Factors for the Overall Success of Petosa Vineyards Inc - Case Study Example

The Petosa Case Study

Question 1- Choice of Entity

A business is a building where goods and services are exchanged for other products and services or money. Here, the seller sells his property and services to the consumer at a reasonable price or the supplier may decide to exchange his goods or services for other goods and services. Exchange of goods and services with other goods and services is known as barter trade. The main aim of forming a business is for profit motives. Businesses can be privately owned, state owned, or not for profit. John could, therefore, form different types of entities. They include sole proprietorship form of business, general partnership form of business, limited partnership form of business, limited liability form of business among others (Nickels, McHugh, & McHugh, 2005).

A sole proprietorship form of business is a business, which is owned and managed by one person after which he is succeeded by another. It is advantageous in that you are your boss, you get the opportunity to keep all the profits of the business, and startup and maintenance costs of the firm are relatively small. A sole proprietorship is also beneficial in that you have maximum privacy, and you can easily wind up the business when you feel like. It is, however, disadvantageous since you have unlimited liability for the debts of the firm. Unlimited liability occurs where there is no legal distinction between your assets and the business assets. A sole proprietorship is also disadvantageous since the owner's capacity to raise capital is limited, and therefore, the business tends to be small. Since the business owner is the only person managing the business, he is responsible for the day-to-day decision-making activities of the firm. When the company incurs losses, the owner will bear the risks and losses of the business alone. Lastly, it 's hard to take holidays since the company is managed, controlled, and owned by one person (Nickels, McHugh, & McHugh, 2005).

A partnership form of business is controlled by two or more people, but not exceeding twenty individuals. It can be a general partnership or a limited partnership. A general partnership is an arrangement by which partners are conducting a business jointly have unlimited liability. Here, their personal assets are liable for the company's obligations and debts. A limited partnership, on the other hand, is a type of partnership where the partners’ assets are not liable for the obligations of the business. It is advantageous since the business is easy to establish and the startup and maintenance costs are low. It is also advantageous since more capital will be available for the firm and the owners will have a greater borrowing capacity as compared to a sole proprietorship business. Lastly, there is the opportunity for income splitting depending on the capital contributed by each partner, thereby reducing the amount of taxes to be remitted to the government. It is, however, disadvantageous in that the liability of the partners is unlimited and they are therefore jointly liable for the partnerships' debts and obligations. If one partner joins or leaves, revaluation would be necessary, making the business incur enormous costs. Lastly, since each partner is an agent of the partnership, he or she is liable for the actions of other partners (Nickels, McHugh, & McHugh, 2005).

A corporation is a type of business or entity formed by a group of people who have been authorized by law to act as a single entity. Therefore, an entity is separate and distinct from its owners and enjoys most of the rights and responsibilities that the owners possess. These rights include the right to enter into a contract, the right to borrow money, the right to sue or be sued, to pay taxes, own assets and hire employees. It is, however, disadvantageous since he will pay massive taxes and the profits of the business would be used to pay the obligations and liabilities of the company (Nickels, McHugh, & McHugh, 2005).

I would recommend a sole proprietorship or a partnership for John’s business. I would recommend these two because these two forms of business do not require legal procedures and massive capital to build. I would also recommend a partnership type of activity since John would want other partners to venture into the business so that they can bring expertise to the firm.

Question 2- Succession

Based on the information provided, one of John and Jennifer’s children should succeed the company. This is because the two own 75 percent of the parent company, the subsidiaries, and all the assets in them. They cannot, however, manage the business since at 70 years they are timeworn and would like to eat the fruits of their labor. The two have decided to go for a vacation in Napa Valley to enjoy their celebrity of being famous wine makers. Their children will, therefore, succeed the firm. All the advantages point towards Chris (Michael, n.d.).

From the information, it is evident that Chris is John and Jennifer’s son, he is the Chartered Financial Officer of the company, he has a degree in accounting as well as the law as his father, and he is the leading winemaker after his father. However, it is also noted that Chris is the youngest of the five children and can be conceding to staff. Albert has a degree in Economics and Entrepreneurship. He has also gained experience from implementing his mother’s organic farming techniques in various vineyards. Nino, Jennifer’s son also has been a great help to the business. He graduated from the University with a degree in information studies. He has therefore been responsible for marketing the company's products through social media and other electronic marketing methods. He has however had no interest in the daily operations of the business (Michael, n.d.).

