advantage and sales opportunity for “Premium Bario Highland Rice” and “Natural Bario Highland Salt”.

5.11 Milestones 1. Development by the founding team of a 'rough' prototype, to be further developed by a professional by January 5, 2013. 2. Attain funding to complete the testing and development of a complete and working product prototype by January 5, 2013. 3. Product development is initially the responsibility of the founding team; later, we will hire a professional quality control for the final testing and completion of the product. This final prototype will be completed by January 21, 2013. 4. Final safety testing of the initial product with regulatory oversight in January and February. 5. After the prototype is completed in February of 2013, a patent will immediately be applied for by the founding team. Target date for patent process completion is February 10, 2013.

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6. Promotional materials will be developed to preempt the completion of the prototype to allow for quick acceleration to market, promotional materials development will begin in February 9, 2013. 7. "Phase One" marketing will include market penetration in Miri’s area. It will begin in February 11, 2014. 8. After successful implementation within our primary market, we will begin the development of new products to address the hospital and restaurant markets, targeted for February 22, 2016.

Milestone 5-Jan

12-Jan

19-Jan

26-Jan

2-Feb

9-Feb

16-Feb

23-Feb

Develop Approximate Prototype Attain Funding Develop Final Prototype Safety Testing Begin Patent Process Design Promotional Material Begin "Phase One" Marketing Begin R & D of New Products

Milestones Milestone

Start Date

End Date

Budget(RM) Manager

Department

Develop

1/5/2013

7/1/2004

0

Founders

Product Dev.

8/1/2013

21/1/2013

0

Founders

Product Dev.

Approximate Prototype Attain Funding

26

Final 22/1/2013

Develop

23/1/2014

80,000

Founders

Product Dev.

6/2/2014

20,000

Founders

Product Dev.

10/2/2014

10,000

Founders

Legal

17/2/2014

25,000

Founders

Marketing

20/2/2015

18,000

Founders

Marketing

22/2/2016

75,000

Founders

R&D

Prototype Safety Testing

26/1/2013

Patent 26/1/2013

Begin Process

9/2/2013

Design Promotional Material

"Phase 11/2/2014

Begin

One" Marketing Begin R & D of 18/2/2014 New Products Totals

RM228,000

5.12 Financial Information

BestBuy Enterprise financed by the founder's and investments from limited partners. The business will be funded with an investment of RM100 000, RM50 000 is loan from AgroBank. The initial funding requirements are modest for the business. The growth of the business, beyond the first year, will be financed by the free cash flows generated by the business. This will allow for the expansion of staff to include additional expenses, the ramping up of marketing expenditures, and the resulting increase in sales. Summary of financial information: 

Total Funding

: RM 150.000.00



Capital Contribution

: RM 100.000.00



Loans

: RM 50,000.00



Financial year

: Every end of the Years

27

The ownerships of BestBuy Enterprise will retain 100% of the equity in the company. The parties agree to cause the Corporation to issue stock to the Parties in the following number and for the stated consideration: Name

Number of shares

Consideration (cash or Property)

Azra Tilai

40,000(40%)

RM40,000

Ernaflovia Datip

20,000(20%)

RM20,000

Farazilla Binti Effendy

20,000(20%)

RM20,000

Elzwin Balai

20,000(20%)

RM20,000

6.0 Web Planning Summary Bestbuy Enterprise sees website as a dynamic marketing tool for sales and direct e-mail marketing. The goal will be to implement a functional and professionally-designed website that will provide information about our new product lines for target customers and potential business partners, and new product updates. Bestbuy Enterprise website will be available as a resource to customers and interested parties. The website will be simple so that the interested parties can easily understand the information that has been provided for them. In this website, we will include statistics, surveys, articles and photos to build awareness about the need for and benefits of our product. The information given can gives a description of the product. This is because our product could only be found in the deep interior of the Sarawak Highland. This is one of our company strategies to get close with the customers or anybody who is interested with our product. Furthermore, the website will provide interested parties with a way to contact our company for answers to any questions they may have, and will include information on ordering and locating the product. By doing this, we can answered our customer curiosity towards these products.

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Last but not least, interested parties can drop down their questions regarding our product in this website. Our product will not be directly available online, but we will build positive perception and awareness about our product there through statistics and user testimonials demonstrating our value. Interested parties can also get more knowledge from the website. This is because the website will provide the history of our product. The website will communicate company news to create and maintain positive public relations with the surfing community. 7.0 Management Summary The expansion of the Bestbuy Enterprise will be managed by Azra Tilai and Farazila Effendy. Our company strength is sales people with experience relevant to each new respective target market can be attained as need dictates, but the initial management team consists of the founders themselves.

