Financial Analysis of Honest Tea Essay

Through skillful teas three long eon of business, their business shows whatever confirmatory signs of a bright guild. Since in effect(p) teatime is a aim-up company, it is understandable that their force out in commence is in the negatives since their expenses go out outweigh their gross sales, that as the three years go gone on, their net income has improved, and even increased by 74% from 1999 to 2000 from -$882,359 to -$228,879, which shows a collateral sign of product. clean afternoon tea is as well precise capable to pay back their short term liabilities since their current dimension is a high 5.92. Their profit margin has also increased everyplace the three year period from -71.7% to -36.3% showing positive signs of profit and skill to elevate. serious tea is able to generate $0.50 for every dollar of assets they occupy, which isnt a huge amount, that being in the positive for a start-up company is virtually-valuable.Unfortunately, bonny tea lea f isnt very efficient in turning everywhere its inventory since this turnover ratio is less than one, but, for a start up, they argon doing healthy. Revenues increased tremendously from 1998 to 1999, but fell by almost 50% in 2000, so that is worrisome. The debt to honor ratio in 1999 was .241 and it decreased in 2000 to .142. A lower debt to equity ratio usually implies a more than financially stable business, so its swell that the debt to equity decreased from 1999 to 2000.Companies with a higher debt to equity ratio be considered more risky to creditors and investors than companies with a lower ratio. Unlike equity financial support, debt mustiness be repaid to the lender and requires debt servicing or regular interest payments. In some other words, debt nonify be a far more high-priced form of financial backing than equity financial support. Companies leveraging large amounts of debt might not be able to gather the payments. Creditors view a higher debt to equit y ratio as risky because it shows that the investors fork outnt funded the operations as often as creditors need, so its good to see that frank tea leaf has been getting more money from investors so they dupet have a large amount of debt.Compargond to some other companies in their industry (Triarc Cos Inc, Saratoga drink, National Beverage Corp., Clearly Canadian Beverage, etc.), direct tea is far behind. Most of this is due to the fact that fairish teatime is a start-up company and all of these other companies be well established, but these competitors are turning out positive profit margins and positive net incomes which makes it very hard for practiced teatime to compete in the food grocery store.1.) Honest teas sales dropped in 2000, so they are trying to remember more capital to aliment the company running. The victory of the company, before the cold spell in 2000, had drawn a clutch of media attention which caused Honest Tea to be featured in Fortune, Entrepr eneur, and Beverage World, which definitely helps the companys reputation, but Honest Tea actually postulates to get their sales back way out in localize to stay relevant in the market.2.) jump of all, in the future, Honest Tea fill to raise more financing to be successful. They requirement to find more gamble capitalists or angel group in set up to support the continuation of the company. Honest Tea also needs to start expanding distribution of their product, but that discharge only happen if they get the financing to pay for the distribution. They need more distribution so they can leg it up more customers that will demand their product, in hopes that either they can grow Honest Tea as its own company, or that it will get picked up as crash of another big cross off untold(prenominal) as Pepsi or Coca Cola.3.) In order to hatch its distribution and growing the company, Honest Tea believes a $2 one million million round of financing would carry Honest Tea to prof itability.4.) Honest Tea has received financing from many different places. The first financing had come from Goldman and Nalebuff, they would be decent investors but they only have so much money to give to the company. Next, they approached family and friends, they raised around $200,000 for Honest Tea but they wouldnt be considered the i continue investor because they dont have exuberant money to support Honest Tea past their seed stage.Customers of their product have also contributed capital to the company, but these investors have not been the skillful investors because they are not as sophisticated as jeopardize capitalists and angels, and dont necessarily have the experience with interpreting financial statements which intend they require a lot of extra time and attention and that names outside(a) from Goldman and Nalebuffs ability to focus on growing Honest Tea. They also received financing from venture capital groups, which would be a wagerer fit for Honest Tea since t he venture groups dont need as much attention as Honest Teas other unexperienced investors but they also demand more rig of the company than Honest Teas other investors.5.) Right away with the financing from the family and friends, there wasnt rightfully a specific structure, but in 1998 Honest Tea established a financing structure. The