The Paul Olsen case describes the situation for a decision that Paul Olsen needs to make. Paul and Robert Rose devised a plan to open a piano bar in a new urban mall development in Pittsburg, PA. If successful, Paul and Robert would add a restaurant and café at the same location to grow their business. With three and a half months before opening, Paul did not have enough investors to fund the startup costs, so he needs to decide whether to invest all of his student loan money ($12,500) to maintain the timetable for the opening.
Similar to the R&R case, the Paul Olsen case is about identifying risks and developing strategies to manage that risk. By controlling risk, Paul is able to minimize his exposure to potential losses if the business does not succeed. Paul’s history of running small businesses since he was a teenager definitely helped him negotiate favorable terms to mitigate some of that risk. For example, he signed the option for the space without having to pay a down payment, and he negotiated a favorable 15 year lease for a flat rate plus a percentage of revenue. Knowing his history, he likely negotiated favorable terms with the subcontractors building the piano bar as well.
Paul and Robert also developed strategies to reduce their startup and operating costs. Instead of opening a restaurant, they decided to first open a piano bar. With cash flow from the bar, they could then add a restaurant and café in later years. They also minimized the remodeling work by using the existing brick wall for decor. By making changes to Robert’s original plan, they reduced their upfront costs to $250,000. Although the details are not explained, they also reduced the cost per customer down to a third of the industry average. During class discussion, there was a question whether their assumption was too optimistic. Although all entrepreneurs need to be