Magnet Beauty Case

1. Magnet Beauty leases all of its stores from the same lessor. They have determined that leasing makes more sense than buying properties. Describe the process that most companies undertake to make lease-versus-buy decisions.

The decisions that companies make when deciding to lease or buy start with determining the different cash flows that would transpire as a result of either leasing or buying. Also, the company would calculate the npv of these cash flows and how each would affect the company. After these analyses, the company would consider certain “good” reasons for leasing, which include tax reductions, the reduction of uncertainty based on the lease agreement, and the transactions costs that would result of either leasing or buying. After all these considerations, and assuming that the company chooses to actually lease, it would decide which lease agreement it will make. These include operating leases, financial leases, sale and leaseback, and leveraged leases.

Magnet Beauty

Besides these universal considerations, I believe that Magnet Beauty would have to make certain decisions based on their specific business strategy and agenda. These include:

A. The increase in accounts receivable due to business relations with airlines and luxury hotels.

B. Founder Janette Clark’s strategy to grow her business for only a few more years and then sell.

C. The ISAB attempt to control business, monitor tax situations, and regulate lease agreements.

D. Maintain position within loyal customer base.

All of these components are important factors in whether Magnet Beauty leases or buys and, if a lease agreement were chosen, how it would be set up.