Thi Corporate Finance

The main business activity of Tim Hortons is to sell as much of their product as possible, and continuously innovate new products in order to sustain organic growth in the company as well as attract and retain customers. THI has two main operating strategies from which they generate revenues; company owned restaurants and franchising restaurants. The majority of the revenue generated comes from franchising however; in 2012 99.5% of restaurants were franchised while only 22 locations were company operated. There are two ways that THI franchises the restaurants, VIE (Variable Interest Entity) and FIP (Franchise Incentive Program). Under the VIE agreement, THI owns the assets and the appointed manager operates the restaurant. Under the FIP arrangement, the owner will pay a franchise fee at the commencement of the restaurant and will continuously pay a royalty fee (a percentage of sales) to Tim Hortons. This is an off the balance sheet item which is recognized under revenue, and in 2012 accounted for 28.68% of total revenue. Under this agreement if the restaurant is not operating successfully and meeting sales targets, THI retains the right to buy back the restaurant, make any necessary changes and franchise it to someone else. The assets and liabilities owned under the VIE structure are consolidated and accounted for on the balance sheet under notes receivables.

The main competitors that were chosen for Tim Horton’s are McDonalds and Starbucks. After rigorous screening of many competitors it became clear that while there are no perfect competitors, MCD and SBUX would provide useful insight towards ranking THI among its peers. The main issue with McDonalds is its size and international presence while SBUX is targeting a different target market (higher end) with the focus on selling the “Starbucks Experience”. Both of these competitors have similar operating strategies as Tim Horton's, although it is structured differently. For Starbucks their company operated...