financings have been structure so that when an investor purchased common stock, the founders were given warrants for creating the company. Honest Tea structured them in this way because Nalebuff though that by including warrants for the founders with exercise prices staged at multiples of the sign price at which family and friends brought in would avoid such disagreements. If the company did well, wherefore they would be able to exercise their warrants and they would own a hugeer division of the company, but if they didnt, and so the original investors would own a larger slicing of the firm.6.) Honest Tea should look for angel investors or v enture capitalists, this is because the investors that Honest Tea currently has are very inexperienced when it comes to financial statements, so to have financiers that have experience and knowledge when it comes to investing and finance. Angel investors and venture capitalists also have more access to large amounts of capital and have connections that the current investors do not.7.) The proposed financing and valuation do make adept because it gives Honest Tea the best chance of the founders maintaining 50% of the equity of the company. Honest Tea is using a warrant ground structure, which seems complex, but rattling its a smart way to structure their financing. This type of financing allows Honest Tea to keep founder equity, as long as they meet their goals and targets. If they dont, more of the equity goes to their investors because they will be issued more shares of the company.This is agood set-up because it gives Honest Teas owners a curtilage to work hard to meet their g oals, and if they dont the founders will drift off their 50% share of the company. The valuation of the company makes sense because its based on Honest Teas sales of their two products and the range of their bottling show. If they sell a lot of their products, the valuation of their company goes up. However, if they dont sell enough of their product, the valuation of the company goes down. If the valuation goes below $15.1 million, then shareholders will be issued more shares and they would get more control over the company.8.) The ready to drink tea market is looking very promising for Honest Tea. In 1999, the ready to drink tea market be $2.67 billion, which was an increase by 9% from 1998. Although this doesnt seem like a huge market, because the wholesale and retail sales have increased by 9% in just one year, I believe that the market will grow. Experts even projected that the read to drink tea market would more than double in size over the next 10 years, meaning the $2.67 billion market will be an over $5 billion market in a short 10 years. diffusion channels have also been growing, ready to drink tea sales and loose tea hairgrip sales have been growing in other channels such as drug stores, and growing by 21.2% growth in volume sales in mass merchandise, which is outgrowing other forms of drinks such as coffee and bottled juice. Honest Teas competitors are national brands Snapple controls 14.6% of the market, Arizona Iced Tea holds 10.6% of the market, and Lipton represents 9.5% of the market.Honest Teas contestation/ brand inscription would be considered one of the barriers to adit all of Honest Teas competition is well established national companies, which meaning that it would be very hard to compete with them since they have already know their distribution around the country and they all have operative control of the ready to drink tea market. Economies of scale is another barrier to entry for Honest Tea, since other companies in the mar ket has a lot of intersection their average costs fall, but since Honest Tea is a sensitive company their average costs are still large, so they need to work to increase their production to get their average costs down.9.) quick growth is not that important, especially if it causes Honest Tea tocompromise some of their convictions. It would be more beneficial for the company to grow slowly and organically to keep the mission of their company. If a venture capitalist knife thrustes Honest Tea to grow too fast, this may cause Honest Tea to happen upon shortcuts when it comes to being organic and environmentally and economically responsible, which could cause customers to not value the Honest Tea brand as they did when they were growing slowly.So I would say that rapid growth is not important to Honest Tea. However, going national is very important for Honest Tea. Honest Tea needs to go national in order to get brand loyalty, so grocery stores, gas stations, dining establishments, etc., would demand to have Honest Tea in their establishment. Going national would also mean that Honest Tea would have better access to investments or a chance to be acquired by a strategic partner, which is part of Honest Teas exit strategy. So going national is a huge part of what Honest Tea wants to accomplish with its company, which office its very important to go national.10.) Honest Tea needs the money for investing in vernal distribution channels, hiring a nation sales force, purchasing selling and merchandising materials, gaining capital to support the launch of Honest Tea in new super market chains, and gaining capital to get the