7.1 Management Team Initially, both founders will share in the operational and financial responsibilities of the company. They will be responsible for finding, attaining and managing new accounts. Both founders will be responsible for making direct sales, marketing, and all other operational tasks involved with making this company successful. The President will oversee all company decisions. Azra Tilai is the President in Bestbuy Enterprise. He has been 10 years of industry experience. He will oversee operations in all aspects of the business. He will be responsible for hiring new personnel members to enhance the management team. Besides, he will concentrate also on sales, Internet, e-commerce and promotion. He will oversee product development and production by making sure to order the products needed to maintain a smooth flow. He will also see to it that orders are filled and reached to their destination. Azra Tilai received his bachelor of Degree in Business Administration from the University Malaysia Sarawak with a concentration in Entrepreneurship.

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The Vice president of Bestbuy Enterprise is Farazila Effendy. She will be in charge of the administrative functions, including public relations. She has a background in accounting and will incorporate his expertise in areas such as marketing relations management.

7.2 Management Team Gaps As the market is growing, Bestbuy Enterprise will continue to develop new product. Thus, it will be necessary to hire new sales secretary as we expand into each new market segment. An individual that have specific contact with high-end restaurants, hotels, souvenir shops and supermarkets will be a necessary addition to successfully create a complementary relationship with the target market. This can help the company to accelerate sales growth.

7.3 Personnel Plan Our aim is to increase salary and compensation in line with a projected increase in sales and profits. Our overall personnel costs will be RM20000 for the first 12 months, which includes president and vice president only. In year two and three, payroll cost for president and vice president are both RM 10500. The present personnel cost figure is subject to change as business demands it. If our sales are growing, we will need to consider adding one or more employee to assist with the increased administrative demands. All sales for the first year of operation will be closed by the executive management team. Starting from the second year, we will employ a Sales Secretary. Sales secretary will be in charged sales transactions. His/her compensation will be a combination of fixed salary and commission on sales. For the purposes of financial planning, we combined the Sales Secretary compensation into an aggregate forecast. Over a certain period, the sales will growth. As the sales are growing, our company needed new employees to ensure the development and market for our product can goes according to company plans. At the beginning of the business, president and vice president will take control for the product and market. Starting in the second year, we are planning to hire sale secretary to 30

handle the tasks. We plan to assign RM15000 for the second. For the third year, we are planning to hire another secretary. We also plan to assign RM1500 for the both secretaries in the third year.

Personnel Plan

Year 1(RM)

Year 2(RM)

Year 3(RM)

President

10,000

10,500

10,500

Vice President

10,000

10,500

10,500

Sale Secretary

-

1,500

1,500

Sale Secretary

-

-

Total People

2

3

4

Total Payroll

20,000

22,500

24,000

1,500

8.0 Financial Plan

Based on market research, we expect the business to begin growing at 45% per month for the first 12 months, then at the yearly rate of 90% for the next two years. Due to our low initial investment costs, we can maintain the operations of the business with the cash buffer we will have from start-up. In addition, we will almost immediately have a positive cash flow, allowing us the flexibility to cover any unforeseen expenses.

8.1 Important Assumptions Sales 

We have assumed no payroll expense for the start-up period.



100% of sales will be made on credit, the industry standard. Although we do plan to sell organic rice and natural salt mostly for the promotion purposes to government agencies

31

who usually demand substantially longer payment terms, our major target group will remain commercial entities. On average, we assume on a 45-day collection schedule. 

To be flexible in meeting the customer demand, we plan to maintain a minimal stock of product at a rented warehouse and dispatch it from there. The rest of the product we expect to be shipped in large quantity.



We try to increasing our marketing and sales expenses to represent the expected increase in costs associated with developing packaging, advertisements, additional promotions, and creating awareness of our products in the differing markets after fully analyse the market segment.

Market 

Initial target market aimed respectively at the high-end restaurant’s kitchen manager, high-end hotel’s food and beverage manager and the most popular souvenir shops.



Projections related to consumer acceptance we estimated using market surveys.



Initial total market size is comprised of local retailers in Sarawak and will begin expansion into the Peninsular of Malaysia and Sabah.

Research 

Further research to finally arrive at a working prototype will be outsourced to researchers with extensive experience working in plantations fields.



