Mini Case Study: Too Hot To Hold By Gwendolyn Bonnefille

Question

Mini Case Study Too Hot To Holdgwendolyn Bonnefille A Singl MINI- CASE STUDY: TOO HOT TO HOLD Gwendolyn Bonnefille, a single mother, is barely scraping by. Although she earns a fair salary working in the accounts receivable department of a local business, she has to pay for child care for her two children, Samantha who is 5 and Merlin who is 3. While surfing the Web, under a listing titled “businesses that can be moved,” she found for sale a business that makes a great hot sauce called Caterwauling Coyote, with the slogan, “You’ll howl at the moon!” The sauce is made in the kitchen of the owner, bottled, labeled, and then delivered to gift and specialty shops in south Texas. The equipment to make the sauce is commercial quality and appears to be in good condition. The business financial statements and the owner’s 1040 C business tax returns do not agree. The financial statements show that in the most recent year the business earned $60,000 on sales of $200,000. The 1040 C shows a profit of only $10,000, and a zero tax liability because of deducting losses suffered in prior years. The sellers are asking $240,000 for the business. They are willing to finance $190,000 at 10 percent for 15 years. When Gwendolyn sat down with the owner, Sylvester Gatos, he attempted to explain the discrepancy between the accounting and the tax returns. “You see,” Sly said, “there are two things. First, some of the expenses on the schedule C aren’t really business expenses, if you know what I mean. Second, when we did the income statement, we took out depreciation, interest, property tax, and the money that we used from the business because a buyer will not have those expenses.”

Dr. Jack HW Helper · Accepted Answer

In analyzing the mini case study of Gwendolyn Bonnefille and her potential acquisition of the Caterwauling Coyote hot sauce business, several key issues arise. The discrepancies between the financial statements and the owner's 1040 Schedule C, the viability of the purchase price, and the critical information needed for making an informed decision are essential aspects of this case. Analysis of Sly's Explanation Sly's explanation regarding the differences between the income statement and his 1040 Schedule C raises significant concerns. First, he admits to some expenses on the Schedule C not being genuine business expenses. This is a major red flag for any potential buyer. Business owners should provide accurate financial documents that reflect the true financial health of the business. Furthermore, Sly's statement about removing depreciation, interest, property tax, and personal draw from the income statement to present what he terms as buyer-friendly numbers is questionable. This practice suggests that the reported earnings of $60,000 may not be entirely reliable. In accounting principles, both profit and expense categories should be consistent and transparent to ensure accurate reporting. By excluding such fundamental costs, Sly could be artificially inflating the business’s profit to make it more appealing to prospective buyers. A well-informed buyer should approach such discrepancies with caution, recognizing the potential for financial misrepresentation. If significant elements of the financial records are manipulated, Gwendolyn risks investing in a business that may not be as profitable as represented, possibly leading to severe financial repercussions down the road. Consideration of the Purchase Price With the financial statements indicating a profit of $60,000 and sales of $200,000, Sly values the business at $240,000, which is seemingly high given the low net profit reported on Schedule C. If we take Sly’s numbers at face value, the price-to-earnings ratio w

Mini Case Study: Too Hot To Hold By Gwendolyn Bonnefille ✓ Solved

Mini Case Study Too Hot To Holdgwendolyn Bonnefille A Singl

Paper For Above Instructions

Analysis of Sly's Explanation

Consideration of the Purchase Price

Essential Information for Decision-Making

Conclusion

References