I’m working on a Business case study and need support to help me understand better.
It was a fall overcast day and Sean Ellington was returning from yet another day of driving around, selling Environmental software to help companies comply with federal government standards. As he cruised passed the local county soccer fields, he pulled over to watch a team practice. Observing the coach, he quickly realized that the “coach” was a dad and while good intentioned, he really did not know much about running a soccer practice or how to provide proper skill instruction.
Sean was a former soccer player who grew up playing in a club system in Ca, before being recruited by Louisville and having a successful 4 year college career. However, upon graduation the “call” to the pros never came and subsequently Sean began a career in sales which melded well with his outgoing personality. As he continued to watch the dad struggle to provide instruction to the team, an idea began to form in his mind…”maybe I should start a soccer club like the one I played in as a youth.”
The more Sean thought about the idea, the more he liked it; however, Sean was a realist and knew his strengths and weaknesses. He knew while he was a gifted marketer, sales person, and great at building relationships; he really had no idea about “business” beyond ensuring he met his monthly sales quotas. Additionally, while he was in a solid position financially, his wife actually managed the budget for their personal finances!
Still, Sean decided this was an idea worth pursuing. He talked with his wife, Shelly, about the idea, the challenges he faced, determining if his idea was sound, and if it would be profitable enough for him to earn a living (he requires a minimum of $65,000 per year in income). Shelly advised him to speak to their neighbor, Mike, who taught at the local college, saying “maybe he can help you find a few resources to help you solve the challenges you face”.
Sean dropped by Mike’s house to see if he had time for a chat, “Mike, can I buy you a beer and bend your ear for a minute”? Mike agreed and off to the bar they went…two beers later and after a brief explanation of the club idea; Sean confessed he would need help discovering if the opportunity was worth pursuing, but was not sure how to proceed. Mike suggested Sean utilize a unique program the college started a year prior. Sean could “invite” the local marketing and business students at the college, for a modest fee, to do market research. Sean loved the idea!
Sean met with the head of the Marketing department at the college, Dr. Blairinoff, who explained the students would help Sean figure out the market research to include items like costs, services he could offer, and a variety of other data. Dr. Blairinoff felt certain this data would assist Sean in determining if his idea was solid. The only catch was there was a $5,000 cost for the team (made as a donation to the school). Sean told Dr. Blairinoff he would think about it and get back with him. Sean discussed the idea with his wife and they decided it was worth spending the $5,000 from their $65,000 savings they had accumulated over the years. Ten days later, Sean wrote a check to the local college and met with the students to discuss his idea. The students, after a lengthy Q&A session, felt they knew exactly what Sean wanted to accomplish and told him they would deliver Sean their research results Nov 1st.
The Big Day!
Sean could barely concentrate on his sales job as he was so excited to learn what the students discovered. Finally, Nov 1st arrived. Sean met with the students at the college and they delivered the following report to him.
Industry: Nationally, the youth sports industry is over a $9 billion market and the number is projected to continue to rise as parents continue to spend more on dues and travel expenses correlated with youth sports. Additionally, the major youth sports (basketball, baseball, soccer, and football) account for over 70% of youth participation in sports with outdoor soccer being the second most popular, only trailing basketball. Soccer, as marketed, is divided into two distinct strata’s: Youth (4-11 years old) and Select (12-18 yrs. old). The fee structures on average for youth range from $250-$1,300 per player per season; for select $1,800 – $2,500 per player per season. An average youth club consists of 600 – 800 players and select ranges from 300-1,500 players.
Competition: Locally, there is only one select soccer club called the “Kicks” that charges annual dues/fees and uses “professional” (meaning non-parent) coaches. There is also a local city league that children can also participate in. In surveying parents (we surveyed 250 in the city league) many would rather have their child receiving “professional” instruction but the only option was to join a club over an hour away. Additionally, surveys were conducted with parents of children in the select club and they indicated while they were generally happy with the club, it was the “only team in town,” so they did not have much of a choice but to play there.