Karen, who is Jennifer’s sister, owns 5 percent of the parent company. Her son, Stephen therefore, despite his high IQ should not be the successor of the business. Stephen should also not succeed the business since he has poor communication skills and therefore cannot relate well with workers of the firm. Tom, who is a brother to John, owns 20 percent of the enterprise. His children, however, have no interest in the daily operations of the firm and therefore should not be the successors. They only enjoy their role as support people just like their father. They are, however seemingly happy to collect a paycheck and take care of their families. They should however not be the successors of the company as they would likely result in the downfall of the company (Michael, n.d.).

Chris should be the only successor of the company and should be helped by Nino on the part of the communication skills. Nino is known for marketing the business's products and services through social media and other electronic marketing platforms. His marketing strategies have catapulted the growth in the company's exports to other nations and overseas markets. He could, therefore, be a great help to the enterprise when Chris becomes the owner. Trey, who is Jay's last-born son, could succeed Chris when Chris retires or falls the age of retirement. He could be helped by Carly, who is Allison’s daughter. This is because Carly worked closely with her Uncle Albee in the vineyards and could, therefore, be an excellent vineyard manager when the time comes (Michael, n.d.).

Several requirements may help future generations of the company. These requirements include excellent communication skills, good entrepreneurship skills, good decision-making skills, proper accounting and economics prowess, and knowledge in law and factors affecting the company. Future generations would also benefit when one partner has experience in the vineyards and is, therefore, interested in the day-to-day operations of the business (Michael, n.d.).

Question 3- Estate Planning

Estate planning is the process of arranging the disposal of a person's estate during the individual's lifetime. John and Jennifer's company that is Petosa has cash at hand worth $ 350,000. The two have also invested in stocks, treasury bonds and other securities worth $ 3,500,000. John and Jennifer also own retirement funds worth $ 1,650,000, a home in Florida worth $ 750,000, a home in New York worth $ 450,000, and the last home in Napa Valley worth $ 825,000. The couple has stocks held in other businesses. These other companies include Petosa Vineyards Inc and Petosa Wine Lands Inc. They have a 75 percent shareholding in Petosa Vineyards Inc. worth $ 15,000,000, and 100 percent shareholding in Petosa Wine Lands Inc. worth $ 7,500,000. Their total assets amount to $ 30,025,000, with zero liabilities as seen in appendix one. Lastly, they have a mortgage on the Napa Valley house worth $ 600,000 and equity worth $ 29,425,000 as evident in exhibit one. The couple would love to distribute their assets fairly to all of their children and grandchildren (Financial and Estate Planning Resources, 2012).

It is also evident from the information provided that John put the vineyard lands under the parent Petosa Wine Lands Inc. These vineyard estates would pay taxes and rent to the parent to reduce tax and reduce the liability of the owners. The couple has a trust fund of $ 5,000,000 for a given insurance company. The beneficiaries of the trust fund are their five children and can only receive the amounts of the trust fund when their parents die based on the will written by their parents. The trust fund has a "pour-over" provision that allows it to purchase assets from the estate of the last to die. This provides liquidity for future generations and allows them to pay the property taxes when they fall due. Any assets after this purchase are to be distributed equally among the five children (Financial and Estate Planning Resources, 2012).

John and Jennifer also have a heart for performing charitable activities. The couple wishes to foster the men’s hockey club and the women’s skating program at Syracuse University. As such, they have contributed $ 5,000,000 to build a new ice hockey arena called the Petosa Pavilion.

Based on the couple’s estate plan in Appendix 1, they should live on their retirement funds of $ 1,650,000. The couple should also consider selling their stocks, and bonds in other companies which could earn them an additional $ 3,500,000 which they could live off even after retirement. The couple should also consider living in the New York home as it is the cheapest house for them to live in while also thinking that they are old, and they might pass away soon. To treat their children and grandchildren in a fair manner, the couple has decided to give gifts worth $ 28,000 per year for those involved in the business. This is a good move for the children, and grandchildren would not have to fight for the estate. Since Chris is the next successor of the company, he should own the Napa Valley home. He should also consider living with Carly and Trey, as they would be of great help to him in the future (Financial and Estate Planning Resources, 2012).

Albeit and Nino should inherit the Florida home, and this would give both John and Jennifer a chance to travel when they feel like. Lastly, the couple should consider selling 50 percent of the stocks held in Petosa Vineyard Inc to take care of their charitable bequest of $ 5,000,000 for both the hockey and the skating programs. The family would, however, remain with 25 percent shareholding in Petosa Vineyard Inc. To lower the overall estate cost, John and Jennifer should consider paying off their mortgage on the Napa Valley home so as to reduce future interest on the mortgage (Financial and Estate Planning Resources, 2012).

