1. S w
9B09N014
DOUGLAS FINE FOODS
Samira Amini and Jeff Goodwin wrote this case under the
supervision of Professor James E. Hatch, Mary Crossan and
Gerard
Seijts solely to provide material for class discussion. The
authors do not intend to illustrate either effective or ineffective
handling of
a managerial situation. The authors may have disguised certain
names and other identifying information to protect
confidentiality.
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3. his father and brothers, who were actively managing multiple
business ventures.
In 2007, Matthew Douglas purchased one-third of the family
business and became more involved in
growing DFF. Later that year, he was asked to take the helm as
interim CEO for a couple of months while
his brother, Jason, took time for a personal sabbatical. Things
ran smoothly for his trial CEO period, and
Douglas made an effort not to “shake things up,” never placing
much effort on a strategic agenda because
he knew his brother would pick up where he had left off when
he arrived home. Unfortunately, no one
could have prepared Douglas for what happened next. Jason
arrived back in Canada rested and re-thinking
his role in the business only to face the sudden passing away of
the middle Douglas brother Mark. After
much consulting with his soon to retire older brother Jason it
became a moment in time when Douglas said,
1 Although this case is based on an actual situation, some
financial and other details have been disguised at the request of
the company.
Page 2 9B09N014
“I can let this crush me or use it as a catalyst.” He chose the
latter and, in June 2008, took the full-time
reins as CEO of DFF in June of 2008.
4. By 2008, DFF had grown to be the largest privately held
Canadian food services company. Still
headquartered in Calgary, DFF provided nutritious and healthy
business dining, residence and camp food
services, catering, vending machine services as well as food
service equipment and design. The business
serviced clients in various industries, schools, sports arenas,
concessions, warehouses, government offices
and corporations. DFF was proud to employ 850 full-time staff
and relished in the history and legacy of the
company’s tremendous growth story, from a $1 million business
in 1991 to a $30 million business by
2008.
The business focused on creating relationships with a wide
range of organizations that had a consistent
need for food and beverage services. Not just a “food provider,”
DFF offered a broad spectrum and full
array of services in nearly every aspect of the value chain,
beginning with the design, construction,
financing and equipping of a food service facility (e.g. a
cafeteria) and extending to staffing and providing
full-scale operations for delivery of the food service. In the
majority of cases, the food services
infrastructure was already in place and DFF offered its expertise
in working to adjust and augment the
associated people, programs and operations.
DFF prided itself in its ability to offer flexible and unique
services to clients. The company was able to
accommodate any catering requirement from simple luncheons
to elaborate high-end banquets for
hundreds of guests and even outdoor events, such as corporate
picnics for thousands of patrons. DFF
offered several dining concepts for its institutional clients:
5. Main Street Café for business, university and
college settings; and Hero’s for high schools. The company also
offered the products of a number of
national “brand” franchises to strengthen and support their
services in large venues.
Main Street Café was DFF’s own internally branded dining
concept that offered product variety and menu
flexibility, with a full range of healthy options. The Hero’s
program provided school cafeterias with
excellent food quality and variety at reasonable prices and was
able to compete with outside retailers. An
important asset was DFF’s position as an authorized franchisee
for four popular national chains: Tim
Hortons, Canada’s largest coffee chain; Pita Pit, a retail chain
specializing in healthy, fresh food; Subway,
the world’s largest sandwich chain and Starbucks, the world’s
largest coffee chain, all of which provided
the necessary complement of brand recognition. In addition,
DFF had its own unique blend of first-quality
coffee, JOJO Stop, which was made with top-of-the-line
equipment and was designed to compete with the
national gourmet coffee retailers.
DFF’s corporate goals provided important guidelines for
decision making in the organization. Douglas felt
they both provided guidance for steering the company in the
right direction and embodied many of the
lifelong family lessons instilled in the company’s history.
Customers — To understand and contribute to their success
while providing the best product and value-
added service as our customers perceive it.
Employees — To attract and retain enthusiastic, knowledgeable
people who will enjoy delivering top-
6. quality food and value with courtesy and excitement.
Community — To be one of the most valued corporate citizens
in the communities in which we work.
Sustainability — To engage actions, attitudes and habits that
lead by example in respecting our
environment.
Page 3 9B09N014
Profitability — To obtain the most attractive bottom-line
profitability for our shareholders and investors
while achieving our stated customer and employee objectives.
MATTHEW DOUGLAS
From a very early age, Douglas had learned about
independence, hard work and integrity. As he was
growing up on the family farm, his father had taught him the
basics: “Be honest, work hard, treat people
well and respect the land.” Throughout his life, Douglas lived
and breathed these principles, which were
reflected in his everyday decision making. Born into a family of
entrepreneurs, he started his own retail
business, Douglas Waterbeds, in 1979, while attending the
University of Calgary and studying criminology
and law. His deep-rooted sense of entrepreneurial spirit was
7. evident as he grew the small dorm-room
venture to a four-store chain business. Subsequently, Douglas
tried his hand at various other businesses:
medical waterbeds, a bacteria product that eliminated grease
and odor in plumbing systems, real estate
ventures, coordinating provincial sailing regattas, and building
one of the largest cooking stores in the
Country — all before he was 30 years old. Each time, he built
personal shareholder value and sold off the
enterprise before moving on to a new challenge. In 1989, his
two brothers bought a hotel restaurant
complex, the Central Park Hotel. Douglas took a keen interest
in the business and began assisting with day-
to-day management activities, helping to transform the hotel
into a top-notch business and leisure lodging
destination.
