5.0 financial plan

Second Cup – MarkhamBusiness Proposal

Prepared for: Ken and Mary Hatch

Prepared by:

Amlani, Tahir; Boese, Kristen; Capjack, Adele

Luchkovich, Amy; Marofke, Lindsey; Paulhus, Casey

Second Cup – MarkhamKen and Mary Hatch

Table of Contents

1.0 Executive Summary.................................................................................................4

1.1 Introduction..............................................................................................................7

2.0 Operations Plan........................................................................................................82.1 Description of Operations...............................................................................................82.2 Franchising Process........................................................................................................92.3 Hours of Operations.......................................................................................................92.4 Daily Activities.............................................................................................................102.5 Weekly Activities..........................................................................................................132.6 Quality Control.............................................................................................................132.7 Suppliers......................................................................................................................142.8 Service Providers.........................................................................................................142.9 Environmental Issues...................................................................................................152.10 Location.....................................................................................................................152.11 Site Plan.....................................................................................................................162.12 5 Year Development Plan...........................................................................................16

3.0 Human Resources..................................................................................................183.1 Management Team......................................................................................................183.2 Organizational Structure..............................................................................................213.3 Recruitment and Retention..........................................................................................223.4 Job descriptions............................................................................................................233.5 Training Programs........................................................................................................233.6 Store timings................................................................................................................233.7 Total Salaries, Wages and Benefits Costs.....................................................................24

4.0 Marketing Plan........................................................................................................254.1 Products.......................................................................................................................254.2 Pricing..........................................................................................................................264.3 Promotion.....................................................................................................................264.4 Place............................................................................................................................274.5 Segmentation...............................................................................................................284.6 Targeting.....................................................................................................................284.7 Positioning...................................................................................................................294.8 Competitive Analysis....................................................................................................294.9 Franchising Restrictions...............................................................................................314.10 Opportunities.............................................................................................................31

5.0 Financial Plan.........................................................................................................325.1 Sources of Financing....................................................................................................325.2 Base Case Results........................................................................................................325.3 Contingency Plans........................................................................................................37

The Second Cup Business Plan Group 2


List of Appendices

Appendix 1 – Organizational Chart.............................................................................41

Appendix 2 – Product List...........................................................................................42

Appendix 3 – Anticipated Look...................................................................................45

Appendix 4 – Floor Plan..............................................................................................48

Appendix 5 – Markham Demographics......................................................................50

Appendix 6 – Detailed Financial Model......................................................................51

Appendix 7 – Financial Plan........................................................................................52



1.0 Executive Summary

“Second Cup has become the largest Canadian-owned specialty coffee retailer. And since its

inception, Second Cup has grown to more than 360 cafés across Canada and over 15 cafés

internationally, making Second Cup a second home to hundreds of guests every day.” (Second

Cup, 2008a)

Operations

Hand selected by the Second Cup Real Estate Department, Second Cup – Markham is the

potential next location for this fast growing enterprise. Situated in Markham, Ontario, the

proposed location is located in a power centre intersecting two major roads and is embedded in

a business community and an affluent residential neighbourhood, a prime location to capture

the future growth of the Toronto suburb. The proposed franchise will continue to sell the

favorites of Second Cup: premium coffee, pastries, whole beans, non-coffee beverages, and a

variety of merchandise while providing the highest levels of customer service.

The business will maximize business traffic by opening early each day to attract the morning

traffic and remaining open later on weekends to take advantage of the social weekend groups.

Each day the staff will perform a number of duties to ensure that customers are provided with

high quality products and a high level of customer service. Daily activities will include opening

procedures, beverage preparation, order-taking, payment acceptance, and closing procedures.

On a weekly basis, other activities such as product ordering, staff scheduling and facility

cleaning will be performed to keep the store running at optimal levels. Local suppliers will be

used to promote community support and will include various service providers for barista

cleaning, internet service, accountancy services, and legal services.

The future Second Cup site will be able to seat 40 customers and will promote neighbourhood

oasis atmosphere and will include couches, a fireplace and additional patio seating. Although

there are no immediate expansion plans, the site can be upgraded to support higher drive thru

traffic levels and increased seating.

Human Resources

The proposed owners for the site are Mary and Ken Hatch. As local residents of Markham, they

have the knowledge and understanding of the local coffee market and are familiar with the local



competition. Their direct coffee industry knowledge and experienced managerial skills will not

only result in an efficient store, but will contribute to their successful ownership. Ken will be

responsible for the administration, finances and marketing of the company while Mary will

oversee the operations of the business.

Ken and Mary have been approved by Second Cup Head Office and will undergo an intensive

3-week training program called ‘Coffee College’ provided by Second Cup. The program will

empower the owners with the business tools and product knowledge to be successful.

Additional training will be taken through online e-learning training modules.

The company will setup as a corporation to take advantage of tax deferral opportunities. The

organization will consist of the management team (Ken and Mary) and the support staff. Second

Cup – Markham will use an attractive compensation package including unique benefits to attract

and retain staff, with a focus on recruiting students. Managers will be responsible for overseeing

staff and performing operational duties. Sales Associates/Baristas will be the front line workers

who will be responsible for serving customers effectively and efficiently. Training at each level

has been customized for each level and will require the successful completion of certificate

programs.

Marketing

Second Cup – Markham will sell five categories of products: a) coffee/teas/ciders b) specialty

coffees/hot chocolate c) blended drinks d) beans/merchandise and e) pastries. All drinks will be

made to order and the beans and merchandise will be obtained from Second Cup Head Office.

The prices of the products are pre-set by Head Office to ensure consistency between stores.

Although Head Office will conduct advertising and promotion on behalf of Second Cup –

Markham, the owners will promote their store by: giving free drinks for the grand opening of the

store, sponsorship of local children’s sports teams, donating leftover pastries to local community

charities, and developing customer relationships. Promotion of the store will also occur due to

its store front location of a busy intersection in Markham.

Markham is a fast growing municipally with a population of over 287,000. With above average

income levels compared to Ontario and Canada, the location will be exposed to higher levels of

disposable income. As such, the focus will be to draw open business workers and the local



community, specifically women and students. Although Markham has a number of competitors

including Starbucks, Tim Hortons, independent coffee houses, McDonalds and other

restaurants and convenience stores, Second Cup has a unique and growing product and image.

Second Cup – Markham will position itself to focus on three main areas by promoting: a) the

‘good for you’ image b) the neighbourhood oasis image and c) a community-oriented business.

This strategy will appeal to the target market and will result in capturing the maximum future

growth of the city which is expected to grow to 386,000 people by the year 2021.

Financial

Second Cup – Markham will require $301,000 in financing to start the business which will be

financed from debt and equity. Debt will account for 66% or $200,000 of the financing while the

remaining 33% or $100,000 will be financed from equity. Ken and Mary Hatch will receive Class

A common shares for a nominal value of $1,000. Preferred shares worth $100,000 will be

issued and will entitle holders to dividends of 15% of positive retained earnings. These shares

will be callable in the 5th year for a lump sum amount.

Analysis has shown that Second Cup – Markham expects to have higher gross profit margins

than the industry average beginning in the second year of operations and higher net profit

margin after the third year. The company will have a higher current ratio than compared to the

industry starting in year 1 which will allow to company to meet its obligations in a timely manner.

Net income is expected to be ($104,371) in the first year and growing to $129,075 in year 5.

The NPV (net present value) of the business plan is $180,447, which indicates that the plan is

viable using a 20% required return on capital for the equity investors. Due to low capital start up

costs and strong gross margin percentages on each of the product categories, as well as low

operating costs, Second Cup – Markham will produce positive cash flows, positive net income

and a strong internal rate of return for the investors and for Ken and Mary.



1.1 Introduction

Second Cup is a well-established coffee shop franchise in Canada that sells coffees, pastries

and merchandise to its customers.

Ken and Mary Hatch have decided that they are going to invest in a franchise of Second Cup in

the city of Markham Ontario. They have already gone through the process Second Cup has of

choosing the franchise owners and they are ready to start up their own coffee shop.

Mission statement

Second Cup strives to be the model for the quintessential, convenient “Neighbourhood Coffee

Shop” by supporting and promoting positive social interaction in the community. In doing so we

open our doors to invite people from the surrounding area to meet, organize, and get to know

one another as a community.

Short term goals

Acquire the necessary financing

Achieve a 2% market share by year 3

Build our reputation in the community as a neighbourhood coffee shop

Become profitable within the first 2 years of operations

Become knowledgeable about Second Cup operations and procedures

Create community awareness of the new franchise location to obtain

50% of potential customers in year 1.

Appropriately obtain quality staff and train them on Second Cup

operations and products

Long term goals

Build a sustainable business that can support Ken and Mary

Maintain healthy positive economic profits and cash flows

Increase community awareness of the new franchise location to obtain

100% of potential customers by year 3.

Obtain a loyal customer base

Enjoy work and building relationships with people in the community



2.0 Operations Plan

2.1 Description of OperationsSecond Cup purchases high-quality whole bean coffees and sells them along with fresh, rich-

brewed espresso beverages, a variety of pastries, and coffee-related accessories. Therefore,

there are three main components to the business: selling purchased beans, pastries and

merchandise, preparing and selling beverages and offering great service.

2.1.1 Sale of whole beans, merchandise and pastries

Whole beans are purchased and stored behind the “bean counter” for customers to then

purchase to use at home when making coffee. A variety of different roasts ranging from 1 – 5, 1

being the lightest roast and 5 being the darkest roast, as well as a variety of flavors are kept on

stock to ensure customer needs can be met. The beans are weighed and sold in either ½ pound

or 1 pound bags, either grinded or non-grinded, according to customer needs.

Second Cup franchisees order merchandise from head office to sell in the individual stores.

Although a variety of accessories can be ordered from the parent store, common merchandise

sold includes travel coffee mugs, tea pots and ceramic coffee mugs.

