Initial Public Offering

Based on the popularity of the Death Bomb Sausages, I am researching the possibility of taking the company public.  I see the entire production team becoming equal owners after the IPO.  Although it has been a while, I have some experience with the public offering process.  I led the effort for three or four clients during my CPA days with Coopers and Lybrand and I reviewed potential acquisitions for Fiserv.

So I know that the venture capitalists will want detailed financial information that clearly shows a robust profit potential for the enterprise.  The first part of the effort is identifying the cost of producing a high quality product.  Based on the cost, we will establish a price that will generate an attractive return for the company.  The resulting corporate profits will then increase the share value, ultimately, rewarding all of the stockholders.  I’d like to think that Death Bomb is on the same path of the original McDonalds.  The book keeper who accepted stock in lieu of $2,000 of back pay is now a multi billionaire.

What does it cost to produce a pound of world class sausage?

We have fixed costs related to the plant and equipment we need to make sausage.  Equipment includes the world class sausage grinder, vacuum sealing machine, scales, cutting boards, knives, and stainless steel pans for different processing stations.  To date we have made more than 1,000 pounds of sausage with little “wear and tear” on the equipment.  I will, conservatively, assume that we will need to replace our equipment after making every 5,000 pounds of sausage.  With these assumptions, what is the real fixed equipment cost needed to prepare a pound of sausage?

Equipment Cost:

            Sausage Grinder                     $ 450

            Vacuum Sealer                          150

            Scales                                         100

            Cutting Boards                              75

            Stainless Steel Pans               150

            Miscellaneous                               50

            Total Fixed Asset Cost        $ 875

If the total outlay for Fixed Assets to produce 5.000 pounds of sausage is $875, the cost per pound is $.18. 

Okay, we nailed that.  What are the variable costs?  Variable cost includes the cost of pork, the cost of spices and the cost of packaging for the final product.  They are variable because we don’t incur any of these expenses until we actually produce some sausage and they are directly related to each pound we produce.

Variable Cost Per Pound of Sausage:

            Pork Shoulders                                    $  2.50

            Spices                                                         .12

            Packaging for the Final Product        .05

            Total Variable Cost                           $  2.67

We have Fixed Cost per pound of $.18 and Variable Cost per pound of $2.67.  Other than labor, the total cost for Death Bomb to produce a pound of the best sausage in the world is $2.85.

What are the labor costs?  Actually, Larry Durbin has provided most of the insights regarding labor costs.  He noted that John Ball, Steve Nauman, Larry Durbin and Mike Sinelli required three hours of effort to produce 33 pounds of sausage at the last production session. They are all accustomed to a significant level of compensation.  We have an expert tax attorney, a heavily experienced 747 airline pilot, a cardiologist, and a CPA/Systems Engineer.  Without disclosing individual compensation structures, at the time of their respective retirements, the average hourly compensation for this group was $268.15 per hour.  So at the last session we required 12 man hours to produce 33 pounds of sausage.  Total labor cost was $3,217.80 (12 x $268.15).  Cost per pound is $97.51 ($3,217.80 divided by 33). 

Our aggregate cost of making one pound of sausage is as follows.

            Fixed Cost                   $     .18

            Variable Cost                  2.67

            Labor Cost                    97.51

            Total Cost per Pound  $100.36

If it costs a little more than $100 to make a pound of sausage, what should our selling price be?  The VC (impressive, insider designation for Venture Capitalists) would like to see 20% margins.  I believe that a 25% markup would be more appropriate.  Shortly after the public offering, I think we will need a corporate jet and our quarterly board meetings should all be in Paris.  25% will do a better job of covering the additional overhead.  So our selling price will be $125.

I like the concept.  Death Bomb sells 10 million pounds of sausage, every quarter, at $125 per pound.  We all earn $270 per hour when we decide to make sausage.  All of the initial shareholders earn at least $100 million profit on their initial shares.      

I’ll be back in touch when I have completed the business plan and had preliminary discussions with the money guys.  

Michael Jay Sinelli, EHQ

Exalted Hind Quarter