Douglas’s personality complemented his long list of
achievements. By his current age of 53, he had been a
national-level athlete, had climbed Mount Kilimanjaro, had
skydived, had scuba dived in the Great-Barrier
Reef, had obtained his pilot’s license, spent a decade acting on
stage, film and TV and had published a
book. His positive attitude and integrity had been transcribed
into his everyday life, especially with his
customers. He fostered a culture of responsibility,
accountability and teamwork and consistently remarked
how “employees worked in his organization because they
wanted to be there — not because they were just
looking for a ‘job’.”
INDUSTRY
The industry was divided into commercial food service (food
and beverage outlets and restaurants), which
8. represented 79 per cent of the market, and non-commercial food
service (food services non-restaurants),
which represented 21 per cent of the market. See Exhibit 1 for a
further breakdown of the market
segments.
The food services industry in Canada was mature with a high
degree of competition. Canadian food service
operators were expected to face their most challenging business
environment in the next decade as
cutbacks on consumer and business spending were beginning to
surface amid a potential economic
slowdown. A Canadian Restaurant and Foodservices Association
(CRFA) report2 forecast real growth in
food service sales to slip by 4.6 per cent, which equated to an
industry sales forecast of nearly $59 billion
for 2009. See Exhibit 2 for historical and forecast food service
sales.) On the basis of this economic
outlook, commercial food service sales would slip 2.5 per cent
in 2009, and, in particular, total caterer sales
were forecast to drop by 3.0 per cent due to a decline in social
catering and reduced contract catering
spending in the business segment. Non-commercial food service
was expected to see a modest increase of
2.8 per cent, and institutional food service leading the growth
with a 5.8 per cent increase. See Exhibit 3
for the latest detailed forecast of food services sales by channel.
2 Source: CRFA's InfoStats, Statistics Canada, fsSTRATEGY
Inc. and Pannell Kerr Forster,
9. Page 4 9B09N014
Food costs (35.4 per cent of sales) and labor costs (31.5 per
cent) accounted for the two largest expenses
borne by foodservice operators.3 See Exhibit 4 for a breakdown
of average industry expenses as a
percentage of operating revenue.) Although the average pre-tax
profit was 4.3 per cent of sales, this
percentage varied significantly by province (from 2 per cent to
7 per cent). Profit margins diverged even
further from one sector to the next.
COMPETITIVE LANDSCAPE
DFF was vying to compete with global, regional and local
players in the food services business. In Canada,
only three major global competitors accounted for the majority
of the food services business. These
companies each had Cdn$20 billion or more in worldwide sales
and tended to focus on the larger contracts.
Similar to DFF, a handful of well-recognized regional Canadian
competitors each had their own target
clientele and levels of service in the marketplace. In addition,
DFF always kept a watchful eye on local
competition. With low barriers to entry, a significant number of
“mom and pop” shops had opened,
although these competitors tended to be smaller, niche players
that only serviced local clientele. Although
this atmosphere sometimes made small local contracts
competitive, these undersized players did not have
the scale or expertise to supply larger institutional clients.
10. In the food services business, the name of the game was
reputation, relationships and retention. If a
company was doing a good job of servicing a client, it was hard
to lose the business. Typically, the larger
food services contracts were tendered through a request for
proposal (RFP) method and were fixed five-
year contracts. The RFP required not only a formal response but
usually also included presentations and
product samples. It was not uncommon for a company to keep a
contract well beyond its expiration date if
the supplier was providing excellent service. By winning a new
contract, a vendor was typically taking
business from a competitor who was inadequately servicing the
needs of the client.
Global Competitors
Compass Group
Compass Group4 was founded in 1941, and was the world’s
largest food service company with operations
in more than 60 countries. Compass Group provided hospitality
and food service for a variety of businesses
and public sector clients, including cultural institutions,
hospitals and schools. It also offered vending
services and catering and concession services for events and
sports venues. Compass Group employed
more than 365,000 employees worldwide. It grew to its
leadership position through aggressive expansion
and numerous acquisitions and was now focused primarily on
streamlining operations and maximizing
profits. It saw continued growth coming from its efforts to
extend additional services to clients, particularly
in the corporate hospitality segment. Compass was also working
to expand its facilities management
11. business. Compass Group in Canada tended to focus on health
care, education (college and university),
remote sites and travel concessions. The company’s total
revenue and EBITDA (earnings before interest,
taxes, depreciation and amortization) were US$19.1 billion and
US$1.5 billion respectively for fiscal
2008.5
3 Source: CRFA’s Foodservice Operations Report,
4 Source: Hoovers Company Search
5 Source: Google Finance and Capital IQ
Page 5 9B09N014
Sodexo
Sodexo6 was the world’s number-two contract food service
provider with operations in 80 countries, where
it employed more than 212,000 staff. Its subsidiaries offered
corporate food service and hospitality
services, vending services and food services for educational
institutions and other public sector clients.