Pastries are also purchased from suppliers and sold to customers. The assortment of pastries

available depends on the time of day. In the mornings, a variety of muffins, croissants and

danishes are offered. As the day progresses, many of the breakfast pastries are sold and the

display case gets refilled with squares, cookies, and coffee cakes to accommodate the changing

desires of customers throughout the day.

2.1.2 Sale of beverages produced

Second Cup prepares both coffee and non-coffee beverages. The main categories of drinks

made and sold are:

Coffee/teas/ciders

Specialty coffees/hot chocolate

Blended drinks



2.1.3 Customer service

Second Cup prepares drinks fresh and quickly made to order, thereby allowing them to

accommodate customer requests. This personalized service coupled with an atmosphere that

has a friendly neighbourhood feel is what customers expect of Second Cup. In addition, the

potential owners, Ken and Mary Hatch, of Second Cup – Markham will offer wireless internet

which will be provided by a contract internet provider.

2.2 Franchising ProcessThe franchising process started with a seminar held by Second Cup where they discussed the

business opportunity of opening a new franchise store. An application was then submitted by

Ken and Mary and after a pre-screening of qualifications and numerous interviews they were

approved for a Second Cup. The location was agreed upon in Markham, Ontario, as the

application is for a Second Cup franchise, not a particular location, wherever the location may

be. Currently Ken and Mary reside in Markham and are considering the opportunity.

There are many benefits to opening a franchise such as the large support it provides and the

assurance that the business model is successful. The franchisor provides product knowledge

and business advice and in addition offers guidance. Second Cup already has established

supplier relationships, product reputation and a loyal customer base. However, there are

standards franchisees must adhere too and therefore these rules must be followed in order to

own a Second Cup franchise. In addition to not having complete independence in decision

making, new franchisees typically work many hours to successfully establish the business.

2.3 Hours of OperationsAlthough Second Cup is a franchise, the stores set their individual hours. The hours of operation

for Second Cup – Markham will be:

Monday – Thursday: 6 am – 11 pm

Friday: 6 am – 12 pm

Saturday: 7 am – 12 pm

Sunday 7 am – 11 pm

The hours set attempt to accommodate target markets. The store must be open early in the

morning during the week to service the customers on their way to work, however it can open

later during the weekend as less people desire coffee at early hours. Second Cup – Markham



will be open until 11 o’clock at night during the week as many people go for coffee as a social

event and students sit and study. The hours are extended on Friday and Saturday nights as

even more customers are looking for an activity for weekend enjoyment.

2.4 Daily Activities 2.4.1 Opening activities

One staff member will be required to come into the store 30 minutes before opening to prepare

for the day. This person will be one of the few key holders and will be a responsible, trusted

employee. The duties to be performed by this employee will include:

1. Opening the safe where the float is stored, re-counting the money and placing it into the

tills

2. Measuring the required beans for the day. This requires weighing the whole beans in a

coffee filter and transferring this filter containing the beans to a “coffee drawer” where

the days worth of coffee is stored and ready to be brewed

3. Grinding coffee beans and brewing coffee

4. Taking the muffins out of the supplier containers and transferring to the display case

5. Setting the patio furniture outside

6. Ensuring behind the counter is stocked and tidy

7. Ensuring the seating area is tidy

2.4.2 Preparation of beverages

The most important activity of all employees is to service the customer which primarily includes

making the requested beverage and taking payment. Projections indicate 1 customer will be

served every 2 minutes in the average business day. As discussed above the main categories

of drinks sold are:

1. Coffee/teas/ciders – These drinks are relatively quick to prepare. There should be a

constant supply of fresh coffee and once a pot becomes empty the employee needs to

brew another. Tea and cider only require hot water to be served.

2. Specialty coffee/hot chocolate – These drinks take more time and expertise as they are

made on the barista machine and therefore employees must be trained on how to use

the machine. The barista machine is used to heat milk and make espresso shots which

are used in the beverages. There will be a visible chart illustrating the amounts and

types of syrup required for each drink to ensure the beverages are prepared consistently

and accurately.



3. Blended drinks - There will be a chart detailing the required ingredients and amounts to

prepare the blended drinks.

See Appendix 2 – Product List for a complete list of all beverages to be sold.

2.4.3 Taking payment

Once a customer places an order it will be entered into the till and payment will be collected.

Second Cup will accept cash, credit cards and debit. They will also have a gift card program

whereby money can be loaded onto a card in a prepaid manner and this card can be used for

payment, thereby decreasing its balance.

2.4.4 Drive thru

The store will have a drive thru window. All employees working will have a head set that notifies

them, with a beep, when a car is present and waiting to order. Any available employee will be

able to answer the drive thru with the press of a button on their headset which will transmit their

voice to an outside speaker allowing them to take the order. There will not be a separate barista

machine or coffee pots beside the window, but instead the beverages will be prepared with the

same equipment as used for walk in customers, but the drinks will then be carried to the

window. There will be however, a separate till beside the drive thru window. Please note that

facilities are available for expansion of the drive thru window to house a separate barista

machine or coffee pots beside the window.

2.4.5 Flow of work

Assuming there are 2 employees working, as this is typically the case, the flow of production

would operate as follows:

One employee will be stationed at the till. As a customer approaches and orders a drink this

employee will enter the order into the till and take payment. If the customer orders a

coffee/tea/cider or a pastry this employee will prepare the beverage and/or take out the food

from the display case. If the customer orders a specialty coffee/hot chocolate or a blended drink

the employee will add the syrup required into the cup and place the cup on top of the barista for

the second employee to make.



The second employee stationed at the Barista machine will be responsible for making all

specialty coffees/hot chocolates and blended drinks started by the other employee who poured

the syrup into the cup. The second employee will also be responsible for answering the drive

thru when a car is present and taking the order.

The employee that is not busy will be responsible for going to the drive thru window, entering

the sale into the drive thru till and taking payment. Additional duties that need to be done during

the day such as stocking, preparing syrups and weighing beans for customers wanting to

purchase, will be done by both employees when they are not busy serving customers.

2.4.6 Preparing syrups, stocking and cleaning

During non-busy times, employees will be expected to prepare the syrups required for the

beverages, stock the cups, gather dishes from the tables and clean the used mugs and

counters.

2.4.7 Closing procedures

One staff member will be required to stay 30 minutes after closing to shut down the store. This

person also will be one of the few key holders and a responsible, trusted employee. The duties

to be performed by this employee will include:

1. Cashing out the tills – This requires the employee to count the money in all tills and

prepare a bank deposit for amounts in excess of the float amount. The bank deposit

should be kept on the safe along with the floats. The bank deposit should be reviewed

and only deposited into the bank by Ken or Mary.

2. Cleaning the coffee pots and barista machine

3. Taking excess food out of the display case and organizing for pick up by charitable

organizations

4. Taking in the patio furniture

5. Moping the floors

6. Tidying the bathrooms and entire store

2.4.8 Entering financial data

Second Cup – Markham will have a computer equipped with accounting software, such as

Simply Accounting and Monday through Friday, Ken will enter financial information from the



previous day into the system. On Mondays he will have to enter both Saturday and Sunday’s

transactions.

2.5 Weekly Activities2.5.1 Ordering

Breakfast, food and milk will be ordered once a week by Mary. Roughly the same orders will be

placed week to week unless large variances are noted. Weekly orders will be placed, however

breakfast pastries and food will be delivered daily and milk will be delivered once a week.

Supplies will be ordered as needed.

2.5.2 Scheduling

A staff schedule will be prepared by Mary every week for the following week. The schedule will

be posted in advance (i.e. Wednesday for the week starting the following Sunday) to allow the

employees time to plan personal schedules.

2.5.3 Bathroom cleaning and general maintenance

Ken will be responsible for cleaning the bathrooms once a week. Second Cup employees will be

responsible for ensuring daily cleanliness, however the Ken will be responsible for cleaning the

toilets and sinks. He will also use his past experience as a caretaker to perform general

maintenance around the store.

2.6 Quality ControlMaintaining consistent and high quality products and service is especially important in a

franchise business, such as Second Cup, as customers expect the products and service to be

consistent regardless of the location. In order to control this, Second Cup has standard

operating procedures that must be followed. These standards will be reviewed by Ken and Mary

and monitored for compliance.

At the store level, in order to ensure quality and consistency all employees will be trained on

how to make the beverages according to standards and reference charts will be posted for

guidance. Ken and Mary will need to monitor such things as customer complaints and excess

customer wait times in order to improve the service being provided.



2.7 SuppliersSecond Cup has a list of approved suppliers, which must be used in order to maintain the

quality behind the Second Cup name. The list was provided to Ken and Mary and they have

chosen the following suppliers:

Breakfast pastries – Beebell Bakery

Other food products (squares, cookies cakes) – Carols Sweets

Milk – Dairyland

Other supplies such as: cups, lids, straws, coffee sleeves, coffee, syrups, and

merchandise - Head office

The breakfast pastries and other food products (squares, cookies cakes) will be delivered every

morning at the same time the opening employee gets into the store. In order to ensure

freshness, only enough for 1 day will be delivered at a time, however orders will be placed

weekly for the same quantity every day, and any left over’s will be given to charity.

Milk will be delivered every week and kept in the storage room cooler. Expiry dates will be

checked by every employee prior to opening a new jug to ensure only fresh milk is being used.

Other supplies will be ordered and delivered as needed. As these items are not perishable, and

storage space is available, stock will be kept on hand in order to avoid running out.

2.8 Service Providers Second Cup will need to hire service providers to fulfill certain needs. The following services are

needed:

1. Barista cleaner and repairer – A professional will be hired to completely clean the Barista

machine every month. This will need to be done after hours as they will need to

disassemble to the machine to properly clean it. They will also be responsible for

performing required maintenance and be available for emergency repairs needed.

Second Cup staff will be responsible for ensuring daily cleanliness, such as wiping off

the steam arm and empting the espresso trays. This service will be provided by a local

Barista Service such as Peggy’s Barista Services.