Local Fees: The local select club (Kicks) charged $2,100 per player per season and the city youth team charged $650 per player per season. Another interesting note is that the dues paid for both youth and select are actually paid monthly to help the family afford the seasons payments but instead of being spread over a 12 month year instead are charged from Sept – June (10 months); with no fees paid during the two month summer period as this is the period that tryouts happen, new players are signed up and teams are formed for the next year. The parents indicated, they really liked this payment plan as it freed cash up for summer vacations.
Demographics: The city currently has a population of 1.1M and is growing 4% annually as the job market is expanding in the area. Additionally, the expanding job markets are technology and professional services; resulting in a rapidly expanding, well paid middle class. The Kicks only has Select soccer available for ages 12-18 and currently has approximately 650 participants in the club. The local city league offered soccer for children ages 6-18; and has over 1400 players with 70% being in the 4-11 year old range and the balance in the older age brackets.
The marketing team paused, and asked Sean if he had any questions yet. Sean said, “That was great industry information; do you have specific data and recommendations?” “Yes we do,” the students answered and they continued to deliver their report.
Marketing Team Recommendations/Conclusions/
- Club: Offer both youth and select teams: Price the youth at $650 per season to compete with City league initially and then escalate pricing; 5% in yr. 2 and an additional 7% in yr. 3. For select, set an initial price of $2,000 per season and then escalate pricing 5% in yr 2; and an additional 5% in yr 3.
- Offer individualized training: Offer individualized training to players on an hourly basis; the research team felt confident that a parent for a youth or select player would pay $50 an hour for this service. Additionally, based on their surveys, they were confident that 20% of youth players and 10% of select players would purchase on average 15 hours of instruction per season; 1.5 hour each per month per 10 month season. The bonus is the coaches being paid salary would cover this training for no additional compensation.
- Host a tournament: The research team informed Sean that there are no local soccer tournaments held. In the youth sports environment, teams will travel to attend a tournament and typically pay an entry fee of $250-$650 to play (depending on if youth or select). They advised Sean to host an annual recurring event (EVERY APRIL), “The Citywide Futbal 4All Cup” and charge an entry fee of $550 per team for select and $350 for youth.
- Sponsors: The research team also advised Sean to sell a sponsorship for his team jerseys. The front named sponsor was recommended to be sold at $30,000 per season with an additional payment of $1,500, if players (combined in both leagues (select and youth)) were greater than 1200.
- Coaches: A youth/select coach on average can coach a maximum of 4 teams at any one time; recommendation is to hire coaches on an as needed based on the number required to coach all formed teams and offer them full time wages at $35,500 with a 4% year over year increase. Typically, in addition to wages, there was an additional 12% expense for every payroll dollar for taxes and benefits (8% tax, 4% benefits). Timing on hiring coaches is typically 30 days prior to the start of a season.
- Fields: The County, over the last few years, had made significant investments in fields and field development. Based on this, lighted fields were available to be rented on a minimum 3-year agreement for a cost of $25,000 per field per year (paid quarterly at the beginning of each quarter). On average, a field could service 8 teams practicing/playing per season. However, the county does not maintain the fields (water, cut grass, fertilize, stripe for games), once a field is leased. This expense is the club’s responsibility and costs, on average, $2,100 per field per year (paid monthly).
- Equipment: The equipment expense for a club, per research, is as follows:
- Nets: Two nets, regulation size, at a cost of $1,500 each are required for each field rented. Additionally, youth size nets (4 per rented field) are also required at a cost of $1,200 per net. Nets last 7 years.
- Soccer Balls: Each team will utilize 20 balls on average per season at a cost of $30 per ball. Balls last 1 season.
- Gear: Misc. training gear (cones, corner poles, shooting targets etc.) is estimated to cost $10,000 per rented field, but lasts, on average, 5 years.
- General research/information:
- US Club Soccer offers player memberships at a cost of $26 per play. This cost covers issuance of a player card and provides the club insurance protection from law suits, should a player be hurt. The recommendation is that the club pays this expense from player dues.