Other operations included event concessions, health care
foodservices and such outsourced facilities
management services as cleaning, grounds keeping and laundry.
Sodexo was focused on winning new
clients for its outsourcing services, especially in the area of
12. facilities management. The company had also
been making targeted acquisitions to expand both its services
and geographical reach. In Canada, Sodexo
tended to focus more on universities, private schools, health
care and camps. Sodexo’s total revenue and
EBITDA were US$20.4 billion and US$1.03 billion respectively
for fiscal 2008.7
Aramark
Aramark8 was the world’s number-three contract food service
provider and was also a leader in the
uniform supply business. It employed 250,000 staff. Aramark
offered corporate dining services and
operated concessions at many sports arenas and other
entertainment venues. The company also provided
facilities management services and continued to look for
opportunities to expand not only its client base
but also the number of services it supplied to its existing
customers. Aramark targeted industry segments
such as correctional facilities and health care operators. Keen
on international expansion, the company had
recently focused on Europe and Asia, where it was the official
food service provider for the 2008 Olympic
Games in Beijing. Aramark in Canada focused on education
(colleges, universities and private schools),
health care, business dining and remote camps. Aramark’s total
revenue and EBITDA were US$13.29
billion and US$1.04 billion million respectively for fiscal
2008.9
Regional Competitors
Diana Hospitality
13. Diana Hospitality was formed in 1988 and provided a workplace
environment with quality food. The
company offered hospitality programs and management services
to a wide range of clients who valued
fresh on-site culinary services, with a strong focus on retail
food service partnerships. It had experience in
the health care, education, and business and industry sectors
where labor management agreements were
required. Diana Hospitality’s Food Consulting Services Inc. was
a management advisory service
specializing in innovative, resourceful solutions for clients who
wanted to improve their food services.
WilliamsFoods
WilliamsFoods had built a strong reputation by providing
quality food products and exceptional customer
service. The company continued to grow in size and strength
and enjoyed exceptional corporate
partnership with its clients. WilliamsFoods offered event
planning and management, culinary expertise,
signature brands and cafeteria services. WilliamsFoods took
care of all aspects of food service at a site,
including vending with nationally branded products and their
own prepared foods. WilliamsFoods also
specialized in facility design from complete renovation to minor
makeovers. The company provided food
services to corporations, government, industrial sites, sports
centres, golf clubs, educational facilities, fine
6 Source: Hoovers Company Search
7 Source: Google Finance and Capital IQ
8 Source: Hoovers Company Search
9 Source: Google Finance and Capital IQ
14. Page 6 9B09N014
dining restaurant facilities and high-profile tourism
destinations. For WilliamsFoods, the choice of client
was as important an issue as the choice of a food service
company must be to any potential client.
WilliamsFoods experience was built on quality performance and
was dependent on management
capability, high staff morale and the insistence that their staff
show a high degree of commitment to each
contract. The company believed that its staff must feel a degree
of “pride and ownership” and consequently
be directly accountable for all aspects of each contract.
West Coast Company (WCC)
WCC was a family-run business originating in Western Canada,
now with locations across the nation.
WCC had 70 major clients and primarily provided services to
the education segment (secondary and
college education) as well as health care. WCC had good
relations with its customers and had a very
similar culture and skill set to DFF.
DFF’S FOOD SERVICES CLIENTS
Education
15. This segment consisted primarily of cafeteria services and
vending machines in secondary schools,
universities and colleges. The university and college sector was
a mature market and was characterized by
a heavy requirement for capital and high commissions.
Universities, which tended to be very involved with
their food service offerings, required a customized personal
approach, were not always concerned about
low-cost but sought good, quality service that formed a part of
their on-campus offering. The college
sector, although similar to the university sector, offered more
emphasis on margin returns for the food
service provider. High schools offered very thin margins, were
primarily driven by the financial return to
school boards and tended to focus less on quality. Private
schools were also similar to the university and
college sectors and shared their requirements for very high-
quality service, but provided excellent margins.
The education segment represented 29 per cent of DFF’s
business.
Recreation
Many recreation facilities included a “snack shop,” a full-
service restaurant or a concession-style service.
This segment consisted of both amateur and professional venues
and was associated with an upfront
investment, high margins and profit sharing with partners. The
professional team sector (e.g. the National
Football League, the National Hockey League and Major League
Baseball) was dominated by larger
players in the market and offered minimal entry to mid-level
players. Municipal arenas and sports
complexes were abundant, and contracts tended to be awarded
16. on shorter cycles, typically every three
years. The recreation segment represented 9 per cent of DFF’s
business.
Health Care
Most health care facilities either operated or leased cafeteria
space for staff, patients and visitors. This
segment included patient food services and was characterized by
high margins and adequate quality levels.