After a working prototype is developed it will be pushed through the appropriated regulatory channels.



Funding for research for the organic rice and natural salt will be provided for in the initial start-up capital outlined in the start up table and summary.



We will use our success market to propel and fund in additional research and development on producing organic rice and natural salt compete will market demands especially producing the organic rice, since it take time.



Should the cumulative RM 60, 000 expenses earmarked during the second and third years for the patent protection of our products be minimized, our bottom line profitability will be positively affected.

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General Assumptions

2013

2014

2015

Plan Month

1

2

3

Current Interest Rate

10%

10%

10%

Long-term Interest Rate

10%

10%

10%

Tax Rate

30%

30%

30%

Other

0

0

0

8.2 Key Financial Indicators

The benchmarks chart, below, shows a quick comparison of Sales, Gross Margin %, and Operating Expenses, inventory turnover and collection days.

Benchmarks 4.0

3.0 2013 2.0

2014 2015

1.0

0.0 Sales

Gross Margin%

Operating Expenses

collection Days

33

Inventory Turnover

Sales - Our sales are projected to grow at a consistent rate of 90% yearly, and we believe this accurately reflects the realistic growth our product would be capable of attaining if we can properly utilize existing channels of distribution and gain social acceptance.

Gross Margin - As we grow, become more efficient, and gain economies of scale we begin to see a slight growth in our margins.

Operating Expenses – in 2014 and 2015 we see an increase in number of operating expenses that we will incur. We begin incurring larger costs involving advertising, promotion, marketing, and payroll expenses.

Collection days – we will collect our accounts receivable on average of 45 days. In 2014 and 2015 we will have the cash to cover unexpected costs or expenses so that we may decide to allow a longer collection period.

Inventory Turnover – our preliminary forecast suggests that for us to be flexible in meeting customer demand we will need to maintain minimal inventory stock. On average, we will keep two weeks worth of inventory on hand.

8.3 Break-even Analysis

The following fixed costs reflect the relative costs for selling and distributing our product within the Sarawak area, and do not reflect the fixed costs necessary to expand further. We expect to pass the break-even point in January 2013. Table below show a breakeven analysis:

34

Break-even Analysis

Monthly Revenue Break-even

RM 12,250

Assumptions: 40% Average Percent Variable Cost

Estimated Monthly Fixed Cost

RM 7,350

8.4 Projected Cash Flow Overall, our business is expected to generate sufficient cash flows. Our cash balances will, among other things, depend on the level of inventory we’ll decided to keep at a rented warehouse. We expect to secure a RM50 000 to payback the load from Agro Bank and attempt to apply a new load for expended BestBuy Enterprise as the profit return is stable. In year 3 of operations, we will begin looking at our ability to begin paying back our initial investors the RM100 000. Although the terms of the additionally sought investment are yet to be agreed upon, we belief that our partners members expecting a return on their investment on the desired rate. Nevertheless, for planning purposes, we have made provisions to start paying out a modest dividend from the third year of our operations. Currently, we set dividend payments to be equal to 5% of net profits.

Pro Forma Cash Flow 2013

2014

2015

Cash flow from Operation

(4,000)

5,900

40,000

Cash flow from Investing

0

0

0

Cash flow from Financing

0

0

0

35

Total cash flow

(4,000)

5,900

40,000

Beginning Cash Balance

30,000

26,000

31,000

Ending Cash Balance

26,000

31,900

71,900

2013

2014

2015

RM 86,000

RM 93,400

RM 148 000

Calculations:

Cash Received Less: -

Cash Spending

(RM 28,000) (RM 24,000)

(RM 32 000)

-

Bill payment

(RM 62,000) (RM 63,500)

(RM 76 000)

(RM 4,000)

RM 40,000

Cash flow from Operation

RM 5,900

Cash required – RM 30,000 Cash Balance - 2013 RM (30,000 + (-4,000)) = RM 26,000 - 2014 RM (26,000 + 5,900) = RM 31,900 - 2015 RM (319,000 + 40,000) = RM 71,900

8.5 Projected Profit and Loss

Our profit and loss projections reflect our expectation that monthly fixed costs will remain constant over the course of the first year.

This business is projected to become profitable in October, 2013, after the start-up advertising is completed and customers begin to discover the speciality about the organic rice and natural salt. For the entire 2014 calendar year the business will be profitable. It will grow at a rate of over 20% after the third year of operation.

