Case

Gravestone Inc.

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Problem Definition

Your client, Gravestone Inc., is a mason producing gravestones situated in Switzerland. He is producing high-quality, hand-crafted gravestones with very skilled labour-force.

In the recent past a technology was developed that would allow him to produce his gravestones with much less labour.

He is contacting us to make a decision if he should invest in this new technology and if he even should remain in the business itself.


Comments

This case is made to be interviewer-led. Therefore the interviewer should guide the interviewee through the interview. The questions should be read out and shared with the candidate.

At the beginning the interviewer should ask the interviewer for a plan to solve this case, but after the interviewee has presented his plan the interviewer should ask the candidate to solve certain problems.


Short Solution

  • Technology makes business unprofitable.
  • Client should sell company.

Detailed Solution

Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.

Paragraphs highlighted in blue can be verbally communicated to the interviewee.

The following framework/structure provides an overview of the case:

I. Strategies

1. What strategic options can the owner consider?

  • Sell the business to a third party.
  • Sell the assets of the company and close it.
  • Keep everything as it is.
  • Keep operating, but invest in the new technology

II. Market

2. How would you calculate the current value of the business?

The interviewee should gather information about the client’s competitors and the situation on the market:

Information that can be shared on the interviewee’s inquiry:

  • Gravestone Inc. has a 10% market share and a relative market share of 1 (ratio of Gravestone Inc.’s market share to that of the nearest competitor).
  • The market is expected to remain at the same level for the near future.
  • The market size can be calculated with different methods (let the candidate brainstorm before you provide him with the different possibilities):
    • Calculation with total population, growth and birth rate
    • Review of death records in a certain period
    • Number of obituaries in newspaper and coverage
    • Calculation from population and average life expectancy

You can share Table 1 with an overview of the market situation and Table 2 with an overview of the costs if inquired by the interviewee.

With the provided information the candidate should calculate the amount of demanded gravestones per year. The candidate can use the number of gravestones to calculate profits and finally the value of the business:

(Every year 1/80 of the population dies)

(Discount rate of 10% and infinite future profits of $100,000)

Main conclusion

The company is worth $1 m whether they keep or sell it.

III. Company

3. What is the value of the company if it was shut down and the assets were sold?

Information that can be shared on the interviewee’s inquiry:

  • Fixed assets are mainly only land and improvements. These are owned by the company.
  • There are different possibilities to determine the value of the land (let the candidate brainstorm them before you tell him):
    • Find comparable real estate and determine the selling price
    • Find comparable real estate and determine the rent per square meter, then discount the cash flows generated by renting
    • Find the rate of appreciation of property in the near area and then apply to book value of current land and improvements.

Share Table 3 with information about the value of the property if inquired by the interviewee.

With this information the candidate can calculate the value of the property/assets. Due to the fact that the property was held for 54 years, the present value will be

Main conclusion

As the value of the assets ($0.83 m) is lower than the discounted cash flows ($1 m), it would be better to continue the business.

4. What would the value of the company be if it would invest in the new technology?

Information that can be shared on the interviewee’s inquiry:

  • The new technology is sold by a tool company that holds the patent. They could sell it to competitors of Gravestone Inc., as they are not selling an exclusive right.
  • The impact on the recognition of the brand is negligible.
  • Fixed assets are mainly only land and improvements. These are owned by the company.

You can share Table 4 with information about the new technology if the interviewee inquires it.

As every competitor can buy this technology it is assumed that the overall cost structure of the industry will become lower.

As a result the prices will fall as the companies want to gain market share by cost competition.

The gross margin will remain the same since the industry structure did not change.

New Labour costs = Old COGS * 90% * (1 - Cost saving) = $5,000 * 0.9 * 0.4 = $1,800

Material cost = COGS * 10% = $5,000 * 10% = $500

New COGS = $1,800 + $500 = $2,300

New Price = $2,300/(1-0,038) = $2390.85

New contribution margin = Price - New COGS = $2390.85- $2,300 = $90.85

Profit/Loss = Price * gravestones * market share - fixed costs = $90.85 * 50,000 * 10% - $900,000 = $454,250 - $900,000 = - $445,750

Main conclusion

IV. Conclusion

The new technology will make the business unprofitable.

The candidate should include these points in the conclusion:

  • As the technology will make the business unprofitable pretty soon, the owner should try to sell his company as soon as possible.
  • Due to the value of the assets and the present value of the discounted cash flows, he should try to sell the company as a whole.

The only other possibility would be to gain more market share. However, this is seen to be practically impossible (advertising/marketing rather complicated for this topic and acquiring other competitors not wanted by client).

Difficult Questions

What are possible strategies if the owner is unable to sell the business now?

Suggested answer:

  • He can utilise the business as a cash cow, but should avoid investing more in the business than is necessary to run it on the present level.
  • At some point the business will become less profitable as the other competitors are adopting the new technology. This is the point where he should really try to sell the company’s assets and shut the company down.

More questions to be added by you, interviewer!

At the end of the case, you will have the opportunity to suggest challenging questions about this case (to be asked for instance if the next interviewees solve the case very fast).

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Case exhibits






Cost of goods sold or COGS refer to the carrying value of good sold during a particular period.