CLOSING CASE CHAPTER 6

1. Based on the case, what are the identified risks and rewards for Chris in terms of
working with Nose-Clear?

Risks

 People are naturally (and legitimately) suspicious of inflated effectiveness claims in

homeopathic products because there is no third-party scrutiny or review.
 A massive drop in sales of homeopathic products by 2008.
 Charlie was a bit of an unknown in terms of his management competence.

Rewards

 Large market size- Seventy-two million people use headache and sinus/allergy
medications, with an estimated $13 billion market in the United States and $20 billion
markets worldwide.
 Homeopathic trait- this made it cheaper and easier to manufacture, and free of regulatory
entanglements.
2. What are the risks and rewards for Charlie in terms of working with Chris?

Risks

 Loose control -the parent company (whether SMA or Pharmaceuticals) would be able to
extract all the value from this product and has patented product MuAd™ which will own
the rights.
 Earn less profit in joint ventures because of less control of business functions and small
ownership share.

Rewards

 Both of Chris's companies had reputations to uphold.

 Firm brand name of Chris's companies because of the quality services they offered to
their customers, such as educational programs.
 3. Below is a list of possible negotiable issues that can be used to structure a deal.
Use these to create potential offerings for Charlie under each of the business structures
(buyout, wholly owned subsidiary, joint venture, and buyer–supplier).

1. Be sure to articulate an ideal but realistic deal (your goal) and a minimally
acceptable deal (your resistance point).

2. Are there any other issues that you could add to expand the pie?

3. Having looked at the different business structures, which one would you advocate
and why?

4. Could you develop a hybrid structure for this partnership?

Negotiable issues (although each could potentially break down into sub-issues as
well):

− Ownership percentage of any jointly owned organization

− Royalties for sale of product

− Profit sharing on sale of product

− Licensing fee for services (marketing, clinical, and production)

− Pay for service

− Marketing support in terms of advertisement

− Branding support in terms of product

− Clinical tests on efficacy of product

− Production management of product

− Exclusivity in terms of markets and products, as well as subsequent deals

− Managerial control of the various business functions

− Introduction to key opinion leaders.

Buyout

Since Charlie's business has been underperforming, he can sell 51% to 99% of his business
shares to Chris. This would mean that he gives up managerial control of his company's various
business functions because SMA or Pharmaceuticals is the parent company. Therefore, Charlie
can agree with Chris on the specific tasks he would give to don't feel like to have lost much.
Another advantage is that he will incur fewer costs by controlling few business functions.

Wholly owned subsidiary

This structure means that one party (parent company) owns 100% of the business shares. Hence
Charlie has to give up managerial control of all the various business functions. Charlie would no
longer influence significant issues affecting the partnership. Besides, the parent company will be
in charge of the production management of a product. Even though Charlie (subsidiary) will be a
junior, he gets a good brand name given that SMA or pharmaceutical have been performing well.
Also, his company's valuation will increase because he is under the umbrella of the parent
company.

Joint venture

In this type of structure, businesses enjoy either 50/50, 60/40 ownership percentage. The control
functions are nearly the same; for example, company A can control production functions while
company B controls the marketing function. The above case won't be fair for Chris to enjoy 50%
or 60% share because his companies have been running well compared to Charlie's, whose sales
dropped drastically to below $100,000. Charlie will be happy with this because he has some
control functions hence not feel like a junior.

Profit sharing on the sale of a product is based on the party's contribution to capital at the
beginning of the joint venture. Also, because a new company will be formed, key opinion leaders
that will assist in decision making have to be brought in based on the party's agreement. Each
party has to bring their key opinion leaders who have to be blended before business operations
begin hence they will drive for the success of the company.
Buyer–supplier

Under this structure, a win-win situation should be negotiated before the partnership begins. In
this case, SMA or Pharmaceuticals will be the supplier because they own patent rights for their
products. Firstly, Charlie can negotiate with Chris based on exclusivity in terms of markets and
products and subsequent deals. This can, for example, involve one wholesaler or retailer who
sells and distributes products in the market. The main aim of this system is to maintain a strong
brand and high customer service. Therefore, Charlie can give in to this idea because his products
will get promotions given that they had reduced sales. For services like royalties for the sale of a
product, licensing fee for services (marketing, clinical, and production), marketing support in
terms of advertisement, branding support in terms of product, and clinical tests on efficacy of
product, it would be wise if Charlie negotiates for a low price because his products were
underperforming. The services have to be paid for given that his products will be under the
parent company brand's name. Though the charges may seem high because of financial
instability, it would bring a good change because the products will be marketable, generating
finances for upscaling.
DISCUSSION

Given your choice of business deal, what information should you be looking for as the deal
is executed in order to minimize your risk and maximize your return?

 Financial statements-this involves analyzing the income statement, balance sheet, and
cash flows of the company I am in a contract with. A favorable financial position will be
an assurance of good returns will vice versa is true.
 Sales return- how much in sales the party has been making, the sales trend from the past
to current time, and the growth of customer base in recent years.
 The company's history- how long the company has been in operation, the successes and
failures in achieving its goals. Has the company been growing, and how has it been
responding to an economic crisis that faces it.
 Ownership shares-What percentage are both parties going to get, and profit ratio to sales
made.
 Reputation- What is the public saying about the company, and does the company shows
transparency in its dealings.

Put differently, how will you identify whether your original business deal is optimal once
you begin to work with Charlie?

 Reviewing financial statements- analyzing income statements to know how much profit
has been made, balance sheet to check whether assets are more than liabilities, and cash
flows to see whether the cash inflows are more than cash outflows if all of them are less
than the one recorded in the original business deal, then.
 Position in the market- this is done by assessing the current customer base. If it has
decreased, then the original deal is optimal.
 Checking customer satisfaction- customers' feedback needs to be taken from surveys and
reviews to understand whether the services are satisfactory. If the rating goes down, then
the original deal is optimal.
 Creativity- the original business deal entailed a team of experts and opinion leaders who
came up with new ideas that resulted in the success of SMA. Therefore, by checking the
current team's effort, I will know their productivity in the company. In case of decline,
then the original deal will be considered optimal.