Recently, health care facilities had begun to offer branded food
outlets to enhance their offering. This
segment represented 6 per cent of DFF’s business.
Page 7 9B09N014
Government
Similar to the education segment, government clients usually
required cafeteria services and vending
machines for municipal, provincial and federal facilities.
Government-funded organizations tendered their
food services through the RFP process. This segment
represented 21 per cent of DFF’s business.
Business and Industrial Clients
17. A large number of businesses and industrial clientele offered
cafeteria services in their factories, office
buildings or warehouses. These contracts offered food services
to anywhere from 10 to more than 1,000
employees. Business clients focused more on quality of food for
their employees. Business and industrial
clients represented 35 per cent of DFF’s food services business.
Services
Cafeteria and Food Services
The majority of DFF’s business could be characterized as food
services, which included staffing, preparing
and selling high-quality cafeteria-style food. In the majority of
cases, the physical infrastructure was
already in place, and DFF worked to adjust and augment the
people, programs, operations and food
offerings. This service accounted for the majority of DFF’s
services revenue at 57 per cent.
Catering and Special Events
Catering and special events were typically based on relationship
sales. Many of the contracts were referrals
in this segment, which had been experiencing growth. The
service offered high margins and had the benefit
of set beginning and end dates. This segment represented 22 per
cent of revenue to DFF
Branded Food Outlets
Branded retail offerings, such as Subway, Pizza Hut and Tim
18. Hortons, provided high brand recognition
and was a growing segment. These outlets were franchised and
operated by DFF and could be provided to
any segment as the sole food services provision or to
complement other cafeteria services. Although the
business offered lower margins, branded food was seen as a
necessity to compete. Branded food outlets
accounted for 11 per cent of DFF’s services revenue.
Vending Sector
Vending services offered slim margins and required continuous
maintenance and stocking. Although the
major companies that participated in this space were profitable,
vending machines sales were slowly
declining. Companies looked to keep existing vending contracts
and not necessarily seek out new business.
Vending services accounted for 6 per cent of revenue for DFF.
Food Services Design
Another recent trend focused on adapting and enhancing
existing facilities. These projects required
expertise in the industry and often entailed redesigning cafeteria
and food court settings (e.g. adjusting the
layout, service format, equipment, physical facilities and
interior design) to enhance revenue and improve
Page 8 9B09N014
19. efficiencies. Although most food services companies offered
some form of design, only a few did it well.
Food services design accounted for 4 per cent of DFF revenue.
CURRENT SITUATION
In June 2008, Douglas’s eldest brother announced that he would
like to retire. As a result, Douglas was
working on a financing arrangement to acquire all the remaining
shares in the business and become the
sole owner of the family enterprise.
Douglas spent his first several months as the official CEO
reviewing operations, talking to employees,
meeting with suppliers and discussing operational agendas with
DFF’s clients. After taking all this into
consideration, Douglas sat back and wondered in what direction
he should lead the business. After nearly
every question posed to the staff, he wound up hearing the same
answer: “because we’ve always done it
that way.” As the new CEO, he wondered how he would be able
to change the mindset of employees who
had worked in the Douglas family business their entire lives.
Although the business was profitable, he
wasn’t sure what to do and how to prioritize his decisions.
One option Douglas had at his disposal was to position DFF for
either immediate or eventual sale to a
financial buyer, a private equity firm or a strategic
buyer/competitor. His attitude had always been to work
every day to prepare his companies for a sale. Having the good
fortune to have his hand in many
entrepreneurial activities in his life, Douglas understood what it
20. took to build a successful organization,
how hard it was to be profitable and how quickly the business
reputation could be tarnished. DFF had
achieved a positive reputation in a mature, well-established
industry, which made the company a ripe
acquisition target. Recently, a few of DFF’s smaller competitors
had been acquired by larger international
players; Douglas speculated he could be next. On the other
hand, he needed to make a pragmatic decision;
he enjoyed the earnings and leadership role and wasn’t sure how
he would be perceived if he sold the
business before even giving it a try as its new leader. Douglas
wondered what changes could be made to
make the business even healthier and more attractive to a
potential buyer.
Douglas thought about where he should position the company to
compete. He knew that if DFF
consolidated a number of the smaller or mid-level market
players, the company would have a stronger
advantage against larger competitors and would have a unique,
more customized approach to serve
segments of the market. Because margins seemed to be
tightening year after year and, except for the larger
competitors, few companies had critical mass in the mid-market
space, he wondered whether this situation
was an attractive opportunity to take over other companies.
He was also aware that the large contracts, typically won by the
bigger competitors, offered higher margins
and could be won without significantly increasing the number of
employees or adjusting operations. This
option was advantageous because it would grow volume,
achieve economies of scale and quickly grow
EBITDA to position the company for a possible sale.
21. Another option Douglas contemplated was dedicating his efforts
to growing the business organically.
Plenty of opportunities were out there, and with the right focus,
he felt that he could win some of these key
contracts. He remarked that he already had the best employees
and as a favoured author of his wrote “if
you have the right people on the bus . . . you can go anywhere.”
