Be Our Guest Inc.

Introduction

The concept of establishing service business for the provision of catering services to other catering

businesses was evolved by Stephen Lizio during the year 1983 and using his experience in food and wine

industry he established his services business with the name of Be Our Guest Inc. Initially they offered the

short time manpower solutions to the catering services business and later on after doing successful

business they introduced the services renting caterers equipments such as chairs and tables. Furthermore,

as the business grew, Lizio hired a part time financial consultant as full time chief executive officer and

Lizio himself became the chairman of Be Our Guest Inc in the year 1988. During the same year food

industry sponsored an event “Aid and Comfort” that gave an opportunity to Be Our Guest Inc. and they

earned great revenues by serving that event in the form of renting catering services and caterer

equipments. During the year 1989, Simon Williamson was hired as management executive and she was

responsible for the management of daily operations, meanwhile, she used her past experience in order to

improve the efficiency of organization’s operations. Key customers of Be Our Guest were those engaged

in provision of catering and event management services such as event planners, catering firms and large

hotels. Lizio had been successfully running the business operations and reach annual revenues of $1

million in the year 1991. Furthermore, its successful operations were recognized by Boston Chamber of

Commerce (BCC) when it was recognized by BCC as a “Small Business Firm” of the year 1997.

Inventory of catering equipments was managed through a computerized system and inventory was

divided into divisions according to type of catering equipment, furthermore, each order for the delivery of

catering equipments was handled by the head of division and collection and delivery of equipment at the

event site was responsibility of driver. In addition to this, Be Our Guest was situated at the center of

Boston city and this competitive advantage enabled the quick and easy delivery of equipments to event

location. However, Be Our Guest was full service category firm except the provision of tent because of

the high labor cost and low profit margins on tent orders.
Problem Statement

The management is concerned about the size of credit line that they should request to the bank for next

year, meanwhile, the management is considering whether some of their borrowing should be shifted from

short-term borrowing under the line of credit to the more permanent financing provided by a term loan

and they are also concerned about the covenants imposed by the bank.

Analysis

4. What should Al Lovata and Simone Williamson ask for when talking with the bank? If the
company needs additional bank financing, should the increase be provided by an increase in
the credit line, or should the size of the term loan be increased to meet the need? Should they
ask for some relaxation or change in the loan covenants, particularly the personal guarantees
that they have provided at the bank’s request?

Al Lovata and Simone Williamson should approach Anne Granger in a confident way. Be Our
Guest’s balance sheet is fairly strong and fairly liquid, the income statement shows signs of
growth and the company is generally doing well. Hence Be Our Guest can take a confident
stand to discuss the covenants openly with the bank in order to reach some relaxation on the
strict terms. They need to work with the bank to: *lower the rate *review the requirements of
personal guarantees for the loan Be our Guest Inc. can consider the possibility of going to
another bank if State Street holds their ground on these strict covenants

Considering the current and past status of the balance sheets and income statements it is
realistic to assume that Be Our Guest, Inc. would not have much difficulty to find a new lender
who would agree on different, more relaxed terms of covenants. The company mainly needs the
line of credit to finance the seasonal effects of Q1, which could be reduced by a solid growth or
expansion plan or merely revising the company’s HR strategy regarding the full-time staff during
Q1.

For example, they could reduce the staff’s hours, which would keep them on a full-time
employment base but would reduce the G&A costs for this particular quarter; or they could put
the full-time staff on a strategic rotation plan which incorporates the poor business of quarter 1
but leaves options in case of unexpected business in this time period which would also reduce
the general G&A costs and still leave the company in a good position to handle short-term
notice business. Regarding the interest for outstanding borrowings on the credit line as well as
the interest for the long-term loan, it has been reliably covered and there is no immediate
reason to believe that this will change. Any future increase of the long-term loan to drive the
growth of the company in terms of business expansion or increasing assets can only be
interpreted in a positive way seeing that the revenues have shown to increase with all previous
growth-measures. State Street bank should recognise the company’s solid management
foundations and the well-going business over the past years and keep their good standing with
Be Our Guest, Inc.

Lovata and Williamson want to be prepared for future growth. The way to growth has been
identified in two possible options, completing an acquisition or expanding their product line. Both
of these strategies need to be supported by a consistent long term plan in order to finance their
investment needs. Pertaining to this reason, for funding their growth they should ask the bank to
extend their long term lend (clearly cheaper than a revolving credit) and moreover ask to re-
negotiate the interest rate (too high especially to be a “prime rate”). Additionally each growth
plan in the first few years needs patience and flexibility in terms of managing losses, therefore it
would be crucial to review at least part of the current covenants, like prohibiting two consecutive
quarters of net losses and avoiding a net loss for any fiscal year. Taking into account that they
are in a good financial position and that the extra money they would need is for future
expansions and growth of the company, refinancing its existing debt to obtain better terms,
could be quite reasonable. Moreover the company has a fairly strong balance sheet and
profitable growth, so it has plenty of bargaining power to negotiate a better deal with the bank.
The only negative item is given by the decrease in the last 4 years of the “net income”, but again
it is an issue suggested by a covenant (distribute more than 50% of the earnings to the
principals). It is probably the most useless and most dangerous of the list as it is leading the
owners to distribute the profit thereby increasing the G&A costs. Definitely, another crucial
aspect is about liquidity pain, especially for an already seasoned business as that of “Be Our
Guest”. In this case they should consider converting some of their revolving credit to term debt
(cheaper) making line of credit available, which is currently fully used (coherently to the 1998
expected cash position, answer 3). In this sense the best deal for “Be Our Guest” might be to
invest in a business that generates revenue during current slow seasons and eases the firm's
reliance on credit for working capital. Thus even if the tents business could be apparently
external to the “Be Our Guest” business model this business expansion should be taken into
consideration. It is not only a new source of profit but will also enable profits for the current
business in the slow seasons (tents are mainly set off in the rainy and cold seasons like fall and
winter). However, they should be able to distinguish between long term debt and short term line
of credit, using the first one for investments and the second one to manage liquidity pain
periods.

Leaving aside its convenience in general, the nature of the long-term debt, makes the
development of the financial plan easier by providing the exact future payment scheme. On the
contrary the line of credit is extremely useful to manage liquidity pain periods but should be paid
back quickly or converted in term loan. Finally while refinanced bank loans for now may be
adequate to finance the company, it may not be enough for future plans and therefore curb the
expansion (current debt/tangible worth ratio is already higher than 1).

They should consider a different way of raising funds e.g. from selling equity. Reviewing the
personal guarantees is fundamental in order to attract new investor and to manage the
company differently. Be Our Guest was created as a business idea and for many years ran
more like a family business but now it is a profitable firm that should be managed in terms of
efficiency and profitability. This leads to two necessary actions: one by the State Bank, to get rid
of the covenant including the personal guarantee of the loan by the management; and second
by Be Our Guest, Inc. to review their company status.

In terms of the State Bank, it will be essential to convince Anne Granger to remove the covenant
regarding the guarantee for the long-term loan.

From the point of view of the management of Be our Guest, Inc. they need to review their
company status. Only when they successfully separate the business from the family-business
approach on which terms Be Our Guest, Inc. was founded, they can attract future investors.