Corporate Valuation. Massari Mario

– that is, about €205 per sqm.

Zeta management, taking into account the particular crisis currently afflicting the real estate market, believes the average rental cost per sqm can be squeezed down to €194 (Exhibit 2.16).

Exhibit 2.16 Evolution of average rental cost per sqm

      Euro

      Assumptions on Promotional Activities Costs

      As said, Zeta promotional activities are managed by the central structure, which takes care of the advertising campaign with national reach and, partly, of the promotional campaigns at single points-of-sale level. In t0, Zeta has borne costs linked to promotional activities of €31 million (equal to about 2.8 percent of revenues).

      For each year of the business plan, the promotional activities costs are calculated as the algebraic sum of:

      ● The costs of the promotional activities of t0, increase by 1 percent CAGR each year

      ● The additional costs deriving from the opening of new points of sale

      ● The cost saving from the closing of some old points of sale

      Assumptions on the Logistics Management Cost

      Zeta manages the logistics in a centralized way. As such, suppliers deliver their goods at the central logistics warehouse of Zeta, which in turn redistributes the goods to the points of sale. In t0, Zeta has borne logistics management costs of €62 million (5.6 percent of revenues).

      For each year of the business plan the logistics management costs are calculated as the algebraic sum of:

      ● The costs of the logistics management of t0, increase by 2 percent CAGR each year

      ● The additional costs deriving from the opening of new points of sale

      ● The cost saving from the closing of some old points of sale

      Assumptions on the Central Structure Costs

      The activity of Zeta points of sale is coordinated in a centralized manner by the holding, which also manages, inter alia, the following activities:

      ● Purchase management

      ● Definition of the commercial strategy

      ● Business financial control

      ● Administration

      ● IT management

      In exercise t0, central structure costs have been €21 million (equal to 1.9 percent of revenues). During the business planning, Zeta management has hypothesized that these costs grow by 2 percent CAGR each year.

      Assumptions on Working Capital

      At the end of t0, Zeta working capital is negative:

      ● Trade credits are practically zero, thanks to the very business activity of Zeta.

      ● Trade debts outweigh the value of inventory.

      In preparing the business plan:

      ● Trade debts have been estimated based on the average days payable outstanding, which Zeta management estimates will decrease from 90 (t0) to 85 (t5).

      ● Inventory has been estimated based on the assumption that the company maintains about €850 of inventory for each commercial sqm managed.

      Assumptions on the Capital Expenditures

      The investments mainly relate to the points of sale. As anticipated, over the plan horizon, these are expected to evolve in number as an effect of management's opening and closing decisions. The capex envisaged in the plan relates to mainly three areas:

      1. The maintenance capex necessary to guarantee the normal operations of the points of sale.

      2. The growth capex aimed at improving some of the points of sale. As anticipated, Zeta management expects to renew 20 points of sale in each exercise.

      3. The growth capex needed to open the new points of sale (35 in total over the plan, as explained above).

      Conclusions

      This business case shows us some general rules applicable to the commercial companies selling goods through proprietary stores. Usually, the planning process starts from the forecasts on the evolution of the following:

      ● Commercial surface managed by the company, which is in turn a function of the number and dimension of the points of sale.

      ● Revenue per sq foot of managed commercial surface. In turn, this is forecast based on:

      ● The expected evolution of the competition level among the different actors in the market.

      ● The expected evolution of the number of the points of sale. For instance, the average revenues per sqm are positively influenced by the decision to close the points of sale underperforming versus the average. On the contrary, in the short run, they could be negatively affected by the decision to open some new points of sale, since the new points of sale can reach regime profitability only after a certain time lag (which depends on the industry features).

      ● The frequency of the interventions aimed at renewing the points of sale. Generally speaking, after a renewal intervention, the average revenue per sqm soars.

      ● The new commercial/promotional activities envisaged in the plan horizon.

      The major part of the operating costs is represented by the costs incurred to purchase the finished goods to be sold in the point of sale. In general, their incidence (and their effect on the contribution margin) is a function of the forecasts on the evolution of average unitary prices paid to suppliers.

      The other most relevant cost items attributable to the commercial activity are:

      ● Sales force employees' costs. For commercial companies operating through a points-of-sale network, most employees are engaged in the stores.

      ● Rental costs. These are factors when points of sale are not proprietary.

      ● Promotional activity costs. These consist of both advertising with local/national reach and initiatives carried out at the single point-of-sale level.

      ● Logistics management costs. Usually, suppliers deliver the finished goods to the central logistics warehousing of the commercial company, which in turn redistributes them to the different points of sale on the basis of their needs.

      ● The points-of-sale activity is coordinated by a central entity/structure. In the business planning phase, it is thereby necessary to carry out a series of forecasts also on the costs to run the central management structure.

      ● Working capital available. The nature of the business activity of commercial companies is such that working capital is usually very close to zero or even negative.

      ● Capital expenditures. Capex is mainly related to points of sale and is made up by three types:

      ● Maintenance capex, necessary to guarantee the normal operations of the points of sale

      ● Growth capex to better already existing points of sale

      ● Growth capex to create new points of sale

      2.3.3 Companies Operating on Order

      Company Kappa activities are:

      ● The realization of feature animated movies in 3D

      ● The creation of new characters

      ● The development of the storyboards

      Kappa activity is carried out by using digital technologies.

      In general, each commission managed by the company is independent from the other ones the company is contemporarily working on. Duration of commissions is variable, and the most