Considering the maturity of the industry
and the fact he wasn’t exactly getting calls every day asking to
buy his company, maybe consolidation
really wasn’t the right way to go. He considered a few
approaches to organic growth and was unsure which
might work best. Douglas wondered what kind of trends and
product innovation DFF could capitalize on to
give the company a competitive edge. Due to health issues such
as obesity, diabetes and high cholesterol,
more and more people were consciously choosing health and
wellness as a lifestyle and this preference was
Page 9 9B09N014
beginning to be reflected in consumer diets. Privatization and
public–private partnerships by government
and nonprofit organizations were also becoming standard
practice; Douglas wondered how he could
capitalize on this new way of securing business. He could also
work on improving margins by adopting a
low-cost strategy, lengthening trade payments and significantly
lowering input costs. Douglas wondered
whether he could grow by focusing more heavily on his existing
22. clients. Douglas knew that some key
decisions were necessary because, in this industry, you could
choose to either innovate, consolidate
(acquire or be acquired) or be pushed out by stiff competition of
the global players.
FINANCIAL SITUATION
As a private business, DFF had not previously been managed to
impress outside investors or hit lofty share
targets but was run in the most effective manner for tax
planning purposes and to meet the needs of
employees. See Exhibit 5 for the latest financial statements. In
the most recent year, the company had
generated more than $33 million in sales, profit of $235,000 and
almost $1.7 million in EBITDA. On the
other hand, the company had built up a substantial amount of
debt obligations.
In 2008, Douglas agreed to buy out his retiring brother’s shares
of the company for $1 million.10 The
company’s bank had tentatively agreed to provide the company
with the financing required.
Douglas knew the organization had intrinsic value for him but
not necessarily for the market. In talking
with various financial advisors, Douglas learned that the
company needed to achieve roughly $5 million to
$10 million EBITDA to successfully exit the business and
position DFF as an attractive take-over target.
THE AUTO DECISION
A major decision had to be made with respect to DFF’s largest
23. client — Canada Auto Corporation (CAC).
In 2004, DFF had received a phone call from CAC asking
whether DFF would like to bid on the food
services contract for an assembly plant with 5,000 employees. If
DFF won the contract, it would replace
one of its major competitors and heighten awareness of DFF in
the automotive industry. Revenues from the
contract would take the form of a management fee. A
management fee was utilized in businesses in which
the client wished to maintain a high degree of control and was
willing to pay for that control and have a
company with professional experience manage the food services
division.
Initially, DFF had declined the offer to bid as it struggled with
the management fee business model. Under
the proposed contract, DFF would be provided with minimal
financial transparency and control, yet would
be expected to run the cafeteria and food services more
efficiently. After lengthy negotiations with CAC,
DFF decided to proceed with the RFP and subsequently was
awarded the contract.
From 2004 to 2008, DFF continued to make minor
improvements in food services delivery and
increasingly struggled with the conflict between the contract
and DFF’s core values. For example, cost
cutting often trumped quality. Also, retaining and motivating
staff was increasingly difficult, due to poor
labor relations conditions, which had a negative effect on DFF
staff. The cafeteria tended to become the
dumping ground for employee complaints and harassment,
evidenced by an increasing trend toward
conflict between members of the CAC unionized workforce and
the cafeteria staff. Although the contract
24. represented a substantial portion of EBITDA (almost 20 per
cent), Douglas continued to find the contract
difficult because it consumed much emotional and intellectual
time. He felt he was always extinguishing
small fires and was beginning to lose sight of the larger picture.
On the other hand, the contract brought
10 Exhibit 5 does not include the money to be paid to Douglas’s
brother for his share of the company ($1 million), which was
expected to be paid before the end of 2009.
Page 10 9B09N014
significant value to CAC and had transformed its dysfunctional
food services operation into an effective,
break-even operation by improving hours of operation, lowering
costs and doing its best to enhance the
atmosphere of an industry in dire straits.
By 2009, management at DFF had become somewhat reliant on
the strong cash flows from the CAC
contract and many were shocked by Douglas’s decision to
review the agreement and discuss the merits of
declining to submit a RFP for renewal of the contract. Douglas
had always felt uneasy about CAC’s
business model and, looking ahead, he wondered whether these
types of contracts were best suited for
DFF’s core competencies. If the company did decide to walk
away from the contract, how would he
replace the cash flow?
25. In addition, Douglas was worried about the successor liability
provisions of the provincial labour code.
DFF had inherited a unionized workforce when it took on the
CAC contract and was worried about the
liabilities it might incur if CAC went bankrupt. It was no easy
decision.
THE ACQUISITION OPPORTUNITY
Douglas liked the idea of acquiring a company but want to
ensure that any target company would be the
right fit. He also wasn’t sure how much he should pay for a
business. He reasoned that by acquiring a
competitor, he could decrease costs by achieving economies of
scale and grow the top line without adding
many additional staff. His criteria for selecting the appropriate
target relied on strategic alignment,
reputation, culture, technology, human capital, the amount of
cash held by the target, key clients and
market share. Before Douglas had taken over as CEO, a well-
respected manager within DFF had prepared
a list of potential acquisition targets on the basis of the above
criteria; Douglas had narrowed the potential
targets down to two.
