Harvard Case - Metta Rest Spa: Should the Stricklands Lend?
"Metta Rest Spa: Should the Stricklands Lend?" Harvard business case study is written by Lindsay Clayton. It deals with the challenges in the field of Accounting. The case study is 9 page(s) long and it was first published on : Jul 18, 2018
At Fern Fort University, we recommend that the Stricklands do not lend to Metta Rest Spa. While the spa presents an attractive investment opportunity with potential for growth, the risks associated with the venture outweigh the potential rewards, particularly considering the Stricklands' financial position and risk tolerance.
2. Background
This case study focuses on the Stricklands, a family with a significant net worth seeking investment opportunities. They are presented with the chance to lend $1.5 million to Metta Rest Spa, a new venture by an experienced entrepreneur, Maya Singh. Metta Rest Spa aims to offer a unique wellness experience, focusing on traditional Indian therapies.
The main protagonists are:
- The Stricklands: A family with substantial wealth seeking investment opportunities. They are risk-averse and prioritize preserving their capital.
- Maya Singh: An experienced entrepreneur with a proven track record in the hospitality industry. She is passionate about bringing traditional Indian wellness practices to the US market.
- Metta Rest Spa: A new venture offering a unique wellness experience based on traditional Indian therapies.
3. Analysis of the Case Study
This case requires a thorough analysis of the financial viability of Metta Rest Spa, considering the Stricklands' risk tolerance and investment goals. We will utilize a framework encompassing financial analysis, market analysis, and risk assessment to evaluate the investment opportunity.
Financial Analysis:
- Financial Statements: The case provides limited financial information about Metta Rest Spa. A detailed review of the projected financial statements, including the income statement, balance sheet, and cash flow statement, is crucial to assess the spa's profitability, liquidity, and solvency.
- Costing: A thorough cost analysis is essential to determine the spa's operational costs, including fixed costs (rent, utilities, salaries) and variable costs (supplies, treatments). Activity-based costing could be employed to accurately allocate costs to specific services and identify areas for potential cost savings.
- Financial Performance Measurement: Key financial performance indicators (KPIs) such as profitability ratios, liquidity ratios, and solvency ratios should be analyzed to assess the spa's financial health and its ability to generate returns on investment.
- Cash Flow: The cash flow statement is crucial to understand the spa's ability to generate cash from operations and meet its financial obligations.
Market Analysis:
- Market Size and Growth: Analyzing the market size and growth potential for wellness spas in the US is crucial. The case mentions a growing demand for wellness services, but a more in-depth market research would be necessary to assess the spa's target market and competition.
- Competitive Landscape: Identifying key competitors and their offerings is essential. Understanding Metta Rest Spa's competitive advantage, including its unique selling proposition (USP) and pricing strategy, is critical.
- Marketing and Sales: Evaluating the spa's marketing plan, including its target audience, marketing channels, and pricing strategy, is necessary to assess its ability to attract customers and generate revenue.
Risk Assessment:
- Operational Risk: The spa's reliance on skilled therapists and its dependence on a unique service offering pose operational risks. Any disruption to the supply of qualified therapists or changes in customer preferences could impact the spa's performance.
- Financial Risk: The spa's reliance on debt financing and its lack of established revenue streams pose significant financial risks. The potential for lower-than-expected revenue or higher-than-anticipated costs could lead to financial distress.
- Market Risk: The spa's success depends on the market's acceptance of its unique wellness offerings. Changes in consumer preferences or the emergence of new competitors could impact the spa's market share and profitability.
4. Recommendations
Based on the analysis, we recommend that the Stricklands do not lend to Metta Rest Spa.
Here are the key reasons:
- High Risk: The spa's business model is untested, and the market for its unique offerings is uncertain. This creates significant financial and market risks.
- Lack of Financial Information: The case provides limited financial information about the spa, making it difficult to assess its financial viability and potential for profitability.
- Stricklands' Risk Tolerance: The Stricklands are risk-averse and prioritize preserving their capital. Investing in a new venture with significant risks contradicts their investment goals.
Alternative Investment Options:
The Stricklands should explore alternative investment opportunities that align with their risk tolerance and investment goals. They could consider:
- Diversification: Investing in a diversified portfolio of assets, including stocks, bonds, and real estate, can reduce overall risk.
- Established Businesses: Investing in established businesses with a proven track record and strong financial performance can offer greater stability and lower risk.
- Private Equity Funds: Investing in private equity funds that pool capital from multiple investors to invest in a variety of businesses can provide access to a diversified portfolio of investments.
5. Basis of Recommendations
Our recommendation takes into account the following factors:
- Core Competencies and Consistency with Mission: The Stricklands' core competency is wealth preservation, and their investment goals prioritize capital preservation over high returns. Investing in Metta Rest Spa contradicts this mission.
- External Customers and Internal Clients: The Stricklands' investment decision should consider the potential impact on their family and their financial well-being. Investing in a high-risk venture could jeopardize their financial security.
- Competitors: The spa's competitive landscape is unknown, and the potential for new competitors entering the market could impact its market share and profitability.
- Attractiveness - Quantitative Measures: The lack of detailed financial information makes it impossible to accurately assess the spa's profitability and return on investment.
6. Conclusion
The Stricklands should not invest in Metta Rest Spa. The risks associated with the venture outweigh the potential rewards, particularly considering the Stricklands' risk tolerance and investment goals. They should explore alternative investment opportunities that align with their financial objectives and minimize risk.
7. Discussion
Other Alternatives:
- Lending with Conditions: The Stricklands could consider lending to Metta Rest Spa with strict conditions, such as a higher interest rate, collateral requirements, and a detailed business plan with realistic financial projections.
- Equity Investment: The Stricklands could consider an equity investment in Metta Rest Spa, providing them with a share of the spa's profits and potential for growth. However, this would expose them to even higher risk than a loan.
Risks and Key Assumptions:
- Market Risk: The spa's success depends on the market's acceptance of its unique wellness offerings. Changes in consumer preferences or the emergence of new competitors could impact the spa's market share and profitability.
- Operational Risk: The spa's reliance on skilled therapists and its dependence on a unique service offering pose operational risks. Any disruption to the supply of qualified therapists or changes in customer preferences could impact the spa's performance.
- Financial Risk: The spa's reliance on debt financing and its lack of established revenue streams pose significant financial risks. The potential for lower-than-expected revenue or higher-than-anticipated costs could lead to financial distress.
8. Next Steps
If the Stricklands decide to pursue an alternative investment opportunity, they should:
- Develop a clear investment strategy: Define their investment goals, risk tolerance, and time horizon.
- Conduct thorough due diligence: Thoroughly research potential investment opportunities, including financial statements, market analysis, and risk assessment.
- Seek professional advice: Consult with financial advisors and investment professionals to gain expert insights and guidance.
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Case Description
A Canadian couple whose daughter owned Metta Rest Spa, a flotation spa that opened in September 2014 in Vancouver, British Columbia, had invested almost CA$1.2 million in the business. Their daughter had recently asked for another $60,000 to keep the business afloat, and in early 2016 the couple needed to decide whether to invest more money in the business. The business had a net loss in 2015 and needed cash to continue to operate. What other information should they be asking for? They needed to know if the business would be able to sustain itself without requiring their retirement funds.
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