Three Rivers Bottling plant to profitability. They need the money as soon as possible because it need to cover operating losses for the next several quarters to keep Honest Tea functioning.11.) The pro forma projections of Honest Tea do make sense. The pro forma projections take into account the months that ready to drink tea sales may declin e due to seasonal preferences, for example since January and February arent a time where the market would demand a cold, refreshing drink, Honest Tea has projected those months to have the smallest amount of cases sold. Conversely, the projections also show that the tea bag sales will increase when ready to drink tea decreases.Honest Teas projections make sense in the verbalism that they take into account the coolers, marketing, travel expenses, etc., that will come with expanding their business. The projections also show how the expenses per month decrease showing that the company is taking economies of scale into consideration, meaning that themore production they have the average cost will decrease. One aspect of the projections that dont make sense is how the end of 2001 the companys net income is in the positive, but once January of 2002 begins, Honest Tea is project a huge drop in net income to -$286.1, but overly that, Honest Teas projections make sense.12.) Honest Teas fin ancing strategies thus far have not been ideal. They have depended on family, friends, and customers to provide them with capital, and this has caused hardening and Barry to spend much of their time explaining financial statements, inquiring for more capital, and holding the hands of their inexperienced investors. The current financing has caused Seth and Barry to spend too much time worrying about investments, and not enough time to figure out how to grow the business. Seth and Barry really need to start looking for more professional sources of financing such as angels and venture capitalists.The valuation and financing structure that Seth and Barry have set up for the offering of their shares have provided Honest Tea with a much more organized and reliable financial structure that allows them to not have to spend so much time explaining themselves, which gives them more time to grow their business.13.) This deal is very inviting to venture capitalists. Honest Tea has a huge mar ket opportunity since they have created a new beverage category that has been on the rise the past couple of years, which would be very attractive to an investor. Honest Tea has also proved that customers are involuntary to buy their product and even invest in it, which shows they have a following. Another reason this deal is very attractive, is that Honest Tea has received much media attention and received different awards for sustainable practices and packaging, so the product is well known and has the potential to have brand loyalty in the future.Honest Tea also has great anxiety teams that have expertise in the tea industry, and have even worked for companies, such as Sobe, who have rapidly expanded in the past. A great management team is very appealing for a venture capitalist because it authority that the VC has to spend less time watching over the company since they already have the expertise that they need to grow. Lastly, Honest Tea is a great venture capital investment because it already has access to itsown bottling plant, so they have no barriers when it comes to mass production. Their bottling plant has the opportunity to provide Honest Tea with approximately $30 million in sales, which is very attractive for an investor.14.) The deal with the venture capitalist is not attractive for Seth and Barry. First of all, the deal wanted the pre-money valuation of the company to be $5-$7 million, which means that the founders have to give up their proposed 50% control of the company. Secondly, the rapid growth that the venture capitalist is pushing may require Honest Tea to compromise on some of its more socially conscious principles. Currently, Honest Tea is structured so that the founders have the control of the company, so they can do what they like, but giving up half of their control would most likely mean compromising their principles.Even though the $5 million investment would help Honest Tea tremendously, it isnt worth sacrificing their principl es to grow quickly. Honest Tea should consider the Investors deal investment over the venture capitalists. Even though Investors stage set isnt offering as much money as the VC, their principles match Honest Teas principles. Investors Circle invests in socially responsible start-ups, so they wont push Honest Tea to compromise their principles, instead, they would support their principles. Investors Circle is even willing to invest up to $6.5 million depending on the companys needs, so Honest Tea should really consider getting an investment from Investors Circle over the venture capitalist.15.) The deal structure and valuation make sense, but its hard to know what they based the pre money valuation on since its very low compared to Honest Teas valuation. The deal structure does make sense, since the venture capitalist is giving Honest Tea so much in financing it makes sense that they would require significant control over the company.