Group Case: Parking in Parksville Lee Wind travelled to Vancouver Island for a vacation to visit the sand sculpture competition in Parksville, BC. He marveled at the beautiful oceanfront boardwalk, the beachy feel of the town, and the volume of tourists that flood the area in the summertime. Lee has been working as a general manager at a boutique hotel in Vancouver. He had always wanted to live on Vancouver Island, but no job opportunities had presented themself to make it worthwhile to uproot his life. With an entrepreneurial spirit and a hospitality background, maybe it makes sense to start his own business. His feet sore and tired after wandering around all day, an idea started to take shape. Lee has seen people cruising around on e-bikes and e-scooters in other tourist areas. Could this work as a business idea in Parksville? There is an existing boardwalk and road network between beaches, microbreweries, restaurants, and tourist attractions. The distance between Parksville Beach and Qualicum Beach is 12 km, which is just out of walking distance, but easily bikeable. Rathtrevor Beach is another 3 km away. Lee starts to do some research about e-bikes and e-scooters and comes up with the following information. Currently, there are no e-bikes or e-scooter rentals in the Parksville or Qualicum Beach area. The market rate for e-bike and e-scooter rentals in Vancouver where there is lots of competition are: Length of rental E-bike E-scooter 2 hours $ 49 $ 39 Half a day (up to 5 hours) $ 69 $ 59 Full day $ 89 $ 79 24 hours (overnight) $ 98 $ 89 He thinks he would need an inventory of at least 30 e-bikes and 30 e-scooters for rentals and expects that these will be fully rented on the weekends and holidays, and only 75% rented during the week during the tourist season. The initial cost for a commercial-grade e-bike is $3,025 and the e-scooter is $1,200, respectively. Both e-bikes and e-scooters are battery-powered transport devices that can drive, on average, a maximum of 100 km or 2 hours before needing to be charged. It then takes 6 hours to charge the battery to full again. Customers will expect that the bikes are fully charged when they are initially rented. Lee is worried about the downtime of the bikes not earning him rental income when they need to be recharged and thinks he will need a supply of additional batteries but is not sure how much he would need to meet his demand. Each extra battery costs approximately $400. The tourist season in that area runs from Easter weekend (end of March or early April) until Thanksgiving in October. Lee thinks he should operate from 9 am until 7 pm, 7 days a week, and expects that he would need one person to be present on-site to manage bike pickups and returns. He was hoping he could hire local university students for $21 / hour and knows from his own experience how employees cost approximately 12% more than their hourly wage to the business to cover mandatory statutory deductions, vacation pay, and insurance. He is wondering if the business would make enough for him just to handle the business (back-end) side of it or if he would need to also work shifts on the rental side. The weather on Vancouver Island can be unpredictable and Lee wants to ensure the valuable assets are stored indoors and are secure when not in use. He has looked at a Sea-Can option parked at an empty lot adjacent to the beach. He can buy a used Sea-Can for $2,200 and can rent space for it for $500 a month + electricity. He predicts another $1,000 a year for advertising and signage. Lee drew up an initial budget (see Appendix 1) based on his ideas. He wasnt very happy with the income potential, and he also only has $10,000 in initial savings to start the business, which doesnt cover his capital requirements. Dejected, he called his family for moral support, when his mother pep talked him into another idea. Shes a member of the local first nations band to Parksville, and she knows they have been looking for ways to monetize on the tourists in the area. While Lee does not identify as first nations, he was open to the idea of a conversation. His mother set him up with the CFO, Sheila York, CPA, CA, at the economic development corporation (EDC), which is the business branch of the band. At their first meeting, Sheila reviewed Lees budget and recommended that he consult with someone with an accounting background. Lee originally thought he had the expertise needed to prepare a budget and was surprised at Sheilas recommendation. He wants you to look at his budget and make any corrections necessary to his calculations. Lee is wondering how one evaluates business performance once actual numbers come in. He would also like to know what value consulting with someone who has an accounting background could bring to his business. As an example, Shiela Sheila mentioned that if a rental service wasnt performing as planned, an accountant could help Lee figure out if that particular rental service should be discontinued. Lee wants some broad feedback on this specific idea. Regardless of Lees first draft of the budget, Sheila says she thinks it is a brilliant business idea, just in line with the direction the EDC has been heading. This business is something the EDC has thought about starting themselves or might do sometime in the future. She says if he can get his budget in order, they could offer him two options for his start-up capital: Option #1: The EDC would offer him preferable financing terms of prime + 1% (the current prime rate of 5% is expected to remain as is for the foreseeable future) for as much capital as he needs to get going. The loan would be interest only for the first year, with repayment starting in year 2 over a five-year term. The loan would be secured by the bike assets and Lee must have a year-end return on assets of 20% otherwise the full amount of the loan will be called. Lee is confident that he can achieve a 20% return long-term but is concerned about the short-term interest expense. Assuming he treats it as a monthly fixed expense, he is wondering approximately how much revenue he would need to generate to cover it. He has heard of costvolume-profit (CVP) analysis and wants more details on the break-even point, margin of safety, and CVP graph. Option #2: The EDC would provide as much capital as Lee needs, but they want to go into business with him. They would require the business to be incorporated and they would take a 51% ownership stake. Lee would own the other 49% of the corporation with an underlying management agreement that gives him full control over day-to-day management and operations. With the EDC securing an ownership stake in the second option, they are thinking of growing the business bigger with two locations (one in Parksville, and one in Qualicum Beach). Rather than running the business out of a Sea-Can, the EDC would finance the business to have two permanent structure buildings at a construction cost of $500,000 each on leased land from the band. Operating in two locations would require double the inventory of e-bikes, e-scooters, and potentially batteries. Staff would be needed to serve customers at two both locations. There would be some efficiencies on the overhead type costs (insurance, management salaries, etc.). With the permanent structures would also be the possibility of running the business yearround. The EDC sees a good integration opportunity to offer e-bike repairs and service during the slow tourist season at a rate of $95 / hour which they predict would use 65% shop capacity given normal operating hours. The EDC can access federal grant revenue of $150,000 annually to help offset the labour costs if Lee agrees to employ one local band member as a trained technician in the repair shop at $35 / hour and two repair technician apprentices at a living wage. After he met with Sheila, Lees head is spinning, and comes to you asking for help and advice to sort out all the options. He thought he had a good business idea and hadnt anticipated bringing in a business partner. However, he also knows in general that the larger the business, the greater the potential for profitability. Hes worried if he doesnt take the EDC up on their offer that they might start the business anyway, which would impact his entire original business plan. He is wondering if there is anything else he should be considering from an accounting, legal or ethical perspective. Appendix 1 - Lees Year 1 E-Bike Shop Budget Revenues $ 150,000 (Note 1) Expenses Rent business 6,000 Rent - personal 15,000 Electricity - business 1,200 Insurance - business Advertising and signage 1,000 Moving expenses personal 2,500 Wages 50,000 (Note 2) Assets and supplies (Note 3) Total expenses 75,700 Net income $ 74,300 Note 1: I think I can earn this, but not entirely sure. Note 2: I wasnt sure how to cost this out, so I picked what seemed like a reasonable number to pay employees. Note 3: Will the assets of the business impact my net income? Is it different for supplies that will be used up during the year versus assets that I can use for more than one year