Financial Analysis of Honest Tea Essay

Through true tea eras three years of business, their business shows some positive signs of a assure company. Since true teatime is a start-up company, it is understandable that their net income is in the negatives since their expenses go away outweigh their sales, yet as the three years agree departed on, their net income has improved, and purge increased by 74% from 1999 to 2000 from -$882,359 to -$228,879, which shows a positive sign of growth. secure teatime is alike very capable to pay masking their short term liabilities since their current ratio is a high 5.92. Their profit margin has also increased over the three year period from -71.7% to -36.3% showing positive signs of profit and ability to grow. estimable tea leaf is able to generate $0.50 for every dollar of assets they have, which isnt a coarse amount, but being in the positive for a start-up company is important.Unfortunately, honest Tea isnt very efficient in turning over its inventory since this turn over ratio is less(prenominal) than one, but, for a start up, they are doing soundly. Revenues increased tremendously from 1998 to 1999, but fell by almost 50% in 2000, so that is worrisome. The debt to beauteousness ratio in 1999 was .241 and it decreased in 2000 to .142. A lower debt to law ratio usually implies a more fiscally stable business, so its great that the debt to equity decreased from 1999 to 2000.Companies with a higher debt to equity ratio are considered more risky to creditors and investors than companies with a lower ratio. Unlike equity backing, debt must be repaid to the loaner and requires debt servicing or regular interest payments. In another(prenominal) words, debt push aside be a far more expensive form of financing than equity financing. Companies leveraging large amounts of debt might not be able to misrepresent the payments. Creditors view a higher debt to equity ratio as risky because it shows that the investors harbort funded the operations as much as creditors have, so its good to see that effective Tea has been irritateting more money from investors so they take upt have a large amount of debt.Compared to some other companies in their industry (Triarc Cos Inc, SaratogaBeverage, National Beverage Corp., clear Canadian Beverage, etc.), middling Tea is far behind. Most of this is due to the fact that Honest Tea is a start-up company and all of these other companies are well open up, but these competitors are turning out positive profit margins and positive net incomes which makes it very hard for Honest Tea to compete in the market.1.) Honest Teas sales dropped in 2000, so they are trying to find more capital to keep the company running. The success of the company, before the refrigerated spell in 2000, had drawn a lot of media attention which caused Honest Tea to be featured in Fortune, Entrepreneur, and Beverage World, which definitely helps the companys reputation, but Honest Tea really demand to get their sale s back sledding in order to stay relevant in the market.2.) offset of all, in the future, Honest Tea penury to raise more financing to be successful. They need to find more think capitalistics or angel gathering in order to brave the continuation of the company. Honest Tea also needs to start expanding dispersal of their product, but that can only happen if they get the financing to pay for the distribution. They need more distribution so they can pick up more customers that leave demand their product, in hopes that either they can grow Honest Tea as its own company, or that it will get picked up as part of another big brand such(prenominal) as Pepsi or Coca Cola.3.) In order to continue its distribution and growing the company, Honest Tea believes a $2 million round of financing would carry Honest Tea to profitability.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 t hey 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 ideal investor because they tire outt have decent money to support Honest Tea historic their seed stage.Customers of their product have also contributed capital to the company, but these investors have not been the right investors because they are not as sophisticated as sham capitalists and angels, and dont necessarily have the experience with interpreting financial statements which means they require a lot of extra time and attention and that takes away from Goldman and Nalebuffs ability to focus on growing Honest Tea. They also received financing from sham capital groups, which would be a check fit for Honest Tea since the venture groups dont need as much attention as Honest Teas other unexperienced investors but they also demand more control of the company than Honest Teas other investors.5.) Right away w ith the financing from the family and friends, there wasnt really a specific structure, but in 1998 Honest Tea established a financing structure. The financings have been structured 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 lesson prices staged at multiples of the initial price at which family and friends brought in would avoid such disagreements. If the company did well, then they would be able to exercise their warrants and they would own a greater fraction of the company, but if they didnt, then the original investors would own a larger piece of the firm.6.) Honest Tea should look for angel investors or venture 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 paygrade do make sense 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 based structure, which seems complex, but really 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 reason to work hard to meet their goals, and if they dont the founders will lose 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 value of their bottling launch. 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 down the stairs $15.1 million, then shareholders will be issued more shares and they would get more control over the company.8.) The rear to drink tea market is looking very promising for Honest Tea. In 1999, the ready to drink tea market totaled $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.Distribution channels have also been growing, ready to drink tea sales and loose tea bag sales have been growing in other channels suc h as dose 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 competition/ brand loyalty would be considered one of the barriers to entry all of Honest Teas competition is well established national companies, which means that it would be very hard to compete with them since they have already mastered their distribution around the country and they all have significant control of the ready to drink tea market. Economies of scale is another barrier to entry for Honest Tea, since other companies in the market has a lot of production their average appeal fall, but since Honest Tea is a small company their average costs are still large, so they need to work to increase their production to get their average costs dow n.9.) Rapid 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 pushes Honest Tea to grow too fast, this may cause Honest Tea to take 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, discharge national is very important for Honest Tea. Honest Tea needs to go national in order to get brand loyalty, so grocery store 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 means its very important to go national.10.) Honest Tea needs the money for investing in new distribution channels, hiring a nation sales force, purchasing marketing 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 potential 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 decline 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. Conversel y, the projections also show that the tea bag sales will increase when ready to drink tea decreases.Honest Teas projections make sense in the aspect 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 projecting a huge drop in net income to -$286.1, but besides that, Honest Teas projections make sense.12.) Honest Teas financing strategies thus far have not been ideal. They have depended on family, friends, and customers to provide them with capital, and this has caused Seth and Barry to spend much of their time explaining financial statements, in quisitory 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 beautiful to venture capitalists. Honest Tea has a huge market opportunity since they have created a new beverage category that has been on the rise the past couple of years, which would be very harming to an investor. Honest Tea has also proved that customers are willing to buy their prod uct 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 management teams that have expertness 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 means 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 attracti ve 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 presumable mean compromising their principles.Even though the $5 million investment would help Honest Tea tremendously, it isnt worth sacrificing their principles to grow quickly. Honest Tea should consider the Investors Circle investment over the venture capitalists. Even though Investors Circle isnt offering as much money as the VC, their principles ensure 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 get 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.