2. Internet Service Provider – A local service provider such as Josh’s Computers Inc, will

be used to provide the routers and internet service.



3. Accountant – An accountant will be needed to file the annual tax return and prepare

financial statements to send to the franchisor. Since advertising royalties are based on

sales, a review of the financial information may be required for assurance over the sales

stated. This service will be provided by an accounting firm such as Grant Thornton LLP.

4. Legal Service - The law firm McGee & Fryer LLP will be employed to assist in legalizing

incorporation documentation and other start up business matters. They will be retained

for the year to help with general legal questions that may arise during the year.

2.9 Environmental IssuesAs environmental issues are becoming increasingly important to consumers, it is imperative

Second Cup works in harmony with both the environment and people who provide the coffee

beans. Second Cup - Markham will not have a choice in the beans they use however, Second

Cup head office states:

“We pledge that our coffee growing environment is treated with the utmost respect and

dignity. We pledge that no coffee purchased from Second Cup is harvested from child or

forced labour. All of our coffee producers provide a safe and healthy work environment

and employees are compensated in a fair and equitable manner. As well, Second Cup

continues to provide financial remuneration for quality beans to directly benefit the

farmers, workers and mills. This is our promise.” (Second Cup, 2008c).

In addition to caring for the environment and people who provide the beans, Second Cup also

uses 100% recycled paper cups and coffee sleeves. These initiatives by Second Cup

demonstrate the desire of corporate office to work in harmony with the environment, an

increasingly important issue in today’s economy.

2.10 Location The location for the store has been chosen by the Second Cup Real Estate Department. Below

is some important information regarding the location:

Demographic and other studies were carried out to determine the suitability of the site

Second Cup handled the location negotiation and entered into a tenancy agreement with

the landlord



Second Cup will sub-let the property to Ken and Mary under the same terms and

conditions

Second Cup does not mark-up the leases

The franchise agreement is for 10 years with an expiry date related to the current term of

the premises lease.

The location chosen and agreed upon by Ken and Mary is in Markham, Ontario. The store will

be a free standing store in a power center intersecting two major roads in the city, situated

between the business community and an affluent residential area. This location attracts many

commuters as well as local residents. The power center is currently home to many large anchor

stores which will draw traffic into the complex. The store also has ample free parking in front of

the building and large advertising sign so it can be seen from the distance.

2.11 Site PlanThe store will have capacity for 40 customers inside with options to sit on chairs, benches or

large armchairs in front of the gas fireplace. In addition, the patio will seat 8 customers. The

patio will be surrounded by flowers and umbrellas will shade the customers from the direct

sunlight. In the coffee industry, many customers take beverages to go, and therefore a large

seating area is not needed. Having a smaller store gives a cozy, friendly relaxing feel.

The design of the furniture, paint colours and décor, is monitored by the franchisor. Second Cup

has already chosen the colours beige and blue, sleek metal chairs and tables, brown leather

armchairs and couches and a stone floor. The overall atmosphere is trendy, yet not overly

modern.

See Appendix 4 – Floor plan for the proposed floor plan and Appendix 3 – Anticipated look for

an example of the look and feel of the inside of the Hatches future Second Cup.

2.12 5 Year Development PlanNo capital upgrades will be required within 5 years as all equipment has a useful life that

extends that period. Although Second Cup has the ability to require store owners to upgrade

furniture and décor, this would not be required of a new store within its first 5 years of operation.



A potential upgrade would be the addition of a barista machine and coffee brewers beside the

drive thru window. An employee could be stationed at the drive thru all day to satisfy increased

demand of drive thru customers. This would only be a consideration if sales increased rapidly

and the current employees could not handle the volume. This was not built into the capital

budget as projections do not indicate this would be necessary, however the estimated capital

cost would be $16,000 ($11,000 for the barista machine and $5,000 for 2 coffee brewers) for the

expansion.



3.0 Human Resources

3.1 Management TeamThe Second Cup franchise located in Markham will be operated and managed by Ken and Mary

Hatch, with assistance from the franchisor. As local residents of the Markham, both Ken and

Mary Hatch have the knowledge and understanding of the local coffee market and are familiar

with the local competition. Additionally, Ken and Mary have built well-established relationships

with both individuals and businesses in the community which will add in the promotion of the

business.

3.1.1 Ken Hatch

Ken has most recently worked in a supervisory position with a local high school in Markham. His

20 years of experience in the school caretaker field has allowed Ken to develop numerous

transferable skills applicable to the coffee industry. In his supervisory role, Ken has developed

managerial skills to manage and motivate employees. Ken’s extensive knowledge of facility

caretaking will be beneficial by ensuring prompt and efficient responses to any maintenance

problems that arise so as to minimize any disruptions to customers. Additionally, Ken possess

an understanding of the importance of cleanliness and can ensure effective cleaning duties are

performed to provide customers with a welcoming and clean environment.

Ken will be responsible for administration, marketing and promotions, finances, repairs and

maintenance, general day to day management of the store and will communicate with the

franchisor. As such Ken will be in charge of banking and payroll functions and will perform other

financial duties including royalty submissions to Head Office, financial statement analysis and

business planning. Ken will be responsible for ensuring financial stability which will include the

timely payment of suppliers and staff. The growth of the company is important to its success

and Ken will be responsible for growing the business through marketing and promotion

campaigns and sound business practices. Finally, Ken will be responsible for general

maintenance issues that arise.

3.1.2 Mary Hatch

Mary has worked in the coffee industry for the last 8 years. During this time, Mary has gained

invaluable knowledge of the various duties and tasks required to operate a coffee shop

including coffee equipment use, opening and closing procedures and appropriate cash handling



procedures. She will be able to pass on her specialized industry knowledge to the staff and will

use her existing customer base in the new franchise location. Since Second Cup is a key

ingredient to any community, it is the people and relationship building skills that will help to

establish this location and Mary will be able to provide that for this team.

Due to Mary’s background and understanding, she will be responsible for the operations of the

company. This will include staff scheduling, ordering of supplies, customer service, and training

of staff. She will focus her time on hiring, motivating, training and evaluating employees and

ensure proper execution of Second Cup procedures and policies. She will be responsible for

updating the standard operating procedures to provide for increased efficiencies and better

customer service by responding to customer suggestions and drawing on her previous work

experience. With Mary’s firsthand experience as a coffee shop employee, Mary will be able to

coach employees and help them become familiar with the job should they require it.

Since Ken and Mary will both be highly involved in the business (i.e. they will not be working at

any other job), it is unnecessary to hire another manager for the first couple of years. There will

be senior staff members who will assist with tasks such as opening and closing the store, but

there will not be any additional managers on staff until after Year 5.

3.1.3 Current investment

Ken and Mary Hatch will contribute $20,000 of their own funds to pay for the initial franchise fee.

It is expected that there will be the need to provide a personal guarantee for a portion of the

debt once the agreement is reached with the sources of financing.

3.1.4 Current acceptance by Second Cup

To date, Ken and Mary have been approved by the franchisor to open this location in Markham.

In order to get to this level of acceptance, the Hatch’s have already been through three long and

intensive telephone interviews to ensure that they are ready and capable to uphold the Second

Cup brand in their new store. The fact that they have been accepted and approved is a

testament to the franchisor’s belief in their ability. And since the franchisor has been very

successful at picking owners in the past, their acceptance of the Hatch’s provides comfort to

lenders and potential investors that this is a recipe for success.



3.1.5 Relevant training

Both Ken and Mary will rely on the 3-week training course (also known as Coffee College)

provided by the franchisor to bring them up-to-date with the knowledge required to run the

business once it is ready for the public. This course is meant to provide not only the

fundamentals of coffee and retail, but to understand and live the Second Cup brand. While it

could be argued that the course is not long enough, there is evidence to suggest that the course

will be intensive and will in fact provide the necessary training to run the location. It is assumed

that since each location has the potential to affect the overall Second Cup brand reputation, the

franchisor will ensure that new owners are ready to represent their company in the best way

possible.

The 3-week training session is split into two parts: product knowledge and business. The first

half includes learning about Second Cup’s history, the products, how to make the products and

how to use the machines. The second part provides training on the business plan, accounting,

paperwork, projections, inventory and financial statements. This rounded approach to training

has been successful in getting many new owners ready for business. A trip to Costa Rica is

mandatory for all new franchise owners to obtain firsthand knowledge and experience of the

complete coffee process. The cost of the trip is included in the $20,000 initial fee.

Second Cup will provide online e-learning training modules to keep the owners (and the

employees) up to date with the company’s products, their policies and the overall branding

strategy. Ken and Mary will participate in these training modules to keep up-to-date with

franchise operations.

3.1.6 Support team

In addition to the experience and training that will be contributed by Ken and Mary, the

management team will also rely on their outside support team for guidance. This will include the

Franchisor, accounting and legal professionals and the team of investors (which may include

the bank and other potential private investors). These knowledgeable third parties will provide

additional expertise for running the business and making important decisions.

3.1.7 Salary and compensation

Ken and Mary will each receive a salary of $30,000 (before benefits) in the first year and it will

grow by $2,500 every two years after. In many start up businesses, it is customary for the



owners to take a smaller salary in the first few years to allow for reinvestment and growth.

However, due to the fact that both Ken and Mary will be quitting their full time jobs and expect to

work full time hours in the Second Cup, it is reasonable to pay them this amount of salary. This

will allow them to maintain their current lifestyle while fully taking on the challenges of running

their own business.

3.1.8 Management expectations

One of the driving motivations behind the potential purchase of the franchise is that Ken and

Mary want to be their own bosses. While it is true that they will be the managers of their own

location, the fact that they will be purchasing a franchise must be completely and clearly

understood. The franchisor has the ability to uphold strict guidelines that must be followed;

these will be outlined in the franchise agreement and there could be severe penalties for not

adhering to the rules in that agreement. As such, Ken and Mary should be advised to

completely understand the clauses in the franchise agreement to ensure compliance with the

rules of the franchisor and avoid any repercussions.

