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 ...view middle of the document...
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 optimistic, their assumptions were likely reasonable for them to risk their own money and pass scrutiny from investors.
Although the restaurant industry is perceived to have high risk of failure, the risk of a restaurant failing is not too different from other small businesses. Parsa et al. quantified the risk of failure at 26% in the first year and 57% by year 3. He also described several factors that can influence the risk of failure. Those include physical location, firm size, speed of growth, differentiation from other restaurants in the market, adapting to external trends, and management experience. In terms of location and differentiation, Paul’s bar will be located in a new development designed to attract affluent customers and with very few competitors. Paul’s small firm size increases risk because of barriers to attract partners (i.e. suppliers and bankers are prejudiced against smaller firms) and growth that may be too rapid to manage. On the other hand, Robert already has experience in the restaurant business and should know how to run the bar and subsequent restaurant. Their choice of a piano bar may be in response to local trends that favor success.
A final question is whether Paul should apply his student loan money to the startup costs. Since his living expenses and tuition are already paid by the Ford Foundation grant, the loan money is not immediately needed. The contract in exhibit 3 shows that his services towards opening the bar are valued at $17,500 in addition to the cash contribution. Therefore, his percentage claim towards any profits from the bar would be more than double the value of the $12,500 loan amount. Additionally, in the event of failure, the liquidation proceeds will first go to creditors and then to limited partners, which is before the general manager. So his claim is before his partner, Robert, under a liquidation scenario. Unless he can find another opportunity that can provide a better risk/reward profile than the bar, he should proceed and invest the loan money in the bar.