Old Nam Kee

In 1956, Mr. Nam started Nam Kee Chicken Curry Puff with a small stall inside a coffee shop outside the former Capitol cinema. Each curry puff was hand-made and properly sealed to lock in the aroma of curried potatoes, chicken, a slice of eggs and spices.

Mr. Nam started the business with $10,000 and his entirely family helps out at the tiny stall to churn out enough curry puffs to meet customers’ demand. In 1963, Mr. Nam started his first branch near Katong. The Katong stall proves to be a hit with those living in the East and his curry puff ‘loyalist’ grows. By the time Mr. Nam opens his third stall in Toa Payoh in 1970, he was very sure that a central kitchen is a key piece of his expansion plan.

Mr. Nam managed to set up a ‘central’ kitchen in a shop house along Balestier Road in 1972 through borrowing from OCBC. By the end of 1974, Nam Kee’s Balance Sheet as follows:

Balance Sheet as at 31 Dec 1974

| |$ | |$ |
|Fixed Assets | |Capital | |
|Land and Buildings |42,000 |Shareholders’ Equity |58,000 |
|Kitchen Equipment |10,300 | | |
| |52,300 |Long Term Liability | |
| | |Loan from OCBC |20,000 |
|Current Assets | | | |
|Inventories |7,000 |Current Liabilities | |
|Cash on Pakd |20,700 |Trade Creditors |2,000 |
| |27,700 | | |
| | | | |
|Total Assets |80,000 |Total Equity + Liabilities |80,000 |

Mr. Nam is aware that if he wants to further expand his business, he would have to find an investor. He listed down a list of things he needs to cater to the increase in business volume.

Mr. Nam’s wish list
1. Delivery Van $5,000
2. Kitchen Equipment $13,000
3. Operating Cost $12,000 per year
4. Expansion (2 stalls) $16,000
5. Marketing $4,000

In addition, he hopes to par down the bank loan by half and still keeps $20,000 as operating cash flow.

In early 1975, Mr. Nam would turn 50 years old within a couple of months. He is also worried about succession plan as his children show little interest in the business.

One day in Mar 1975, Mr. Nam was introduced to Mr. Pak over a dinner and became good friends. Mr. Pak, age 35, was working with a bank, became very interested in Mr. Nam’s business.

Pak always addresses Mr. Nam as 老南, and he would spend a lot of time in helping Mr. Nam’s curry puff business. Nam taught to himself that Pak would make a good successor and he decides to invite Pak to invest in the Curry Puff business. Nam told Pak that if he invests $40,000, he would give him 40% of the company. However, Pak does not have $40,000 and he asked Nam for installment payment. It was agreed that Pak would pay up $20,000 upfront and the other $20,000 over 4 years.

In the next 4 years, Mr. Nam’s chicken curry puff businesses grew but he was only able to open 1 more stall due to the constraint of cash. Throughout this period, Pak continues to play a pivotal role in the business. In 1980, Pak suggested to Nam to change the company name to Old Nam Kee and convince him in spending some money to market the brand. The campaign was well received and Old Nam Kee’s revenue was up more than 20% compared to the previous year.

In late 1980, Pak learned that rather to grow the business organically; Old Nam Kee could start a Franchising program. Pak, now a Bank Manager, proposed to Mr. Nam for another round of capital injection to venture into franchising.

Pak estimates that the company needs $100,000 of fresh capital to embark on a Franchising Program. Pak told Nam that the company will issue another 60,000 and 40,000 ordinary shares to Nam and himself respectively if they subscribe to the cash call fully. He also explains that Nam continues to remain as the majority shareholder based on the share allocation. Nam sees no catch in the issue of shares and at the back of his mind he was concerned with coming up with the money as most of his assets are tied to the business.

On the other hand, Pak got to know some wealthy individuals that were keen to support him. He did not disclose his ‘dealings’ with the private investors to Nam. Pak was fully aware of Nam’s financial position and as the deadline of the cash call near; he came up with the following proposal.

|Shareholders |Pre Cash Call |Post Cash Call |
|Nam |60,000 |60% |90,000 |45% |
|Pak |40,000 |40% |80,000 |40% |
|Third party |- | |30,000 |15% |
|Total no. of shares |100,000 |100% |200,000 |100% |

Pak told Nam that he only needs to come up with ½ of the money required by the cash call and continues to remain as the largest shareholder of the company. Moreover, combined with his 40% stake, they continue to retain control of the business. The third party investor proposed by Pak is merely a ‘sleeping’ partner.

Nam thought about it and since he is getting old and Pak might eventually takes over the helm, he agreed to the arrangement.

In the following years, Pak began to marginalise on Nam’s position with the support of the third party investor. Firstly, he took over Nam’s position as Managing Director and slowly stripped of most of Nam’s responsibilities in the business.

Nam was utterly disappointed with Pak’s behaviour but there was nothing he could do. In mid 1984, Pak raised $2 million from some private equity funds for 40% stake in the firm. Essentially valuing the company at $3 million pre-money.

At this stage, Nam’s stake is reduced to below 30% and he has totally lost control of the business. In late 1985, Pak named himself as the Chief Executive Officer of the company and proposed to buy over the remaining of Nam’s stake for $1.2 million. Nam eventually sold his stake but make Pak promise to retain the company name of ‘Old Nam Kee’ so long he remains as CEO of the company.

All the characters, names and events used in this case study are fictional. The reader should be aware of his legal responsibilities if he purports to share, distributes or circulate this case study. No part of this case study is to be reprinted without the permission of the writer.

Questions

1. In 1975, Nam needed $60,000 to expand his business but invited Pak to invest $40,000 into the business for a 40% stake in the company. What are the mistakes that Nam has made in his valuation of the company? [6 marks]

2. What do you propose that Nam would have done if a) he did not invite Pak’s participation b) he continues to invite Pak’s participation [10 marks]

3. Was the cash call in 1980 a fair valuation of the company assuming that the company has a compounded growth rate of 10%? [5 marks]

4. How do you proposed to solve Nam’s problem of the additional cash injection assuming that $100,000 is a fair amount to set up a Franchising Program. [5 marks]

5. Define ‘sleeping’ partner and how different are the roles to active directorship? [5 marks]

6. What’s the valuation of the company post-money after the private equity funding? [3 marks]

7. What’s Nam’s exact stake in the company post private equity funding? [3 marks]

8. Do you think the share sale to Pak at $1.2 million fairly valued? [5 marks]

9. What is Pak’s stake in the company after the acquisition of Nam’s stake? [3 marks]

10. What lessons did you learn from the case study? [5 marks]

Submission Requirement

1. You are to work in groups of 2 to 3 within your class ONLY. Individual work is accepted if you are not able to form a group. 2. Please clearly indicate your name, index no. and class on your submission. 3. All submission must be printed double-sided on A4 paper. Please clearly state your assumptions (if any). 4. You are to submit your work to your Mathematics teacher by 9 Apr 12. The School reserves the right not to entertain any late submissions. 5. Plagiarism is regarded as a very serious matter at Dunman High School. 6. Please direct any questions to Mr. Lim at bennet@star-horizon.com