3.1.9 Summary: Why to invest in this management team

Due to Ken and Mary’s previous experience, the extensive training and support that they will

receive from the Second Cup franchisor and the investment they have made personally in

making this business successful, the store will have a strong management team with a recipe

for success. Ken and Mary have the motivation, the knowledge and the dedication to make their

dream of a profitable small business into a reality.

3.2 Organizational StructureSecond Cup - Markham will be operated and managed by Ken and Mary Hatch, who will work

full time hours for the location. To assist with customer service operations, 6 part time

employees will be hired and trained prior to the store opening.

The organizational structure will be setup in a hierarchal manner with Second Cup Head Office

as the top level in the structure. Both Ken and Mary Hatch will act initially as hands on

Managers and provide ongoing direction to Sales Associates/Baristas (please see Appendix 1 –

Organizational Chart). It is anticipated that due to growth in sales, the organization will need to

hire an additional Sales Associate/Barista in year 4.



Legally, the organization will be setup as a corporation. This is more advantageous than a sole

proprietor, co-op or partnership. A corporation will allow the owners to take advantage of tax

deferral opportunities as well provide the owners with limited liability unlike a sole proprietorship.

Although the corporate structure does have more administration and costs associated with it,

the limited liability will allow the owners to separate their personal assets from the business

ensuring their personal financial protection. The business will also be eligible for the small

business deduction which allows for a reduced tax rate on the first $400,000 of business

income. Additionally, the owners will hold shares in the corporation and on disposal of the

shares the owners will be able to take advantage of the lifetime capital gains exemption that

allows for tax savings on any gains realized from the sale of shares.

3.3 Recruitment and RetentionOne of the key success factors in operating the coffee shop will be ensuring adequate staff

levels to provide service to customers. As with many coffee shops, employee turnover is

expected to be high. To mitigate this, Second Cup - Markham plans on attracting and retaining

employees through unique benefits and a friendly culture. Focus will be on attracting students at

the beginning of their post-secondary education. These individuals are typically interested in

earning additional spending money part time while going to school and will likely move onto their

studied fields after completing their education. This is an advantage as benefits will not be

required to be paid as is required for full-time staff. Job ads will be posted through online

advertising sites such as Monster.ca and in local universities and colleges.

The store’s culture will be unique as Second Cup itself and will be focused not only on

customers but also on employees. As such, employees will be provided with a number of

benefits including:

Free coffee

Weekly expense account for non-coffee products with a yearly account increase

Scholarship opportunities for students

Paid training programs

Holiday pay



3.4 Job descriptionsSee the 3.1 Management Team section for details on the responsibilities of Ken and Mary

Hatch.

Sales Associates/Barista

Serve the "World's Greatest Coffee" and all other Second Cup products to guests

(Monster.ca, 2008)

Handle and be responsible for cash received for Second Cup products

Daily cleaning duties, including maintenance of guest service areas

Preparation of The Europeans, Second Cup's trademark espresso beverages

Entertainment of guests with Barista Flair and positive energy

Must achieve a passing grade (85%) on the Certified Sales Associate Exam

Must meet all Barista Qualifications - Barista Oral Exam - Barista Practical Exam

After a 3 month probation period, Sales Associates/Baristas will be eligible to performing

opening and closing procedures, including equipment maintenance and merchandising. With

this new level of responsibility there will be an increase in wages of $1.50 per hour.

3.5 Training ProgramsSales Associate/Barista

All sales associates/Baristas will be required to take and pass the Certified Sales Associate

Exam as well as meet all Barista Qualifications. Additionally, Mary will develop a unique training

program to focus on customer care and quality service. This on-the-job training will also include

training on coffee equipment usage, cash register procedures and opening / closing procedures.

Additional training will be performed through Second Cup’s online e-learning training modules.

The complete training process is expected to last two days. The cost of training will be minimal

due to the online testing and in-house training by Mary Hatch

3.6 Store timings3.6.1 Monday to Thursday

The store will open at 6 am and close at 11 pm during the week. One employee will be required

to arrive 30 minutes before the store opens to stock shelves and prepare the store for the day’s

operations. From 6:30 am to 9:00 am, there will be 2 part time employees to serve customers,



as this will be a relatively busy rush for the store. From 9 am until 5 pm, Ken and Mary will work

together to serve customers in the store in addition to the 1 scheduled staff member. When it is

not busy, they will perform tasks such as ordering products, general cleaning, administrative

duties, etc. From 5 pm until 10 pm, there will be 2 part time employees to serve customers.

From 10 pm until close, one of the part time employees will be required to clean and lock up the

store for the night.

3.6.2 Fridays

The store will be open at 6 am and close at 12 pm

3.6.3 Saturdays and Sundays

The store will not open until 7 am and will remain open until 12pm on Saturday, but close at

11pm on Sunday. Ken and Mary will not work in the store on the weekends, and as such the

entire day will be staffed with at least 2 part time employees. The same responsibilities for

opening and closing the store will still apply.

3.7 Total Salaries, Wages and Benefits CostsDue to premium wage that must be paid to ensure quality employees are attracted and

maintained, as well as the cost of benefits for the salaried and part time employees, the total

cost for the first year will be approximately $173,000 (please see Appendix 6 – Detailed

Financial Plan). The total cost increases over the next 5 years by taking into consideration a 3%

inflation increase in wages per year, increases in management salary and the addition of 1 extra

employee in Year 4.



4.0 Marketing Plan

4.1 ProductsThe products to be sold in Second Cup stores is determined by the franchisor, and therefore

head office has control over what products Ken and Mary will be required to offer. In addition,

the franchisor also has the ability to discontinue or introduce beverages.

Second Cup offers a large variety of products in order to try to satisfy the tastes and demands of

a wide array of customers. As such, hot or cold beverages, non-coffee alternatives, low fat

options and personal customization alternatives are available. As previously mentioned the

products to be offered have been grouped into five main categories, as follows:

Coffee/teas/ciders

Specialty coffees/hot chocolate

Blended drinks

Beans/merchandise

Pastries

For a complete listing of the specific drinks in each category, please see Appendix 2 – Product

List.

The beans and merchandise will be ordered from head office and sold directly to customers.

Beans will be sold in both ½ and 1 pound bags and various roasts and flavors will be available.

Selling Second Cup roast beans for customers to use at home is a great way to build brand

loyalty in customers as they quickly become accustomed to the unique taste of Second Cup

coffee beans and are likely to continue drinking Second Cup beverages. The pastries will also

be ordered and sold to customers. These act as great compliment to a cup of coffee any time of

day, and also make it possible for commuters to pick up breakfast at the same time as a

beverage on the way to work in the morning.

The beverages including, coffees, teas, ciders, specialty coffees, hot chocolates and blended

drinks, will be made to order. All drinks are easily customizable to customer preferences and

this creates the element of customer service consumers are looking for. In addition, the

ambiance and the neighborhood coffee shop feel of the Hatches Second Cup will enhance the

service component of the café.



4.2 PricingPrices are set by head office and standardized by geographic location. Any price adjustments

will be pushed down from head office in order to account for factors such as inflation or changes

in market conditions. As such, the Hatches have no control over pricing, including the ability to

make changes on a go forward basis. The general pricing categories for the products available

at Second Cup mirror the categories of products as noted above.

See Appendix 2 – Product List for the prices assigned to each category.

4.3 PromotionAdvertising and promotion for Second Cup is carried out by head office and franchisees are

charged a royalty fee in order to cover these costs. For example, when a new drink is released,

there is a national promotion that goes along with it. Ken and Mary will participate in these

promotions which include giving away free samples of the new beverage, as well as new

uniforms for the staff to promote the product. In addition, the franchisor maintains a Second Cup

website that provides information on all beverages, nutritional data and general information

about Second Cup.

In addition to advertising done by head office, the Hatches will engage in the following efforts to

promote their individual Second Cup.

Ken and Mary will hold a grand opening for their store, in which they will give away free drinks to

the first 100 customers. They will advertise the store opening in the community newsletter and

local flyer. This will ensure customers are aware of a new Second Cup to be opened their

neighborhood and will also spark interest in the beverages sold.

They will also promote the business through sponsorship of local children’s sporting teams. This

will allow Second Cup – Markham to get its name into the community and to bring the parents

and participants of the local sports teams into the store.

Ken and Mary will promote their store as community friendly. They will arrange for all of the

leftover pastries to be donated to a local community charity to help out those in need at the end



of every day. This will help Ken and Mary to help out the community where they can and it will

allow for positive relationship building with the neighborhood. Ken and Mary will also be willing

to make donations to other organizations in the community should they be approached for such

donations.

Lastly, Ken and Mary will also put in a lot of face time at the coffee shop which will help build

relationships with the customers. Recently a new branding initiative was introduced, with a

greater focus placed on emotional drivers and the experience a customer has in a Second Cup

location. Second Cup wants to come across as a “neighborhood oasis”, a place for escape and

where the customer is valued (Mazurkewich, 2007). Building relationships with customers,

training staff to ensure they are providing customers with a quality experience and the design

and feel of the store are all essential elements of this strategy.

4.4 PlaceSecond Cup is a franchise and therefore, the Second Cup Real Estate division has already

performed market research for the new location of Ken and Mary’s franchise. The shop will be

located in Markham, a suburb of the city of Toronto, between the business community and an

affluent residential neighborhood. The benefits of being situated between the two, is that the

business community as well as the local residents with high disposable income can be targeted.

Based on the convenience of the location it is expected to attract commuters on their way to

work in the morning and business people working in Markham even if they are tight on time. In

addition, the décor and ambience of the café is expected to draw local residents as a place to

meet up with friends and family and relax.