- Game scheduling and referees: There is an organization the club could join, the EDDOA, which will allow your team to join a league. This league arranges games between similar-skilled opponents from surrounding communities. Additionally, joining this organization would mean that all referee expenses are covered for games that the league schedules. The cost is $28 per youth player and $44 per select player. Recommend your club joins.
- Other costs:
- Per research, the club needs a club admin. On average, the pay for an admin to handle the financial books and registration requirements is $39,000 per year, with a 4% annual increase. They typically have the same benefits/tax burden as coaches.
- Bank fees/misc. fees: On average, these are .5% (half of 1%) of Gross annual revenue.
- Software support fees: On average, software support expense to manage the player database and collect funds via credit cards is 3% of annual revenue.
- Marketing expense to advertise the club and tournament events is on average 2% of annual revenue.
- Office Rent: Most clubs (but not all) operate out of the founder’s home in year 1, but by year 2, the club needs office space to help manage the expanding operation. The city offers reasonable rentals, ranging from $450 a month for a 3 year lease, $550 a month for a 2 year lease; and $650 a month for an 1 year lease.
- Uniforms: Every player, for both youth and select, requires a uniform and practice gear. Research shows the club typically provides the game uniforms and requires the players to buy the practice gear (required through the club); but not covered by dues. Each game uniform costs the club $90 each and the practice set costs the club $60 each for both youth and select players.
- Tournament expenses: On average, a tournament has costs such as referee expense, field rental expense, hosting costs that amount to 65% of the tournament’s revenue.
- Legal Expense/Accounting expense: Research showed that on average a typical club spent $1,000 on legal expenses to form the club an additional $2,000 per year on accounting services related to tax return preparation.
- Office expense: For general office admin expenses not accounted for above, research shows on average to budget 1% of revenue.
Sean sat and listened to the report provided by the marketing team in silence. When they were finished he said, “Man, that’s a lot of good information, but as I told you, I am not a numbers guy, so I really only have one question” he paused and asked, “So, can I make a living doing this?” The marketing team looked at each other bewildered and answered, “We don’t know! Our job was to get you the data! Your job is to interpret it! To know if you can make a living, you need to crunch the data and see the story it tells you!” Sean thought a moment, looked at Dr. Blairinoff and said “HELP!”
Your job is to help!! Use the Assumptions below and the information above to answer the questions following the assumptions section.
- To answer questions, use the numbers as recommended by the market research team for all data points in the report. (in other words don’t think “I negotiated a better deal” etc…
- Sean estimates he will sign up 220 youth players year 1 and grow that number by 10% year 2 and 20% year 3 (round all players up to the next whole number).
- Sean estimates he will sign up 300 select players year 1 and grow that number by 5% year 2 and an additional 10% year 3. (round all players up to the next whole number)
- Sean estimates he will sign up 25 youth teams and 30 select teams to the first year’s tournament and increase each number by 10%, year over year.
- Youth Teams will have 11 players (round all teams created up to a whole number)
- Select teams will have 15 players (round all teams created up to a whole number)
- Interest expense is charged at 6.5% per annum on any loans Sean takes, should he need any
- 100% of players pay dues monthly (on the 1st of the month) and there is a 100% collection rate (no need to factor in bad debt)
- Sean signs a 2-year lease at the conclusion of his first year in business
- Sean is willing to invest his total savings in this idea, as is his wife!
- Round all dollars up to whole numbers (no cents!)
- Use a July – June timeframe
Please answer the following questions which will let Sean know if he should start the club and if he can make a living doing so.
- How much initial investment (upfront) capital does Sean need to start the club? Please provide worksheet which explains how you calculated this amount? 20pts
- Identify all expenses needed to start the business and then identify which are capitalized expenses? 25pts
- Please provide an annual P/L for each of the first three years the club would be in business? 20pts
- Please produce a 1 year cash flow statement depicting the first year cash flow of business for the club, by month. 20pts
- Would you recommend he open the club in other words; can Sean make a living doing this (yes/no)? Please provide details on how you made your conclusion. 15pts