When Bruce supplied this, he was implying that he didnt need to pay any more

than $60,000 for the bar. His oral agreement required him to pay off the 23,000 left
of their second mortgage, give them 500 per month in cash, and pay for their health
insurance and medical costs for the rest of their lives. He did pay her the 500 a
month; however, he treated her as an employee leading her to only receive around
400.

Framework for Analysis1:

I. Identify the key problem(s) or issue(s) [usually grouping them according to either importance
or similarity]

1. Whos taking ownership over the business when Harvey dies?

2. The family isnt getting along
3. The mother and him cant agree on a fair contract

II.Situation Assessment

Company goals and objectives

Environmental analysis: General (Economic, Social, Political, Technological,

Other); Operating/Task (Market, Competitors, Human Resources, Regulators,
Suppliers, Buyers.... )

1 Be sure to support conclusions with evidence. Alternatives should flow logically from analysis.
 Company analysis (including a size up of its financial situation, where appropriate:
Ratio analysis, Break-even analysis, General financial evaluation)

Summary of the opportunities and threats as well as the business's overall strengths
and weaknesses

III. Alternatives

Principal criteria to be used in making the decision

Statement of the most logical alternatives
Analysis of the pros and cons of each alternative

IV. Recommended Course of Action

Outline of recommendation
Principal reasons for supporting
Specific steps required for successful implementation
Results expected

This case confirms why families should not do business together. The case centers on the going concern
about the ownership and management of a bar originally started by the father of the family. There is a verbal
agreement between the parents and their son about the payment for the establishment; this was declared in
front of the parents and their attorney.

The income statement for Crowne Inn shows that the establishment is operating with a modest profitability.
The credit for this success is given to the son Bruce. The sales of alcoholic beverages in the United States
have increased, but the bar industry has been experiencing fluctuations, to keep the establishment a growing
concern will require that the owner(s) keep up with current trends while maintaining the existing clientele.
The location of the establish seems to be appropriate to continue to gain in profitability.

There are already three options for the conclusion of this disagreement in place. Option 1 is the have the son
Bruce pay a lump sum, option 2 is to have Bruce pay a smaller lump sum and continue to pay his mother $500
a month for the remainder of her life, and finally option 3 is the sell the bar outright to an outside party. The
main objective is resolving the conflict without injuring the family dynamic further. The mother does not wan
to lose the son but also needs the income for her own survival. By his own admission, any of the option would
alienate the son cause a rift between mother, son, and grandchildren.

First, the original verbal contract needs to become a written contract, this way all parties could read the
agreement in black and white. The reactions to inquiries about the bar and the finances make it appear as if
something inappropriate is taking place. The second step would be to conduct an audit of the books for
Crowne Inn, to make sure all the financial statements are correct. Third, the fair market value for the property
equipment, and reputation of the bar needs to be established. The profitability of the bar since the death of the
 father should also be investigated, with a possibility of Bruce owing his mother half of the profits less what he
has already given her.

The sale of this establishment seems in evitable since no matter which of the above-mentioned options chosen
the bar transfers ownership before the death of the mother. Since the fair market value of the business is the
best option for determining a selling price, use it as the starting point for the real estate. Let the son(s)
interested in the establishment have the first opportunity to purchase the business, giving them a time limit to
make the decision. No matter who purchases the business, contracts need to be written, signed, and sealed, so
everything is kept within legal boundaries.

The family dynamics are what they are; no matter which option is chosen some one will be emotionally
injured. The parties involved are all adults, perhaps this is an opportunity for all of them to step up and behave
like adults. The greatest threat facing this bar is not the competition from neighborhood, but the struggle of th
family that lies within.

BCRC for Students

Case 9: The Crowne Inn
Questions for Financial Analysis of the Case
If requested by your instructor, key-in your answers as appropriate and email them:

1. Describe the difference between an S corporation and a C corporation. What

advantages/disadvantages are there for organizing as an S or a C corporation? How was the
Crowne Inn organized? Do you think this was a reasonable organization?

2. Calculate the compound annual growth rate in sales from 1982 to 2000 (data in Exhibit
2). If inflation was, on average, 4% per year during the 1982-2000 time frame, what was
the real growth rate in sales? How does this real growth rate compare to the trend in sales
of beer as indicated in the case? To what do you owe this difference in Crowne Inn trend in
sales vs. the national trend?

3. a. Discuss the financial performance of the Crowne Inn from 1997-1999. In your
discussion, calculate the Gross Profit Margin, Pre-tax Profit Margin, Pre-tax Return on Equity,
Pre-tax Return on Assets, Total Debt to Total Assets, and Inventory Turnover (based on cost
of goods sold).

b. Judging the income statement on a common size basis as presented in Exhibit 4, how did
the Crowne Inn perform over the last three years?

4. Assume that Harvey and Barbara Johnston had requested that Bruce pay them a lump
sum at the beginning of 1994 in lieu of monthly payments. Assume that, in addition to the
$500 monthly payments and $23,500 mortgage amount, health care for the two of them
cost a combined $700/month. Calculate the lump sum amount that Bruce would have had to
have paid his parents assuming that they both would live another 20 years and that their
required rate of return was 10%.

5. How does your answer to #4 change if the discount rate for the $1,200 is 7% instead of
10%?

6. Assume in 2000, based on information in Exhibit 1, that pre-tax cash flow to Bruce and
his wife was $94,950. Assume that this amount would grow at a constant rate of 6% per
year for a very long period of time. Assume that the tax rate for Bruce and his wife is 35%.
Assume further that an appropriate discount rate is 10% per year. What is the present value
of the after-tax cash flows to Bruce and his wife?

7. In your opinion, is $60,000, the amount that Bruce offered to pay, too high, too low, or
just right? Justify your response.