Allen Lane
...Value ($292K), but these do not in this case give a realistic valuation of the company. I would recommend that he uses the Corporate Investment Business Broker (CIBB) method: CIBB = Asset Market Value + Income After taxes + Owner Compensation after tax Asset Market Value 292.000 Current year After Tax income 42.300 adjusted for New Jersey tax 10% Owners compensation after tax 432.000 adjusted for New Jersey tax 10% Total $766.300 3. How much should he bid? Why? New York Bank has as a minimum required that Allen should bid $600.000 just to be considered. The valuation above have shows a figure of $766.300, so it will have to be somewhere between the two figures. But this is where it becomes tricky, because now you have to consider what kind of risk is related to the investment, as well as your skills as a negotiator. As I see it the risks associated to the investment is amongst other the retention of key employees as the foreman, Bernie, who has been with PTI for over 18 years and who properly knows the company better than anyone else. Also the bookkeeper, Sarah, who knows the financial side of the business as well as Harry’s pricing policies. And last but not least, Eleanor, the customer/order entry clerk, who knows the key costumers, their buying habits and pricing, not to mention her understanding of finished goods inventory. Another risk is retention of key customers, as the top 5 customers account for more than 35% of total sales. PTI have no sales force, and there is a risk that these customers only want to do business with Harry or at least the way he did it. As with Prairie City Bakery, Bill Skeens is what you get – if you buy that business it will be hard to perform the way that he does, because he is the business!! And that is what the customers are used to. As far as it goes concerning Allen’s skills as a negotiator is hard to say, but it seems like he has teamed up with some professional who will give him advice – one thing is sure don’t open too high, you never know that your counterparts reservation, target or goal is. If I was in Allen’s shoes I would bid $620.000 with a goal of $670.000 and a reservation of $760.000. He has some leverage in this case as the bank needs to close this deal as soon as possible, because running a business that makes plastic components is not their core competence. 4. How should he structure and finance his purchase? If Allen gets the deal at his goal $670.000 he would get a company which on the papers is sound, but in reality is flat brook, due to the cash sale. So in addition to the $670K, he would need to raise some additional finance to keep the company afloat. The Burn Rate gives some indication of how much it costs to keep the company running per month in addition some additional cash is needed. He has to consider as well that there are some expenses involved in making such an acquisition, mostly held by the seller, however, her will have to pay some fees to the broker, lawyer, accountant and other advisors. So all in all I would recommend that at least a further $250.000 would be raised, which gives a total of $920.000. This amount includes a buffer, should one of the larger clients leave the firm due to the new ownership. He and his partner have been able to ra...