The café will be free standing store in a new shopping development, and will have a drive thru

as well as ample complimentary parking available for customers. Being situated in a shopping

development means there are large anchor stores to draw traffic into the area which will

generate traffic flow into Second Cup.

4.5 SegmentationMarkham is located in the Greater Toronto Area and is Canada’s high tech capital. Markham is

a fast growing municipally in Ontario with over 287,000 people (Economic, 2007). Markham’s

population is fairly evenly spread between males and females for most age categories and is



also fairly evenly spread between ages, as can be seen in the exhibit (See Appendix 5 –

Markham demographics). The average income level in Markham is above that of the average

Ontario income as well as the average Canadian income. Therefore the residents of Markham

have more disposable income to put towards indulgences, such as coffee.

As per the Coffee Association of Canada, 60% of adults in Ontario drink coffee on a daily basis

and 16% of coffee is consumed or purchased in eating places. The target market and related

expected number of annual customer transactions of the franchise was determined using this

information in (Coffee Association of Canada).

4.6 TargetingFrom the segment information above, we can derive our main target markets, which include

business people and the local community, specifically women, students and all others that want

to indulge on a beverage, coffee or non coffee.

The business community is specifically important because there are many commuters in and

out of Markham daily. The location of the Hatches Second Cup attracts people on their way to

work in the morning and on their way home from work in the evening. The drive thru is

especially important to these consumers, as this option saves them time. In addition, Ken and

Mary will also expand their target to include people working in the nearby businesses as coffee

at work is an all day drink. The people who work at the local businesses will be looking for a

place to get their coffee. They will concentrate on building relationships in the business

community that surrounds their location.

Second Cup – Markham will also focus its efforts on targeting the local residents by building

relationships and designing a desirable atmosphere. This will help to gain repeat customers and

entice those locals into the café. There will be ample parking to make the establishment more

attractive for local residents. They will specifically target students, who will study at Second Cup,

by staying open late hours and women by promoting the idea of “me time”. This is a national

marketing campaign designed by head office to target working women and mothers who

deserve a break (Mazurkewich, 2007). The Hatches will support this campaign by having a cozy

fireplace and comfortable chairs where women can relax and enjoy a cup of coffee.



4.7 Positioning“Second Cup is Canada's largest specialty café franchisor and the second largest retailer of

specialty coffee.” (Douglas) Second Cup has also begun to change their brand to be a ‘good for

you’ brand. They have started to take all of the trans-fats out of their products to show this ‘good

for you’ image (Mazurkewich, 2007).

Ken and Mary would be wise to build the atmosphere to go along with the branding that head

office is doing. They will build the atmosphere to be cozy and relaxing to go with the “me time”

branding being done by head office. Second Cup also wants to make their coffee cafés the

second home of the customers. This will also fall in line with the cozy atmosphere. The shop will

become known as a “neighbourhood oasis”.

As previously mentioned, Second Cup uses local suppliers for baked goods and pastries

available for purchase. This re-investment in the local community creates a positive image with

customers and reinforces the fact that each Second Cup location is committed to the community

it operates in. In addition, Second Cup is a Canadian owned and operated business which may

draw in some customers who prefer to support Canadian entities over international chains such

as Starbucks.

4.8 Competitive AnalysisCurrently in Markham, there are five other Second Cup cafes, three Starbucks coffee houses,

several independent coffee shops and numerous fast food retailers, convenience stores, gas

stations and restaurants which sell coffee. Each of the Second Cup cafes are located sufficient

distances from one another that they are not expected to cannibalize each other’s sales. Head

office has performed extensive market research in order to ensure there is a sufficient market to

support each location. Competition can be divided into two groups: specialty coffee retailers and

basic coffee retailers. The basic coffee retailers such as Tim Horton’s, McDonalds, convenience

stores and restaurants, do not offer as wide of selection of beverages, as high quality of a

product, or the same type of experience and atmosphere as Second Cup. Considering the

differences in the products and service offered, the basic coffee retailers are not considered to

be a close substitute and therefore do not pose a major threat of rivalry to Second Cup. The

specialty coffee competitors on the other hand, including Starbucks and independently run

coffeehouses, offer a similar selection of products, similar product quality and aim to provide

customers with a certain experience when visiting their coffee house. As such, these retailers



are considered to be close substitutes to Second Cup and pose a significant threat of rivalry.

Aside from other factors, personal taste and brand recognition play a role in developing

customer loyalty which may work to the advantage of Starbucks in particular, in attracting and

retaining customers.

CompetitorNumber of Locations in Markham

Features Price

Starbucks 3

Pleasant atmosphere,

similar selection of

products, brand loyalty

Comparable

Tim Horton’s 6

Cheaper price, fast

service, more products

than other fast food

retailers

Lower Prices

Independent coffee

houses8

Pleasant atmosphere,

similar product

selection, relationship

with owners

Comparable

McDonalds 5Cheaper price, fast

service

Low Prices

Convenience

Stores/Gas

Stations

15

Convenience, cheaper

price

Low Prices

Restaurants 18Wide range of other

products offered (food)

Lower Prices

Of the competitors noted above, one Starbucks, one independent coffee house and a few

convenience stores and restaurants are in close range of the Second Cup - Markham location.

The Starbucks is located in a shopping mall and while it has a sizeable lounge area there is no

drive thru, a lack of outside seating and it can be difficult to find nearby parking. The

independent coffee house, Beans, has a more limited menu than Second Cup or Starbucks, but

has a large seating area including some outside seating and an inviting décor. Drive thru service

is not available.



4.9 Franchising RestrictionsAs part of the franchise agreement, owners are restricted to adhere to standards of the

franchise. In particular, coffeehouse locations, the Second Cup logo, and general branding are

determined by head office. Owners have the flexibility to decorate and furnish their location as

they wish, subject to some standards such as televisions are not permitted in the cafes. In

conjunction with a new branding initiative currently underway, head office is trying to make the

cafes approximately 80% consistent and 20% different from one another (Mazurkewich, 2007).

As a result, some of the flexibility previously available to owners in the design of their cafes has

been reduced and they are now required to have certain items such as fireplaces and standard

countertops in every location.

4.10 OpportunitiesMarkham is a growing community, with a current population of 287,000 that is expected to grow

to 386,000 by the year 2021. In addition, more and more businesses are continuing to locate

offices in Markham. This growth in the residential and business community translates into a

larger target market for Second Cup and therefore should result in increased sales in the future.

Gourmet coffee drinkers in general as well as the target markets of the new Markham location

span a wide range of ages. Demographics of Markham indicate a wide range of ages of

residents, with the majority of the population being fairly evenly distributed among the age

brackets starting at 10-19 year old bracket up to the 50-59 year old bracket. In addition, the

average annual income of a resident of Markham is higher than both the Canadian and Ontario

average annual income levels thereby indicating that the a large portion of target market likely

has more disposable income than the average person.



5.0 Financial Plan

5.1 Sources of Financing

Second Cup – Markham will be financed by a combination of debt and equity financing:

5.1.1 Debt Financing

Debt financing of $200,000 is to be obtained by the franchise with repayment terms of 5 years

and an interest rate of 10%.

5.1.2 Equity Financing

Beginning Share Capital will be for Class A common shares purchased at a nominal value of

$1,000 by the Hatches. This is to provide a class of shares for the Hatches to which growth of

the business will accumulate and, when possible, dividends can be paid out. In addition, the

base case projection includes 33% or $100,000 financing from family and friends (angel

investors) for preferred shares. The shares will entitle shareholders to dividends equivalent to

15% of positive retained earnings. The preferred shareholder agreement will state that the

shares are callable as of the 5th year of operations for a lump payment of $195,000. From our

analysis, this lump payout as well as dividends paid will result in an external return on equity

equivalent to 20%. In a worst case scenario, if no dividends are paid in year 1 through 5 the

external rate of return will be equivalent to 14%.

5.1.3 Financial Leverage

If the business would have financed completely by equity, the internal rate of return would have

been 34%, indicating that a healthy return is being generated from the assets of the business

alone. While leveraging the business with some debt financing increases the risk to investors

and creates a yearly required payment, it also increases the return to investors.

5.2 Base Case Results

Please see Appendix 6 – Detailed Financial Plan for the Base Case Financial Schedules 1

through 13, as well as Appendix 7 – Financial Plan for a detailed explanation of how the values

were derived.



Based on the base case financial projections some key financial ratios were calculated and

compared to the industry average for similar retail businesses as follows:

5.2.1 Gross Profit Margin %

Second Cup – Markham expects to have higher gross profit margins than the industry average

beginning in the second year of operations. These strong margins are due to relatively low input

costs required to prepare the beverages offered by Second Cup. Strong gross margins are

required in order to cover additional operating costs associated with servicing customers and

running the business as a very limited amount of fixed costs have been allocated to cost of

sales.

5.2.2 Net Profit Margin %

After the third year of operations, the franchise’s net profit margins will be higher than the

industry average as a result of Ken and Mary effectively managing their operating costs. For

example, Ken will be taking care of the repairs and maintenance costs and they are paying

themselves modest management salaries.

5.2.3 Current Ratio

Through all years of operations Second Cup – Markham will have a current ratio higher than the

industry standard as a result of keeping excessive cash on hand in order to ensure they can

cover loan payments, payables and any unforeseen circumstances.



5.2.4 Financial Results

2009 2010 2011 2012 2013Revenues 282,021 475,334 652,792 699,271 749,059Cost of Sales 78,821 132,850 182,447 195,437 209,352Direct Labour Costs 107,561 110,268 113,726 134,269 138,663Gross Margin 95,639 232,216 356,618 369,564 401,044

Gross Margin % 34% 49% 55% 53% 54%

Operating Expenses 181,471 210,021 230,033 233,666 243,805Interest Expense 18,539 15,141 11,387 7,240 2,658Tax Expense 0 0 2,950 21,229 25,506Net Income (104,371) 7,054 112,248 107,430 129,075

Net Profit % -37% 1% 17% 15% 17%

2009 - The Second Cup in Markham opens in January 2009 and experiences healthy sales in

that year, but due to a slow start up period the income statement shows a loss of over

$100,000. However, there is a healthy gross margin of 34% and there is cash to pay down the

$200,000 of bank debt.

