HONEST TEA CASE Harvard Case Solution & Analysis

HONEST TEA Case Study Solution

Prepare your own pro forma for Honest Tea to determine how much money it really needs to raise if is going to satisfy Seth's growth goals over the next two years. How much money do you think the company needs? Why?

Honest Tea has to now raise another round of the financing for the expansion plans and supporting the future growth of the company. The CEO of Honest Tea, Goldman needs to make a final decision regarding the amount of financing to be raised and the nature or the source of financing. According to Seth Goldman, it has been estimated by him that if a capital infusion of $2 million is made within the company then it can take the company towards profitability. There are a number of strategies and activities for which external financing is required by the company however, the most important is distribution expansion to increase sales. Other purposes due to which the company wants to raise the financing is to launch new supermarkets, new national sales force personnel, marketing the products of the company and purchase the merchandising materials of the company.

The gross profits of the company are lower than the expenses of the company however; the cost of sales to revenue ratio is reducing. However, the level of the sales will have to be increased in order to cover the losses and cover the cost of sales of the company. In order to increase the level of sales, the company will have to raise external financing. We have generated a pro forma of the future earnings and the required level of external financing to maintain the level of sales and increase the sales revenue in future years. The data for 1998 and 1999 has been provided in the exhibits and the data for 2000 has been annualized.

The estimated ratios for revenue over total assets and debt over total assets have been computed based on historical information provided in the exhibits. We have calculated the estimated financing to sustain the sales level as shown in exhibit 1 in appendices. It shows that financing of around $4 to $ 6 million would be required in 2001 and a financing of $ 8 million to 12 million would be required in 2002. Honest Tea is a startup company and it is becoming hard for the company to compete against its competitors, which are generating positive net income and higher profit margins. Moreover, the sales of the company have also dropped in 2000, therefore, high amount of capital would be needed to increase the sales level and expand the business. According to me, the financing that should be raised should be around $ 10 to $ 12 million.

Question 2

Answer the following questions, one half pages to one page each.

a). If you were a potential investor, is Honest Tea a good investment opportunity? Why or Why not?

The performance of the company has been good and the growth prospects of the company are favorable, despite the fact that the company has recorded losses since its initiation. Tremendous growth has been experienced by the company in each year. Between the years, 1998 and 1999 the revenues of the company have been increased by 349% as shown in exhibit 9 of the case.

We have also computed some of the relevant key financial metrics based on the historical information of the company, which are shown in exhibit 2 in the appendices. Although the profit margin ratios of the company are, negative but they are increasing and with the available financing and expansion of the company, the profits would become positive.The company took the advantage of the market opportunity to create a new beverage category, which made the competition irrelevant in the industry. The management team of the company is great and it has the capability and the skills to grow the company at national and international levels.

A lot had been invested within marketing and the research and development since 1999. This is evident by the net losses and this is one of the signs of a growing firm. In the past, the company had received financing from a number of sources, which included the family and friends,and from Nalebuff and Goldman. Therefore, based on the above projections and the valuation of the company that would be performed in the next questions we can conclude that Honest Tea is a growing company and it is a good investment opportunity.

HONEST TEA CASE Harvard Case Solution & Analysis


b). Given how much money you think Honest Tea needs from #1 above, should Seth continue to finance his growth through Angel investors or change direction and pursue traditional Venture Capital firms (who are willing to provide more money but at a lower valuation). Why?

At the time of the start up of the company, both the founders have contributed around $ 300,000 and the management had successfully gathered $ 271,500 from the other external sources after the initial launch of the company. As the owners wanted to retain the control, therefore, they raised the first financing from the family and friends. After the company had been launched and it had entered into a completely new market, the investor risk had increased; therefore, the financing of the company had been structured in a new way by the management. Many investors were attracted by this and they invested in the company..............................................

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