Question 4- Valuation

Since Paul was helpful to the overall success of Petosa Vineyards Inc., John should accept his offer. He should, however, consider the lives of his children, his grandchildren, and future generations even after he passes on. According to the information, it is evident that Chris, Albee, and Nino would receive a 10-year employment contract each after which they seize being owners of the company. It is also apparent that any other family member would get a 5-year employment contract if they so desired. The Hobbs family would be in a position to expand the business, but still sustain the goodwill of Petosa. The children of John and Jennifer would still continue being part of the operations of the company even after Hobbs family manages it (Comment, 2010).

From Appendix 2, it is evident that the firm would have positive cash flows for the years to come. The company would also have earnings before interest tax and depreciation of $ 14,288,665 at the end of the 5th year as seen in Appendix 3. The total value of Petosa as seen in Appendix 3 for the five years, according to Paul would be $ 20, 264,660. Appendix 3 also shows that John and Jennifer would have a 75 percent shareholding in Petosa with interest amounting to $ 15,198,495. According to Appendix 4, the industry indicates that the couple that is John and Jennifer would have 75 percent interest in 2039 amounting to $ 16,023,826. After six years, the business would have a value of $ 22,502,178 as seen in Appendix 5. Based on the financials of John's family, they currently have $ 15,000,000 in the Petosa Vineyard Inc. and $ 7,500,000 in the Petosa Wine Land Inc. This can be seen in Appendix 1. This would give a total value of $ 22,500,000.

If the Petosa's take on the deal presented by the Hobbs, their business will be expanded, and they would, therefore, be assured of a future interest in the firm. The Petosa family would not have to incur any expenditure on the company, as the Hobbs would pay for the company taxes and the rent. However, their children and any other family members would only receive employment for the specified duration of time that is ten years for the children and five years for the other family members who desired to work in the company. When John passed away, the Hobbs may not fulfill their promise to sustain their children and grandchildren. In addition to this, the value of the company would be lower by $ 2,235,340 than when the Petosa family owned it as seen in Appendix 3 (Comment, 2010).

Both parties used capital budgeting techniques to value their property. Here, they considered the net present value of the corporation and the internal rate of return of the business after six years. The most persuasive technique for assessing projects is the net present value. This is because this type of valuation considers discounted cash flows of the firm. When the net present value is positive, the business would realize positive earnings in the future, but when negative, the enterprise would realize losses. For the two parties to reach a deal on common ground, the Petosa family should decide to sell the Wine Land business to the Hobbs family. The Petosa's should also consider other factors like the future value of the company and its current present value. They should consider whether they would earn a profit from the offer or they would realize losses in future. Lastly, the family should consider whether they could be able to pay the expenses of the business when they fall due (Comment, 2010).

Appendixes

Appendix 1: Estate Plan

Petosa

Estate Plan

Personal Financial Statement

12/31/2030

Cash

$350,000

Stocks, Bonds other Securities

3,500,000

Retirement Funds

1,650,000

Florida Home

750,000

New York Home

450,000

Napa Valley Home

825,000

Stock in Closely Held Businesses

Petosa Vineyards Inc. 75%

15,000,000

Petosa Wine Lands Inc. 100%

7,500,000

Total Assets

$30,025,000

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Liabilities

Mortgage on Napa Home

$600,000

Equity

29,425,000

Total Liabilities and Equity

$30,025,000

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Appendix 2: Discounted cash flows

Discounted Cash Flows

2040

2041

2042

2043

2044

2045

Free Cash Flow

4,210,000

4,420,500

4,641,525

4,873,601

5,117,281

5,373,145

Discounted Value

3,676,856

3,371,789

3,092,034

2,835,490

2,600,231

358,194

Thereafter

Discount Rate

14.50%

Sum of values

15,934,593

Petosa Interest 75%

11,950,945

Appendix 3: Capitalization of Earnings

Capitalization of Earnings

2035

2036

2037

2038

2039

EBITDA

2,875,200

2,753,251

2,437,518

2,763,254

2,857,733

1

2

3

4

5

2,875,200

5,506,502

7,312,554

11,053,016

14,288,665

the sum of years

41,035,937

15

Average Earnings

2,735,729

Discount Rate

13.50%

Value

20,264,660

Petosa Interest 75%

$15,198,495

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Appendix 4: Industry Standards

Industry Standards

Sales x 70% plus Inventory

Sales 2039

25,420,671

70%

17,794,470

Inventory 12/31/2039

3,570,632

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21,365,102

75% Interest

16,023,826

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Appendix 5: Value of the firm after six years

EBITDA x 6, plus Inventory at 80%, plus land at Market

EBITDA

2,857,733

Factor

6

Value

17,146,398

Inventory

3,570,632

80%

Value

2,856,506

20,002,904

Petosa Interest

75%

15,002,178

Land at Market Value

100%

7,500,000

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Total Value

22,502,178

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