2010 – In 2010, the company will break even and earn a small net income profit of $7,000. This

results from increased sales (reaching 75% of the target market in that year) and a strong

reputation in the community. The gross margin is strong at 49% and increasing due to the fact

that wage expenses for the part time employees which are allocated into gross margin vary with

changes in wage rates.

2011 – In 2011 the company has a strong net income figure of $112,000. The gross margin

reaches a relatively steady level of 55% and the net profit percentage also reaches a steady

level of 17%. In this year, the company uses up the remaining tax loss carry forward and owes

a small amount of taxes on their earnings, but is able to decrease the amount of interest

payable. As well, in this year, Ken and Mary earn an increased salary of $32,500 each.

2012 – In this year, the company sees a small decrease in the gross margin due to the addition

of 1 more part time employee to assist with the increased business and quantity of sales.

However, the location maintains 100% of target market and follows the growth of the Markham

area at 6% per year.



2013 – The final year of the projection is a strong indicator of the income that the company can

expect to earn in the future. The resulting net income is $129,000 and the profit percentage is

17%, which is sustainable given the conservative estimates used in the analysis.

Cash, End of Period

50,000

100,000

150,000

200,000

250,000

2009 2010 2011 2012 2013

The initial total investment of $300,000 (2/3 debt and 1/3 equity) allows Second Cup to maintain

a healthy cash balance for each of the 5 years. In 2012, there is a large ending cash balance

(over $200,000) but it is required to facilitate the equity payout in 2013. Otherwise, there are no

cash flow concerns for this company.

As such, the plan IS financially feasible with positive cash flow for short term survival and

positive net income to indicate strong potential for long term success.

Net Income Break-Even Quantity of Sales

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

220,000

2009 2010 2011 2012 2013

Net Income Break-Even Quantity of Sales (units) Quantity Sold in Base Case



The weighted average gross margin for the Second Cup product mix is $1.75 per unit, which

includes the base inputs, added inputs, cups and lids as well as $0.55 per unit for direct labour.

The company has a net income break even in 2010, at which time it has enough business and a

large enough percentage of the target market (75%) to cover all of the fixed costs.

2009 2010 2011 2012 2013Projected sales (units) 88,222 144,363 192,484 200,184 208,191

Customers/month 8,625 9,982 10,933 11,106 11,588Customers/day 308 329 360 366 382Customers/hour 26 27 30 31 32

In order to reach the breakeven point in 2011, the company expects to sell 88,000 units in 2009

and grow to 208,000 units in 2013. However, due to the addition of one employee, the

company will still be able to provide customer service for 32 customers per hour, or

approximately 1 customer every 2 minutes. This level of service is completely attainable and

within the location’s capacity in each of the 5 years.

The company also has an economic break even in 2010, at which time they will also be earning

enough of a return to provide the equity investors with their 20% return.

The Second Cup Business Plan Group

Economic Break-Even Quantity of Sales (units)

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

220,000

2009 2010 2011 2012 2013

Economic Break-Even Quantity of Sales (units) Quantity Sold in Base Case

37


Net Present Value of Equity Investment 180,477

Internal Rate of Return on Equity Investment 64%

The NPV (net present value) of the business plan is $180,447, which indicates that the plan is

viable using a 20% required return on capital for the equity investors. Not only does the 5 year

projection forecast positive cash flows for the entire term of the plan, it also provides investors

with much greater than their 20% required rate of return. This makes the investment attractive

and worthwhile to both the debt and equity investors since there will be enough economic profits

to satisfy all sources of financing.

The internal rate of return (IRR) of the plan with 66% debt and 33% equity is 64% overall. The

fact that the equity investors are providing $100,000 (or 1/3) of the financing to run the business,

the income levels reached by Year 5 provide a strong return for them. The company will be

earning normalized net income of $129,000 after tax in Year 5 and there is additional expected

growth in the future. While this investment does carry additional risk, the projections show

dividends starting in 2012 (Year 4) and since investors would only be able to earn 10% on the

stock market, this is an attractive rate of return.

Due to low capital start up costs and strong gross margin percentages on each of the 5 product

categories, as well as low operating costs, Second Cup – Markham will produce positive cash

flows, positive net income and a strong internal rate of return for the investors and for Ken and

Mary.

5.3 Contingency Plans

5.3.1 Risk Analysis

To address the elements of risk involved in our projections, we have prepared a best case, base

case and worst case scenario for Second Cup Markham to determine the effect on NI, and IRR

(see Appendix 6 – Detailed Financial plan) based on changes in the critical variables. The

results are as follows:



As can be seen, even in our worst case scenario net income is positive by year 3 which shows

the business Model for Second Cup bears little risk and can be profitable even in economic

downturns.

5.3.2 Contingency Plans

Best case scenario

In the best case scenario, sales would be higher than anticipated and problems may arise with

capacity limitations. If the volume of customers is higher than expected, employees will have a

difficult time serving the customers in a reasonable time period. We foresee this being an issue

only during peak hours. These customers will either see the long lines, or get tired of waiting in

the lines and leave. This loss in sales to Second Cup Markham may be significant.

To handle this problem, capacity could be increased by adding additional facilities to the drive

thru window. If an additional barista machine and coffee pots where added beside the window,

additional customers could be served faster through the drive thru. When not being used to

service drive thru customers, the additional equipment could increase the number of customers

served per minute in the store. This will require an additional person to be stationed at the drive

thru window at all times.



The capacity for seating is relatively fixed at Second Cup – Markham, unless renovations were

undertaken to increase the square footage of the building. Since the limited seating adds to the

atmosphere and feel of the store, renovations will not be done to increase inside seating even if

volume of sales is greater than expected. This would be a deviation from the fundamental

values of the Hatches Second Cup which is to create a cozy neighbourhood feel to their store.

Worst case scenario

The worst case scenario would be sales less than expected and costs significantly higher than

expected, resulting in losses to the Hatches. Since products cannot be discontinued, in the case

of rising input costs, the Hatches have little few options available to reduce input prices. Instead,

the following actions will be taken by the Hatches:

Elimination of staff – The Hatches will work additional hours to save on labour costs

Increased marketing – The Hatches will temporally increase marketing efforts to

advertise the existence of the store in hopes to increase the volume of sales. This will

only be done for a few months if the increase costs appear to have no affect on

increasing revenues

Pressure head office to increase prices – The Hatches cannot increase prices at will,

however they can pressure head office to increase prices uniformly across Canada. It is

likely that head office will be responsive to significant changes in input prices and do this

automatically.

In the case where the Hatches have losses for two consecutive years (not including the losses

in the beginning from start up) and are not able to pay themselves a salary for these two years,

they will shut down. They will look for a buyer interested in purchasing the Second Cup who will

take over the business.



References

Coffee Association of Canada (n.d.). Highlights 2003 Canadian Coffee Drinking Study.

Retrieved July 4, 2008 from <http://www.coffeeassoc.com/coffeeincanada.htm>

Douglas, Melanie Joy (n.d.). Having a Second Cup Makes Cents. Retrieved July 3, 2008 from

<http://content.monster.ca/10173_en-CA_p1.asp>

Economic/Demographic Profile, Year End 2007 (n.d.). Retrieved July 2, 2008 from

<http://www.markham.ca/Markham/Departments/EDO/Stats.htm>

Mazurkewich, Karen (April 2007). Second Cup's new ingredient: escapism - it's working.

Retrieved July 3, 2008 from

<http://www.strategymag.com/articles/magazine/20070401/biz.html>

Monster.ca 2008. “Sales Associates/Baristas” Monster.ca Website. Retrieved 3 July 2008, from

<http://jobview.monster.ca/GetJob.aspx?JobID=73202982>

Second Cup 2008a. “Second Cup: About Us” Second Cup Website. Retrieved 14 July 2008,

from <http://www.secondcup.com/eng/about_us.php>

Second Cup 2008b. “Second Cup: Our Menu” Second Cup Website. Retrieved 14 July 2008,

from < http://www.secondcup.com/eng/menu.php>

Second Cup 2008c. “Second Cup: Coffee” Second Cup Website. Retrieved 14 July 2008, from

< http://www.secondcup.com/eng/coffee.php>


http://www.secondcup.com/eng/coffee.php

http://www.secondcup.com/eng/menu.php

http://www.secondcup.com/eng/about_us.php

http://jobview.monster.ca/GetJob.aspx?JobID=73202982

http://www.strategymag.com/articles/magazine/20070401/biz.html

http://www.markham.ca/Markham/Departments/EDO/Stats.htm

http://content.monster.ca/10173_en-CA_p1.asp

http://www.coffeeassoc.com/coffeeincanada.htm


Appendix 1 – Organizational Chart


Second Cup

Mary HatchManager/Owner

Ken HatchManager/Owner

Sales associate /

Barista

Sales associate /

Barista

Sales associate /

Barista

Sales associate /

Barista

Sales associate /

Barista

Sales associate / Barista


Appendix 2 – Product List

Coffee/Cider/Tea

Prices: Small $ 1.50, Medium $2.00, Large $2.50

HOT APPLE CIDER:HOT SPICED APPLE CIDER SERVED WITH A CINNAMON STICK

TEA:CHOOSE FROM OUR WIDE SELECTION OF PREMIUM TEA BY THE BAG

AMERICANO:ESPRESSO WITH HOT WATER ADDED TO EQUAL A CUP OF COFFEE

ESPRESSO:ESPRESSO WITH A THICK CARAMEL CREMA ON THE SURFACE.