The primary acquisition targets Douglas considered were West
Coast Company (WCC) and
WilliamsFoods. Both companies had approximately $8 million
in sales and a cost of goods sold of $3
million. Douglas noted that WCC was facing financial stress as
it had negative working capital, weak
EBITDA and significant debt of $600,000. WCC was generating
$150,000 EBITDA, which Douglas
thought he could substantially improve, given the synergies that
26. could be achieved; however, because
acquiring WCC would be a turnaround situation, the synergies
and operating improvements could be quite
uncertain. He reasoned that he would be able to acquire the
company for a very low price but would need
to take on the debt. WilliamsFoods, on the other hand, was an
attractive target because it currently had
more reasonable profits, no debt and provided the opportunity
for some synergies. However, this
acquisition was likely to be more expensive. See Exhibit 6 for
selected data on the target companies.
Douglas seriously considered this opportunity to grow his
business through acquisition if the price was
right. Given its good relations with DFF, the company’s bank
had tentatively agreed to provide the
financing required to pursue an acquisition.
Douglas used an EBITDA multiple approach for valuation of the
target companies. Acquisitions in the
industry were typically at a price of seven to eight times
EBITDA. Goodwill tended to be high in the
industry because client relationships were paramount to success.
To determine the company’s final value,
Douglas needed to keep in mind that many sellers had an
emotional attachment to certain price points and
thus his offer had to avoid disrespecting entrepreneurs who had
taken their whole lives to build their
business and felt that it had substantial value.
If an acquisition went through, Douglas needed to consider how
the acquired company would be
incorporated into DFF’s existing business. Douglas needed to
ensure that legacy information was
27. Page 11 9B09N014
maintained and that both existing clients and acquired clients
were satisfied with the merger. He also had
to have a financing plan in place.
FROM ENTREPRENEUR TO PROFESSIONAL MANAGER
Lastly and of equal importance to the many decisions that had
to be made was the daunting task of how to
transform the organization from an entrepreneurially oriented
family business to a professionally managed
multimillion-dollar company. The industry and the business
world were changing. Gone were the days of
lack of employment standards. Health regulations were
increasingly important, business partnerships were
no longer solidified on a handshake and workplace safety was at
the forefront of industry news. Douglas
remarked:
In the past, relationships and verbal commitments were all you
needed. In today’s world
clients will call and say “clause 2.2 said you’ll do this — you
have 30 days to comply
before the contract is terminated.”
Competition was tough and needed to be matched by sound
management processes and strong leadership,
28. all of which were deteriorating at DFF. Douglas knew he had
his work cut out for him to transform the
company into a professional setting, and he understood that the
transformation needed to start from the top.
Although the industry was changing, DFF had seen little, if any,
meaningful change. The physical state of
their building had not changed in more than two decades,
information systems were in place but utilization
of such systems was barely adequate. On the people side of the
business, the employees were, in general,
ensnared in a culture that did not match the look and feel one
would expect when dealing with a
multimillion-dollar organization. Excessive tolerance for risk,
use of unprofessional communication, an
absence of a dress code policy and other “home grown employee
habits” would be unheard of in most
Canadian corporate settings. Douglas noted:
Our employees look up to the management team . . . we know
what we’re doing, but we
also need to look like we know what we’re doing. I want to
instill a sense of
professionalism and passion in all of our people, including
management.
Douglas noticed employees were resistant to change. For
example, he had recently asked a payroll
employee why he was filling out a report by hand instead of on
the computer system. The employee
remarked “because that is how we have always done it in the
past.”
DFF had frequently solicited the advice of one of the largest
29. accounting and advisory firms in Canada with
respect to employee relations. The purpose of this survey was to
have employees provide
recommendations for change within the organization. In a recent
survey of DFF administered by the
advisory firm, questions included the following:
If I were the new CEO of DFF the first three things I would
change are. . . .
If I were the new manager of my department the first three
things I would change are . . . .
I am held back by the following inefficiencies in the way we do
business . . . .
The results had provided Douglas with ideas on how to improve
the business. For example, employees felt
strongly about the need to have more autonomy in their roles
and in the decision-making process.
Employees felt their current role limited their ability to provide
recommendations.
Page 12 9B09N014
People management was very important in the food services
industry because client relationships were
30. dependent on service delivery and professionalism on the front
line. As such, DFF aimed to treat its
employees well and understood that compensation was not
always the most motivating factor. DFF
motivated and rewarded its employees in a number of ways,
including providing professional development
(e.g. training and mentoring) and profit sharing.
To top it off, difficulties also existed with the senior
management team, which comprised four executives.
Two of the members were not pleased with Douglas taking over
as CEO and would not likely support his
new direction for the company; however, they held important
legacy information about DFF and its clients.