36

Advertising expenses will remain steady during our first year of operations. However, Advertising and Promotion will grow in years 2013 and 2014 years to reflect the purchase of print ads, PR brochures, and additional promotional content.

Table below show the monthly sales forecast on the years of 2013, 2014 and 2015:

Sales Forecast for Premium Bario Highland Rice and Natural Bario Highland Salt

SALES FORECAST MONTH

(RM)

2013

180,000

2014

324,000

2015

420,000

Pro Forma Income Statement for the year ending 2013, 2014 and 2015 2013

2014

2015

(RM)

(RM)

(RM)

Sales (12 Months)

180,000

324,000

420,000

Direct Cost Of Sales

129,000

225,084

275,700

Other

0

0

0

Total Cost Of Sales

129,000

225,084

275,700

Gross Margin

51,000

101,100

144,300

Gross Margin %

28.33%

31.20%

34.36%

(20,000)

(22,500)

(24,000)

Less: Operating Expenses Payroll

37

Rent

(7,200)

(7,200)

(7,200)

Utilities

(800)

(800)

(1,200)

Insurance

(4,800)

(4,800)

(4,800)

Other General and marketing (1,200)

(1,200)

(1,200)

expenses Total Operating Expenses

34,000

36,500

38,400

Profit/ (loss) before taxation

17,000

64,600

105,900

Taxation (26%)

(4,420)

(16,796)

(27,534)

Net Profit

12,580

47,804

78,366

Net Profit/Sales

6.99%

14.75%

18.66%

Table above show the positive results of net profit by using the sales forecast in order to represent the profitability level of our business operations for both rice and salt production. We assume that in futures, people concern about the standard of living especially on their health conditions. Organic rice and natural salt may become their choices.

8.6 Projected Balance Sheet Once we have established a relationship with the manufacturer, we will purchase inventory in certain quantities for both rice and salt. As sales increase we expect that inventory turnover rate to increase.

Our only significant Accounts Payable will be inventory, which are a direct reflection of the level of inventory on hand. We will be paying off our Accounts Payable in accordance with sale of inventory. Therefore, as we begin to sell more organic rice and salts, we will be increasingly capable of meeting our obligations in a systematic time condition, ensuring that we have enough cash on hand to cover our short term liabilities. Table below show the pro forma balance sheets at the end 2013, 2014 and 2015:

38

Pro Forma Balance Sheets at the end of 2013, 2014 and 2015

2013

2014

2015

(RM)

(RM)

(RM)

Cash

26,000

39,500

71,900

Accounts Receivable

31,180

107,804

118,866

Inventory

68,000

32,800

59,200

Other Current Assets

0

0

0

Long –term Assets

0

0

0

Long-term Assets

0

0

0

Total Assets

125,180

180,104

249,966

Liabilities and Capital

2013

2014

2015

Accounts Payable

24,700

13,800

27,900

Current Borrowing

0

0

0

Total Current Liabilities

24,700

13,800

27,900

Long-term Liabilities

0

0

0

Total Liabilities

24,700

13,800

27,900

Paid-in Capital

150,000

150,000

150,000

Retained Earnings

(62,100)

(31,500)

(6,300)

Assets Current Assets

Total Current Assets

Accumulated Depreciation

Current Liabilities

39

Earnings

12,580

47,804

78,366

Total Capital

100,480

166,304

222,066

Total Liabilities and Capital

125,180

180,104

249,966

Net Worth

100,480

166,304

222,066

9.0 HARVESTING THE BUSINESS VENTURE INVESTMENT Harvesting is the process of selling ownership is a privately held business venture to realize the appreciated value of the founders’ and venture investor’s contribution. By harvest time, the set of owners often includes friend and family, angels, venture capitalists, and other later-stage equity investor. A venture typically harvested in one of three ways such as through a systematic distribution of assets directly to the owners, through an outright sale of going concerns to others or through a two-step public equity registration and sale (an initial public offering (IPO) of new share followed by secondary offer of existing owner’s shares. Generally, it is important that the business be keenly aware of investors’ and founders’ desires for eventual liquidity. When an initial business plan is prepared, serious consideration should be given to how and when the business plans to provide a harvest for venture investors. Therefore, we decided to plan an exit strategy from the beginning. In addition, for harvesting purpose, we need to decide to venture’s value at exit and how the exit value pie will be divided among investors. Exits a value for many mature ventures are usually determines by discounted cash flow (DCF) methods (equity or enterprise) or relative valuation methods based on some form of multiples analysis. A relative value method estimates a firm’s value by examining how comparable firms are valued based on value-related multiples. Therefore, the relative value estimates for our company can summarized as follows: Enterprise Value