MACCHIATO:ESPRESSO TOPPED WITH A DOLLOP OF FOAM

CON PANNA:ESPRESSO TOPPED WITH A GENEROUS DOLLOP OF REAL WHIPPED CREAM

BREWED COFFEE:CHOOSE FROM OUR WIDE SELECTION OF PREMIUM COFFEES

ITALIAN SODA:A REFRESHING COMBINATION OF SODA WATER AND YOUR CHOICE OF FLAVOUR

Specialty Coffees/Hot Chocolate


VANILLA BEAN LATTE:CREAMY AND SMOOTH, WITH THE AROMATIC TASTE OF PURE MADAGASCAR VANILLA



SKINNY VANILLA BEAN LATTE:CREAMY AND SMOOTH, WITH THE TASTE OF PURE VANILLA.

CARAMEL CORRETTO:A TEMPTING BLEND OF CREAMY CARAMEL AND MELLOW VANILLA, TOPPED WITH CARAMEL DRIZZLE OVER FOAM

MOCCACCINO:THE DEEP RICH FLAVOURS OF CHOCOLATE AND ESPRESSO.

WHITE MOCHA:VELVETY WHITE CHOCOLATE BLENDED WITH ESPRESSO.

CAPPUCCINO:THE CAPPUCCINO COMBINES EQUAL PORTIONS OF ESPRESSO, STEAMED MILK AND FOAM

CAFFÈ LATTE:THE PERFECT BALANCE OF RICH ESPRESSO COMBINED WITH SMOOTH, CREAMY STEAMED MILK AND VELVETY FOAM

BUTTER PECAN LATTE:THE COMFORTING TASTE OF BUTTERED RUM AND TOASTED PECANS

HAZELNUT LATTE:THE AROMATIC TASTE OF HAZELNUT COMBINED WITH RICH ESPRESSO

MAPLE LATTE:RICH ESPRESSO COMBINED WITH THE TASTE OF REAL MAPLE SYRUP

PUMPKIN SPICE LATTE:THE AROMATIC TASTE OF PUMPKIN SPICE AND GINGER SPICE

HOT CHOCOLATE:A CREAMY BLEND OF STEAMED MILK AND RICH CHOCOLATE

WHITE HOT CHOCOLATE:RICH WHITE CHOCOLATE BLENDED WITH CREAMY STEAMED MILK

VANILLA BEAN HOT CHOCOLATE:PURE MADAGASCAR VANILLA AND CREAMY STEAMED MILK

MILK STEAMER:VELVETY STEAMED MILK WITH YOUR CHOICE OF FLAVOUR

CHAI LATTE:A SOOTHING, MELLOW BLEND OF STEAMED MILK AND AUTHENTIC CHAI SPICES

GREEN TEA LATTE:THE SUBTLE, CREAMY BLEND OF STEAMED MILK AND REAL GREEN TEA

Blended Drinks


MIXED BERRY SMOOTHIE:A REFRESHING ICY BLEND OF BLUEBERRIES, RASPBERRIES, AND STRAWBERRIES

TROPICAL FRUIT SMOOTHIE:A COOL AND REFRESHING BLEND OF PEACHES AND MANGOS

STRAWBERRY LEMONADE SMOOTHIE:AN IRRESISTABLE ICY SMOOTHIE WITH SWEET STRAWBERRIES AND TANGY LEMONADE.

PEACH SMOOTHIE - NEW:A DELICIOUS AND REFRESHING PEACH SMOOTHIE.



HONEY DEW PEACH SMOOTHIE - NEW:A COOL AND REFRESHING SMOOTHIE WITH HONEY DEW AND PEACHES.

BERRY BOOST (ENERGY & VITALITY):A SMOOTH AND REFRESHING BERRY DRINK MADE WITH VITAMIN B, GINSENG, TAURINE AND GUARANA FOR A REVITALIZING ENERGY BOOST

STRAWBERRIES & CREAM:A PUREÉ OF STRAWBERRIES AND CREAM

PEACHES & CREAM:A CREAMY BLEND OF PEACHES AND CREAM

BANANA BERRY:A CREAMY BLEND OF BANANAS AND MIXED BERRIES

Pastries

Muffins/Danishes and croissants, cookies, squares, cakes $1.50 - $2.50

Merchandise/Beans

Bean Prices: ½ pound bags $11.00, 1 pound bags $ 19.00Merchandise prices: Average = $15.00

Ethiopian Limu | Roast: Medium

Rwandan Cup of Hope | Roast: Medium

Sumatra Mandheling | Roast: Medium-Dark

El Toucan (El – Too-can) | Roast: Medium Dark

Fazenda Vista Alegre | Roast: Medium Dark

San Agustin| Roast: Medium

Colombian Supremo| Roast: Medium

Colombian Supremo Swiss Water Decaf| Roast: Medium

Continental Dark| Roast: Dark

Caffé Venice | Roast: Dark

Paradiso | Roast: Medium

Paradiso Dark | Roast: Dark

Paradiso Dark Swiss Water Decaf | Roast: Dark

Royal Blend | Roast: Medium

Royal Blend Dark | Roast: Medium Dark

Holiday Blend | Roast: Medium

Butter Pecan | Roast: Flavor



Caramelo | Roast: Flavor

French Vanilla | Roast: Flavor

Hazelnut Crème | Roast: Flavor

Hazelnut Crème Swiss Water Decaffeinated | Roast: Flavor

Irish Crème | Roast: Flavor

Spiced Eggnog | Roast: Flavor

Stainless Tumbler by Second Cup, $15.00

Black Tumbler by Second Cup, $15.00

Second Cup mug, $7.50

Coffee Press by Second Cup, $7.50

Second Cup tea pot and mugs, $30.00

Reference: (Second Cup, 2008b)

Appendix 3 – Anticipated Look



Appendix 4 – Floor Plan

1. When customers walk into the store, the food display is the first thing they notice which will increase the likelihood they will purchase food items.

2. The Second Cup merchandise will be on display in the front of the store, where it can be easily seen. Having it close to the tills will increase impulse buys.

3. The condiment stand will be close to the door so customers taking their beverage “to go” can use it on the way out.

4. The barista machine is close to the drive thru window. This is done so there will not be a long walk required to take the drinks from the main store to the window.

5. There is plenty of space by the drive thru window for future expansion of the drive thru facilities if desired

6. There is plenty of space behind the counter for 3 workers to comfortably stand and not get in each other’s way

7. There are many seating options: chairs, booths, armchairs and couches to serve customers needs

8. The space in front of the tills is open to allow room for people to line up if the store gets busy



Appendix 5 – Markham Demographics

Markham Demographics

-5,000

10,00015,00020,00025,00030,00035,00040,00045,00050,000

0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80+

Age

Popu

latio

n

MaleFemale

Reference (Economic/Demographic Profile, 2007)



Appendix 6 – Detailed Financial Model

Please see Excel file for details of financial model



Appendix 7 – Financial Plan

Schedule 1 – Base Case

In order to provide an appropriate level of detail for the plan, a 5 year projection of the Second

Cup balance sheet, income statement and cash flow has been prepared. The first year of the

franchise, 2009, has been prepared on a monthly basis.

Key Assumptions:Inflation = 3% per year

Real growth in sales and expenses = 6%

Real growth in wages = 3% (in line with inflation)

Accounts Receivable: Due to the fact that Second Cup accepts only cash, debit and credit card

payments from customer, there will be no Accounts Receivable balance for this franchise. This

will minimize collection issues, bad debt estimates and complexity of accounting for receivables.

Accounts Payable: Upon creating a history with their suppliers, the company will take advantage

of any opportunities to use a supplier’s net 30 policy and will pay for supply orders at the end of

the 30 day period. As such, at any balance sheet date, the company will have one month’s

supply of inputs (or cost of goods sold) as a payable. In addition, the Accounts Payable balance

will include wages and salaries for the following 2 week period. This will include wages owing

the hourly employees, salaries owning to the owners and the associated benefits and

remittance payments due to Canada Revenue Agency.

Schedule 2 - Revenue

Revenue was calculated based on expected sales of the following five product categories:

specialty coffees and hot chocolate; brewed coffee, ciders, and tea; blended drinks; pastries;

whole beans and merchandise available for sale. The grouping of products into these categories

was determined based on the similarity of inputs (cost of sales) and retail prices of each

product.

In order to determine the number of customers expected to be served by the franchise on a

daily basis, a target market analysis was performed. According to the Coffee Association of

Canada, approximately 60% of adults in Ontario drink coffee on a daily basis and 16% of coffee



is consumed or purchased in eating places. Based on this information, approximately 9.6% of

adults in Ontario are expected to purchase coffee on a daily basis. Considering the adult

population of Markham was equivalent to approximately 227,000 in 2008, it is expected that

21,792 of Markham’s residents will purchase coffee on a daily basis. There are a large number

of establishments in Markham which sell coffee and as such, the target population is split

among numerous competitors. Based on our competitive analysis, there are 50 coffee houses,

restaurants, fast food establishments, convenience stores and gas stations which sell coffee in

Markham, resulting in, on average, 436 customers per establishment per day. As such, based

on the franchise being open 362 days a year, annual expected customer transactions are

157,774.

Due to the fact it takes time to build awareness of a new establishment as well as customer

loyalty, it is not realistic that the all of the potential market will captured in the first year of

operations. Therefore, forecasted sales quantities in the first year of operations are based on

attaining 45% of customers in the first month with the grand opening, 40% in the subsequent

two months, 45% for the following five months, and 50% for the remaining four months. In 2010,

approximately 75% of potential customers will be captured and then in 2011, 100% of expected

annual transactions will be achieved. Based on historical growth rates in the industry, sales are

forecasted to grow by 6% per year subsequent to 2011.

The selling prices per item utilized in the calculations, are based on the average retail price of

the various products included in each category. These prices were then multiplied by the

expected sales quantity, for each category, in order to arrive at expected sales revenue. In

terms of beverage sales, quantities per category were determined based on what portion of total

sales is predicted to relate to each group. In the forecast, 35% of sales were allocated to

specialty coffee and hot chocolate, 40% to brewed coffee, ciders and tea, and 25% to blended

drinks. Of customers purchasing beverages, it is expected that 20% will also purchase a pastry

and 2% will purchase whole beans or merchandise.