As a result, meetings had become increasingly difficult because
members held divergent views, which
created an emotional swirl. Douglas was not sure how to
address this issue.
Douglas understood that change began from the top. He noted,
“Culture comes from the leader and you
attract people that believe in the leaders style and vision.” For
change to be successful in organizations,
leaders need to change their own behavior first. Soon after
taking over as CEO, Douglas attended a client
meeting and realized that his behavior and mind space also
needed to change. When the client began
asking questions about the strategy of the organization and in
the direction in which he wanted to take the
business, Douglas had scrambled to find appropriate answers.
He was stuck in the details of managing
because his previous roles in the organization had always
entailed some level of “doing,” (e.g. preparing an
RFP to bid on a new contract). He now recognized, however,
that as CEO, he needed to keep his head out
of the weeds and begin the transformation to become a
31. “thinker.” Thus, his responsibilities and mindset
were no longer merely to manage day-to-day tasks but to worry
about the strategic direction of the firm.
THE DECISION
Douglas knew that the Monday morning meeting would be a
tough one. He was to meet with the
management team and lay out his plan for DFF. Douglas hoped
that the team would understand and
support his vision. The problem was he was not sure what that
vision would be. Should he continue to
grow his business in such a mature industry? He considered
pursuing an acquisition target, but didn’t want
to overpay because cash was already tight. Would the bank
provide the financial support to implement his
plans? What should he do with the CAC business? Regardless of
these decisions, Douglas knew he needed
a change management strategy to deal with the organizational
transformation from entrepreneurial to
professional. As the new CEO, Douglas had his work cut out for
him.
Page 13 9B09N014
Exhibit 1
32. CANADIAN FOOD SERVICE SALES BY COMMERCIAL
AND NON-COMMERCIAL CATEGORIES
Commercial Foodservice (79% Market Share)
Full Service Restaurants (36%):
Includes licensed and unlicensed fine-dining, casual and family
restaurants as well as
restaurant-bars.
Limited Service Restaurants (32%):
Includes quick-service restaurants, cafeterias, food courts and
take-out and delivery
establishments.
Social and Contract Caterers (7%):
Includes contract caterers supplying food services to airlines,
railways, institutions and at
recreational facilities, as well as social caterers providing food
services for special events.
Drinking Places (4%):
Includes bars, taverns, pubs, cocktail lounges and nightclubs
primarily engaged in serving
alcoholic beverages for immediate consumption. These
establishments may also provide
limited food service.
Non-Commercial Foodservice (21 % Market Share)
Accommodation Foodservice (9%)
33. Foodservice in hotels, motels and resorts.
Institutional Foodservice (6%):
Foodservice in hospitals, residential care facilities, schools,
prisons, factories, remote facilities
and offices. Includes patient and inmate meals.
Retail Foodservice (2%):
Department store cafeterias and restaurants.
Other Foodservice (4%):
Includes vending, sports and private clubs, movie theatres,
stadiums and other seasonal or
entertainment operations.
Source: Canadian Restaurants and Foodservices Association,
“Definitions: Foodservice Industry Segments,”
Page 14 9B09N014
Exhibit 2
TOTAL FOOD SERVICE SALES IN CANADA, ACTUAL AND
PROJECTED (1998–2009)
35. FORECAST OF FOOD SERVICE SALES IN 2009 BY
CATEGORY
2009 Forecast
(Millions of Dollars)
% Change '09/'08
Full-service restaurants $20,956.5 –3.1%
Limited-service restaurants $19,147.0 –1.8%
Contract and social caterers $3,780.3 –3.0%
Pubs, taverns and nightclubs $2,304.2 –2.6%
TOTAL COMMERCIAL $46,188.0 –2.5%
Accommodation foodservice $5,937.0 3.5%
Institutional foodservice(1) $3,432.4 5.8%
Retail foodservice(2) $1,178.1 1.2%
Other foodservice(3) $2,162.2 –2.5%
TOTAL NON-COMMERCIAL $12,709.8 2.8%
TOTAL FOODSERVICE $58,897.8 –1.4%
Menu inflation 3.2%
REAL GROWTH –4.6%
36. 1 Includes education, transportation, health care, correctional,
remote, private & public sector dining and military
foodservice.
2 Includes foodservice operated by department stores,
convenience stores and other retail establishments.
3 Includes vending, sports and private clubs, movie theatres,
stadiums and other seasonal or entertainment operations.
4 The commercial foodservice sales and units in this forecast
are based on Statistics Canada’s new Monthly Survey of Food
Services and Drinking Places which replaces the old Monthly
Restaurants, Caterers and Taverns Survey. Comparisons to
previously published data must be made with caution
Source: CRFA's InfoStats, Statistics Canada, fsSTRATEGY Inc.
and Pannell Kerr Forster, CRFA’s 2008 Foodservice
Forecast, http://www.crfa.ca/research/statistics/sales.asp.
