Cases

Heather Evans

Robert Pricer
Professor of Management
UW School of Business

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Whom the gods
would destroy,
they first make
mad. Greek Proverb

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Heather’s
Opportunity
 Appears attractive, good fit
between skills, desires and market
needs.
What does Heather have to do to
capitalize on opportunity?
 Produce designs consumers want
 Line up retailers and advertising support
 Get items produced and delivered on time

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Heather’s
Opportunity
 What are advantages of
opportunity?
 Little capital needed
 Good market niche: Unserved,
fragmented, and growing

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Heather’s
Opportunity
 What are key factors for
success?
 Design sense
 Ability to sell retailer design
 General management
 Ability to manage cash, production,
delivery, and quality

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Heather’s
Opportunity
 What is the upside?
 Very high!
 Liz Claiborne public value of $661
Million
 Licensing of name a big dollar plus
with no additional cost
 Lots of expansion potential in
“niche”
 Costs of operations mostly fixed

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Heather’s
Opportunity
 What is the upside?
 Don’t need to control --Production--
Cutting, Sewing, Shipping,
infrastructure built up in industry to
allow people to do just what she is
doing.
 Low working capital need

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Heather’s
Opportunity
 What is the downside?
 Possible risks include:
• Will her designs sell?
• Successful designs will be “knocked-off.”
• Heather’s ability to design for 5
seasons, 20-30 designs per season

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Heather’s
Opportunity
 What could Heather do to
reduce the design risk?
 Hire a proven designer.
 Do some market research.

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Heather’s Efforts

 Built up expertise in
industry:
 Model; Summer job with Jackie
Hayman.
 Chose Market segment that
matched her background: Morgan
Stanley and HBS. Both feed into
“professional women’s” segment.

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Heather’s Efforts

 Spent a great deal of time

starting business:
 At expense of school
 Lots of research, talking to retailers,
office space, etc.
 Used field study effectively
 Spent lots of time on business plan

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Heather’s Efforts

 Built momentum. When

business plan out, she had
already:
 Incorporated
 Hired and paid Belinda Hughes
 Designed a line
 Arranged for a factor
 Paid rent / found building
 Reserved production capacity
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Heather’s Efforts

 All of Heather’s actions

builds:
 Credibility
 Commitment
 In investors’ eyes (contrast
with First Place & Ice
Delights)

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Heather’s Efforts

 Was flexible - kept eyes and

ears open:
 Worked with Robert T. Vin, then
abandoned him -- Saw would not
work out
 Used phone to check up on Barbara
Tarpe.
 Seized opportunity when 550 7th
St. space opened up.

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Heather’s Efforts

 Used support for key areas

(see field study plan):
 Accountants
 Lawyers
 Advisers

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Heather’s Efforts

 Used existing contacts:

 Industry
 Morgan Stanley
 HBS

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Heather’s Efforts

 Depended too heavily on

Arden -- was introuble when
they fell through.
 Money raising effort with
private investors -- Never
gave them a deal to respond
to.

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 PROS
PROS

Heather’s Business
Plan
 Capitalizes on momentum --
Gets key points out in
executive summary:
 Incorporated
 Have a line
 Hired and paid people
 Have factor
 Have building
 Have production capability
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 PROS
PROS

Heather’s Business
Plan
 Leaves no doubt in
investor’s mind that this is
going to happen. Only issue
is will it be with my money?
 Lays out unique
qualifications of Heather and
concept:

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 PROS
PROS

Heather’s Business
Plan
 Concept based on: Personal
experience; New look, unmet
market need; Professional
management ability

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 PROS
PROS

Heather’s Business
Plan
 Excellent understanding of:
 Customer needs
 Competition
 Market / Channels of distribution
 Positioning relative to these

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 PROS
PROS

Heather’s Business
Plan
 Lays out upside:
 High sales growth
 High profit margins
 Large market -- 4.3 million women,
$5 billion
 Growing market
 Diversification -- Accessories,
leisure clothing, licensing, etc.

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 PROS
PROS

Heather’s Business
Plan
 Lays out time sequenced
plan with numbers attached:
 Hire bookkeeper
 Hire office manager
 Hire showroom personnel
 Shipping employee

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 PROS
PROS

Heather’s Business
Plan
 Plan is:
 Short
 Well organized
 Easy to read

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 CONS
CONS

Heather’s Business
Plan
 Financial statements poorly
presented:
 Only 2 years
 Not well organized
 This reads like a preliminary
document -- much more work is
needed.

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Financing Options

 Arden & Company

 Don’t put any more time into this
dead-end.
 Giving her the runaround
 Typical indirect “no.”

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Questions to
be asked

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What should
Heather do?
 Are her terms reasonable?
 Control--She wants 50%+
• Puts a value of more than $500K at
start-up
• Values Heather’s “sweat equity” at more
than $250K
• She is the company, to control
company, you must control Heather

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What should
Heather do?
 Are her terms reasonable?
 License: Wants to license name to
company, rather than let company
own it.
 If she walks away from company,
have investors’ built her name and
then she walks off with upside?

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What is the value of
the business
 Liz Claiborne gives some
idea:
 Went public at $19/2.22 = 8.6 P/E
 Evans Proj. 1985 earnings = $167,
173
 $167 * 8.6 = 1,437,700/(1+.5)2
 Must value to price!

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What is the value of
the business
 In addition to value, must
resolve other issues:
 Exit route: Forced registration right
(at time interval -- at earnings/sales
level); Payback; Put; Call.

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What is the value of
the business
 In addition to value, must
resolve other issues:
 Control:
• With equity; Voting vs. non-voting
shares
• With board members; rights to appoint
• Staggered by performance goals
(Heather can buy if met, investors can
take if not met)

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What is the value of
the business
 In addition to value, must
resolve other issues:
 License:
• Term
• Royalty
• Option to renew at fixed terms

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 Raised $250,000 for 40% of
equity from friends and HBS
classmates.
 Gave company 3-year royalty
free license on her name.
 Gave investors a “put” on
their stock at a multiple of
earnings in years 3 and 4.

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 First line sold well -- She
used contacts for “free”
publicity, etc.
 First line did not sell
through, she could not sell
second line.
 She would have been
successful if designs had
sold!
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