Schedule 3 – Cost of Goods Sold and Inventory

Cost of Goods Sold: The cost for each of the 5 categories of products in broken down into

sections, including base inputs (the coffee beans, tea bag or drink powder), added inputs

(whipped cream, syrup, milk) and finally lids, cups and coffee jackets. The costs used are



based on bulk buys from Second Cup head office (since we must serve in the same cups as all

other franchise locations) and have been provided by the franchisor.

Base inputs – the base input for a specialty coffee and for a regular coffee are the same

and cost $0.15 to produce. The blended drinks are prepared from a thicker cream mix

and as such, cost $0.20 in comparison while the pastries are purchased from the local

supplier at $1 each. The additional merchandise has an average cost of $9.75, which

includes the profit that Second Cup head office retains for the products.

Added inputs – only specialty coffees and blended drinks include the syrup, whipped

cream and milk products.

Lids, cups and coffee sleeves – paper cups are used for the specialty and regular

coffee drinks and cost $0.25 per cup. The blended drinks are served in plastic to-go

cups and these are more expensive at $0.30 per cup. While some of the drinks may be

served in glass mugs at the store, this will be a rare case and has not been factored into

the cost of the drinks. In these instances, we will simply benefit from a higher gross

margin.

In order to ensure that the direct labour of the part-time employees was factored into the Gross

Margin calculation, the entire costs of wage-earning employees was included to arrive at the

Gross Margin as presented on the Income Statement. In the end, it resulted in approximately

$0.55 per unit sold of direct labour costs. The salaries for Ken and Mary are still included in

Operating Expenses.

Inventory Policy: Due to the fact that most of the inputs for the preparation of Second Cup

products are perishable, the policy is to maintain an inventory of one week on hand. This

means that for each month, the inventory will include one week’s cost of inputs for drinks which

includes base inputs (coffee, tea and powders), additional inputs (milk, syrups, whipping cream)

and cups, lids and sleeves. In terms of pastries, these will be delivered fresh daily and will be

ordered in approximate amount for expected business (in other words, a just in time inventory

system) in which case there will be no inventory of pastries on the balance sheet.

Schedule 4 – Operating Expenses

Marketing Expenses: Per the information provided by Second Cup, there is a 9% royalty fee due

to the franchisor each year. This amount will be determined based on recorded sales in the

year and comprises of 6% to add to Second Cup revenues and 3% to contribute to the national



marketing campaign. For the additional local marketing, there is also approximately $1,000 per

month for sampling, giveaways, print ads and local community sponsorships.

Operating Expenses: The building will be owned by Second Cup (the franchisor) and they have

agreed to charge a very low rental rate for the space. Amounts for insurance, repairs and

maintenance and telephones have been estimated using comparable sized coffee shops in the

Markham area and based on Second Cup statistics. Transaction costs are based on 2% of

credit card sales in the period. All of the costs have factored in inflation at 3%.

Schedule 5 – Human Resource Costs

As indicated in the Management Team summary, Ken and Mary will each earn a yearly salary of

$30,000 in Years 1 and 2, $32,500 in Years 3 and 4 and $35,000 in Year 5 for their contribution

to their Second Cup franchise location.

A regular part time employee will earn $9.50 per hour, which is competitive in the Markham area

and will help to attract and retain quality employees. A key-holding employee (who will have

added responsibilities such as opening and closing the store) will earn a premium of $1.50 per

hour, resulting in total wage of $11 per hour.

All employees will earn 2.42% Employment Insurance, 4.95% Canada Pension Plan and 4.5%

holiday pay as well as the 2.26% required Workers Compensation amounts. The owners will

not be eligible for the CPP or holiday pay.

Part time employees will also be eligible for a weekly coffee allowance of $15. This allowance

will entitle the employees to approximately 3 free products (retail value = $5 each) per week of

employment with the store. As an added incentive, the allowance will grow by $5 per week (or

30%) for each additional year of service.

In the future, once the location is making strong profits, there will also be a scholarship fund.

Part time employees will be eligible for the scholarship based on specifically outlined criteria

(such as a certain GPA, weekly hours of employment, community service) and it will range from

$500 to a potential maximum of $1,000.



The Human Resource costs are included in the Marketing & Operating Expenses (Schedule 4)

to be included in the income statement.

Schedule 6 – Capital Budget

Capital Budget: The initial capital outlay to furnish and decorate the store will be substantial, but

it is expected that there will be no added capital outlays in the first 5 years. The furniture and

equipment are expected to last at least 5 years except for any which need to be replaced due to

breakage or unforeseen circumstances.

Capitalization Policy: It will be the company policy to depreciate any asset purchases for

amounts greater than $500. For purchases of capital assets that are less than this amount, the

cost will be expensed in the year and included on the income statement.

Schedule 7 – Financing Budget

For the current base case projection, the plan includes 67% or $200,000 financing from the

bank, to be classified as long term debt. The projections show that the company will be able to

fund operations with internal financing (i.e. earnings in the first 5 years) and since there are no

plans for expansion in the near future, no additional sources of financing were considered.

The bank loan will include a personal guarantee of the debt amount, which means that Ken and

Mary Hatch will have to put their personal assets at risk to secure the bank. This is especially

important in this case since the resale value of the equipment will not cover the value of the

loan. This personal guarantee will be in place for at least the first 5 years of operations and until

the company has paid off the debt.

The beginning Share Capital from Ken and Mary will be for Class A common shares and a

nominal value at $1,000. This is to provide a class of shares for the Hatch’s to accumulate

earnings in the company and, when possible, pay out dividends to themselves. Dividends will be

paid out on the common shares subsequent to the preferred shares being redeemed in Year 5.

In addition, the base case projection includes 33% or $100,000 financing from family and friends

(angel investors) for preferred shares. The shares will be subject to the dividend policy

discussed below. The preferred shareholder agreement will state that the shares are callable in

the 5th year of operations for a lump payment of $195,000. From our analysis, this lump payout



as well as dividends paid will result in an external return on equity equivalent to 20%. In a worst

case scenario, if no dividends are paid in year 1 through 5 the external rate of return will be

equivalent to 14%.

Schedule 8 – Debt Amortization Schedule

Due to the fact that the franchise will be financed 100% with long term debt, each year will

include both principal and interest payments on the initial $200,000. In accordance with the

competitive rates at local Canadian banks, an interest rate (or cost of debt) of 10% was used for

the calculations.

The bank will be concerned with the speed at which the loan can be repaid and the assurance

that the fixed loan payments will be paid regardless of how well the business performs.

Schedule 9 – Capital Cost Allowance

The Capital Cost Allowance (CCA) rates included in the calculation are in line with the

government’s approved rates for tax purposes.

Schedule 10 – Income Taxes

The franchise will be incorporated and as such, it will be assessed corporate taxes on both the

federal and provincial level. As a Canadian controlled private corporation it will qualify for the

small business deduction and therefore eligible for a federal rate reduction of 17% and

provincial rate reduction of 14%.

The franchise is projected to incur a net loss in the first year of operations, resulting in a tax loss

carry-forward which will be utilized as a reduction in taxes payable in the 2nd and 3rd year of

operations.

Schedule 11 – Ratio Analysis

Current Ratio: Due to the losses and tight cash situation, the company will not reach a current

ratio of greater than 1 until 2011. However, there is healthy growth after that and the company

is in a healthy position for liquidity and cash flow.



Debt Ratio: Since Ken and Mary do not plan to obtain additional financing in the first 5 years,

the debt to equity ratio decreases steadily and in the final year (2013), the only debt results from

the one month’s payables on the statements.

Net Profit Margin: By 2011, the company will be reaching a steady net profit margin of between

15 to 17%.

Schedule 12 – Investment Analysis

Dividend Policy: For the private investors, there is a plan to provide dividend payments as a

method to pay returns. In years when the company will have positive ending retained earnings

before dividends (Opening RE + Net Income), the company will provide 15% of those positive

retained earnings to the shareholders. These payments will begin in 2012 at approximately

$18,000 and almost $35,000 in 2013.

Required Rate of Return: Since the company is a franchise, it does not carry as much risk as a

brand new company with no history. As such, we have assumed that a 20% return is

reasonable and acceptable for investments from family and friends.

NPV and IRR: The NPV (net present value) of the business plan is $180,447, which indicates

that the plan is viable. Not only does the 5 year projection forecast positive cash flows for the

entire term of the plan, it also provides investors with much greater than their 20% required rate

of return. The internal rate of return (IRR) of the plan with 66% debt and 33% equity is 64%

overall. The fact that the equity investors are providing $100,000 (or 1/3) of the financing to run

the business, the income levels reached by Year 5 provide a strong return for them. The

company will be earning normalized net income of $129,000 after tax in Year 5 and there is

additional expected growth in the future.

Schedule 13 – Break Even Analysis

The product mix delivers a weighted average gross margin of $1.75 overall. Based on these

values, and the base case statements, the company will break even during 2010. To attain this

net income breakeven point, it will require 10,000 units per month, which equates to 2,300 units

per week and only 382 units per day. This is more than attainable with the level of staff and the

expected level of sales.



Accounting Information System

The Coffee College that is provided by the franchisor provides training for Ken and Mary

regarding the use of an accounting system. The franchisor also provides the appropriate

system to be included on the site’s computer and as such, the cost is included in the initial

$20,000 fee. As indicated in the Human Resource Plan, Ken will be responsible for the

bookkeeping function at this location.

Each week, Ken will compile a report to review the location’s performance and provide him with

a good idea of how business is going. He will prepare and send a report each month to Head

Office, as well as financial statements for the bank and for investors at year end.


5.0 financial plan

Documents