Page 16 9B09N014
Exhibit 4
FINANCIAL OPERATING RATIOS – 2006
(AS A PERCENTAGE OF OPERATING REVENUE)
37. Source: 2008 CRFA’s Foodservice Operations
Report,http://www.crfa.ca/research/2008/foodservice_profitabili
ty_
improves.asp,
Page 17 9B09N014
Exhibit 5(a)
DOUGLAS FINE FOODS CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2008
Assets Liabilities and Shareholders’ Equity
Current Assets Current Liabilities
Cash $1,428,223 Bank Overdraft(3) 788,229
Accounts Receivable 758,804 Accounts Payable and Accrued
Liabilities 3,353,883
Inventories 1,224,869 Deferred Revenue 386,571
Prepaid Expenses and Deposits 122,092 Income and
38. Commodity Taxes Payable 66,542
Life Insurance 648,742 Current Portion of Long-Term Debt
679,418
Loan Receivable from Related Party(1) 748,361 Current
Portion of Obligation Under Capital
Leases
336,945
4,931,091 5,611,588
Loan Receivable from Related Parties(1) 88,399
Long-Term Debt(4) 1,876,194
Equipment and Leasehold Improvements 14,932,117
Obligations under Capital Leases 485,089
Less: Accumulated Depreciation 11,382,671
Net Fixed Assets 3,549,446
Shareholders’ Equity
Goodwill and Intangible Assets(2) 1,044,984 Share Capital
215,609
Contributed Surplus 200,170
Retained Earnings 1,225,270
1,641,049
Total Assets $9,613,920 Total Liabilities and Shareholders’
Equity 9,613,920
Note 1: These loans are interest free and payable on demand.
Note 2: A large portion of goodwill arose from acquisitions.
Note 3:The bank automatically nets cash balances and
overdrafts although these items are seen separately in the
balance sheet. Interest is charged on the loan at Bank Prime
plus from 35 to 225 basis points based on certain
performance indicators. As of September 30, 2008 the company
39. had a line of credit at the bank of $975,000 of which
none had been utilized. The line is secured by a general security
agreement over the assets of the company.
Note 4:The Company had a variety of loans outstanding.
Interest rates varied from 6.75% to 10%. Collateral security
provided varied from a general security agreement to a second
mortgage on certain assets.
Page 18 9B09N014
Exhibit 5(b)
DOUGLAS FINE FOODS CONSOLIDATED STATEMENT OF
OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2008
Sales $33,192,512
Cost of Goods Sold 14,239,975
Gross Profit 18,952,537
Expenses and Other Income
Operating Expenses 18,437,214
Depreciation and Amortization 978,282
Other Interest and Bank Charges 193,806
40. Interest on Long-Term Debt and Capital Leases 217,812
Debt Accretion Expense 67,223
Contract Management Fee Income - automotive industry –
458,700
Sundry Income – 327,248
Contract Management Fee Income - other – 447,516
18,660,873
Earnings before Interest, Taxes & Depreciation (EBITDA)
1,681,564
Earnings (loss) before Income Taxes 291,664
Income Taxes 56,301
Net Earnings $235,363
Page 19 9B09N014
Exhibit 5(c)
DOUGLAS FINE FOODS CONSOLIDATED STATEMENT OF
CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 2008
41. Cash provided by:
Operations
Net Earnings (loss) $235,363
Items Not Involving Cash
Depreciation and amortization 978,282
Decrease (increase) in Cash Surrender Value of Life Insurance –
27,541
Debt Accretion Expense 67,223
Gain on Disposal of Equipment –7,174
Loss on Disposal of Equipment 13,125
Net Change in Non-Cash Operating Working Capital
Accounts Receivable 121,649
Inventories –75,133
Prepaid Expenses and Deposits –40,506
Accounts Payable and Accrued Liabilities –675,462
Deferred Revenue –13,111
Income and Commodity Taxes Payable –45,445
Loan Receivable from Related Party –748,361
–217,091
Financing
Repayment of Long-Term Debt –714,669
Borrowing of Long-Term Debt 400,000
Repayment of Obligations under Capital Lease –370,411
Borrowing of Obligations under Capital Lease 329,356
Net Advances to Shareholders –88,399
–444,123
Investments
Purchase of Intangible Assets 748,361
Purchase of Equipment and Leasehold Improvements –508,991
42. Proceeds on Disposal of Equipment and Leasehold
Improvements 48,162
287,532
Decrease in Cash 373,682
Cash, Beginning of Year 1,013,676
Cash, End of Year $639,994
Cash is comprised of
Cash 1,428,223
Bank Overdraft (788,229)
Net Cash 639,994
Source: Company files
Page 20 9B09N014
Exhibit 6
SELECTED DATA ON ACQUISITION TARGETS
(IN CDN$000)
WilliamsFood
West Coast
Company (WCC)
![S w
9B09N014
DOUGLAS FINE FOODS
Samira Amini and Jeff Goodwin wrote this case under the
supervision of Professor James E. Hatch, Mary Crossan and
Gerard
Seijts solely to provide material for class discussion. The
authors do not intend to illustrate either effective or ineffective
handling of
a managerial situation. The authors may have disguised certain
names and other identifying information to protect
confidentiality.
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