Question

Case Study

Rhy’s Fries – Part 6

September 30, 20X1

It’s been a crazy ride for Ronald and Rhy’s Fries. He and Peter travelled around the carnival circuit all summer and into early fall stopping at every fair, exhibition, convention, carnival and rodeo they could make it to. Some locations were better than others, and there were some minor issues including a few truck breakdowns, inventory spoilage and some wrong turns that they had to contend with, but overall it was a successful season. Ronald was also surprised to discover how popular his new product was; poutine.

It was so popular that Ronald has decided to pursue this as the next avenue in this business; a fry and poutine restaurant. There is a perfect, high traffic location that is available to buy but a restaurant is completely different than a food truck and he’s a little unsure about what it’s going to take to make it work. The location was previously a clothing retail store, and as such it’s going to require some extensive renovations to turn it into a functioning restaurant. On top of that, it will need kitchen equipment (deep fryers, stoves, cooking utensils, etc.) as well as tables, chairs and other restaurant amenities before it would be able to open.

Alternatively there is a less desirable location that is available to lease. The location is in an older area of the city and was previously a restaurant. It has old, but still functioning equipment (deep fryer, stove, cooler, ovens etc.) though it’s unclear how long the equipment will last. The lessor has also indicated that any of the restaurant amenities (tables, chairs, utensils, etc.) that are on the property can be purchased at a deeply discounted rate. The restaurant itself is in good shape and aside from a thorough cleaning won’t require a lot of work to get it open.

Ronald once again seeks out the advice of Uncle Bob to get some clarity on the potential risks and advantages of each option (Lease vs Buy). He also wants to get some more information about something he recalls Bob talking about at a previous meeting; Internal Controls.

6a.) As Bob, what would you tell Ronald regarding the two options (Lease or Buy)?

6b.) What are some of the important internal controls that Ronald will have to consider and implement in this situation regardless of which option is chosen?

Answer 1

6.a) Buy Option will be a better option.

6.b) 1. Projected value of the property and buying your own equipments than leasing equipment as it will make the business less profitable in the long term.

2. ability to attract customers

3. Don't have to worry about a rent