Jason Kidwell is considering whether to acquire a local toy manufacturing compan
ID: 2776516 • Letter: J
Question
Jason Kidwell is considering whether to acquire a local toy manufacturing company, Toys 'n Things Inc. The company's annual income statements for three years are as follows:
A. Jason has learned that small private companies such as this one typically sell for EBITDA multiples of three to four times. Depreciation expense equals $ 50,000 per year. What value would you recommend Jason put on the company?
B. The current owner of Toys 'n Things indicated to Jason that he would not take less than five times 2014 EBITDA to sell out. Jason decides that, based on what he knows about the company, the price could not be justified. However, upon further investigation, Jason learns that the owner's wife is paid $100,000 a year for administrative services that Jason thinks could be done by a $50,000 per-year assistant. Moreover, the owner pays himself a salary of $250,000 per year to run the business, which Jason thinks is at least $50,000 too high based on the demands of the business. In addition, Jason thinks that, by outsourcing raw materials to Asia, he can reduce the firm's cost of goods sold by 10%. After making adjustments for excessive salaries, what value should Jason place on the business? Can Jason justify the value the owner is placing on the business?
2014 2013 2012 Revenues $ 2,243,155 $ 2,001,501 $ 2,115,002 Cost of goods sold (1,458,051) (1,300,976) (1,374,751) Gross profits $ 785,104 $ 700,525 $ 740,251 Depreciation and administration expenses (574,316) (550,150) (561,500) Net operating income $ 210,798 $ 150,375 $ 178,751Explanation / Answer
Answer (a)
2014
2013
2012
Net Operating Income
$ 210,798
$ 150,375
$ 178,751
Add: Depreciation
$ 50,000
$ 50,000
$ 50,000
EBITDA
$ 260,798
$ 200,375
$ 228,751
No of Times used to value the business = 3-4 times
Range of prices
Lower Price for business = 2014 EBITDA * 3 = $ 260798 * 3 = $ 782,394
Higher Price for the business = $ 260798 * 4 = $ 1,043,192
The price could be in the range of $ 782,384 - $ 1,043,192 based on 2014 EBIDTA
Answer (b)
Ask price of the owner = 2014 EBITDA * 5 = $ 260798 * 5 = $ 1,303,990
Adjustments made to EBITDA based on investigations
2014 EBITDA
$ 260,798
Add : Savings in Administrative Expenses (100000 – 50000)
$ 50,000
Savings in Owner’s salary for running business (250000-200000)
$ 50,000
Adjusted EBITDA
$ 360,798
Value of Business based on adjusted EBITDA = $ 360,798 * 4 = $ 1,443,192
Based on the value arrived at 4 times adjusted EBITDA, the business can be purchased at 5 times the value of 2014 EBITDA as required by the owner.
Expected savings in purchase value based on adjusted EBITDA = $1,443,192 - $ 1,303,990
= $ 139,202
2014
2013
2012
Net Operating Income
$ 210,798
$ 150,375
$ 178,751
Add: Depreciation
$ 50,000
$ 50,000
$ 50,000
EBITDA
$ 260,798
$ 200,375
$ 228,751
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.