Equity Value

Enterprise Value/ Net Sales

RM 1,780,000

RM 8,000,000

Enterprise Value / EBITDA

RM 1,500,000

RM 7,000,000

Equity Value / Net Income

RM 7,200,000 (RM 22,200,000 / 3)

Average Equity Value

= RM 7, 400,000

40

A)

Dividing the Venture Valuation Pie Our business expected that our group of manager have the opportunity to buy the equity in

our company for RM3,000,000. Therefore, the manager have RM500,000 to invest and have identified venture investors who willing to invest RM 2,500,000 in return in an expected 25% annual rate of return. Besides that, to complete the buyout, our managers also must assume an additional RM5,000,000 of a five-year-term bank debt venture mandating 12% annual interest. Thus, the Figure 1.0 shows the venture valuation enterprise pie for our company. The left side of the figure depicts an initial enterprise value of RM 8,000, 000 consisting of a RM 5,000,000 long-term bank loan and RM3,000,000 in equity capital. Our company need to estimate our venture’s exit value for five year. Therefore, our company expected the DCF enterprise valuation method and an EBITA multiples-based relative valuation model is RM 15,000,000. In addition, on the right side of the figure 1.0 shows that a RM 15,000,000 value based on an EBIDTA of RM 1,500,000 times a multiple of 10.

Figure 1.0 : The Venture Valuation Enterprise

Present Value

Future Value

RM 8,000,000

RM 1, 500,000 X 10 = RM15,000,000

Bank Loan Management Equity Venture Equity Total Value

RM 5,000,000 500,000 2,500,000 RM 8,000,000 41

After that, our company should to determining the future value of our company valuation pie and dividing the future value equity pie. Therefore the Figure 2.0 shows the determining the future value of our company valuation pie and dividing the future value equity pie. In the Panel A of the Figure 2.0 shows how the RM 15,000,000 company value will be divided up at exit in five years. First, the RM 5,000,000 bank loan will be paid off, resulting in an equity value of RM 10,000,000 because the venture investors expect a 25% compound annual rate of return, their portion of the equity value at exit would be RM 7,629,395 which the value from [ RM 2,500,000 x (1.25)5]. The managers would receive the residual or remaining equity value of RM 2,370,605 which the value from the [ RM 10,000,000 – RM 7,629,395]. On the other hand, the Panel B of the Figure 2.0 shows the percentage ownership using the future value of the equity that the venture investors would need up front now to get the deal done. Therefore, for the RM 2,500,000 initial equity investment, the venture investors would expect ownership of 76.29% ( RM 7,629,395 / RM 10,000,000 using future value relationship) of the equity to enable the expected 25% compound annual rate of return. Figure 2.0 : Determining the future value venture enterprise valuation pie and dividing the future value equity pie Panel A : Future Value Enterprise Valuation Pie

Panel B : Equity Ownership Percentage

FV = RM15,000,000

FV = RM 15,000,000 –RM 5,000,000 = RM10,000

Bank RM 5,000,000 Venture Investor 7, 629, 395 Managers 2,370,605 Total RM 15,000,000

Managers 24%

Venture Investor 76%

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Therefore, if the deal develops as projected, the management team will earn a very accurate rate of return on their initial RM500,000 investment. This is because the managers are expected to receive RM 2,370,395 at end of five years, and their anticipated rate of return is 36.5% compounded annually.

B)

Method exiting a privately Our company decided used the outright sale as a method exiting a privately. An outright sale

occurs when an entrepreneur sells the venture to family members, managers, employees, or outside buyers. Therefore, our company decided to sells the venture among our family member. There are two basis ways by which our company can transfer a business, or interest in a business, to our heirs such as our children or our grandchildren, are giving the company or selling the company to them. This is because the heirs are unable to generate the necessary financial capital to purchase the venture outright. Besides that, a strategy of selling a venture to a family member below its fair value, to make it easier for the new purchaser to finance the purchase, could be very costly. In addition, the seller of a family business can help heirs purchase the business in a number of ways. For an example, the seller can provide financing by taking back a promissory note that will cover part of the venture’s purchase price. The seller may enter into net gift of stock that is actually a combination sales and gifts transaction, whereby the seller sells stock at a price below its fair value.

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