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Problem 1

Jason Kidwell is considering whether or not to acquire a local toy manufacturing company, Toys Things. The companys annual income statement for the last three years are as follows:

2006 2005 2004
revenues 2,243,155 2,001,501 2,115,002
cost of goods sold (1,458,051) (1,300,976) (1,374,751)
gross profit 785,104 700,525 740,251
General & administrative expenses (574,316) (550,150) (561,500)
net operating income 210,789 150,375 178,751

a. Jason has earned that small private companies such as this one typically sell for EBITDA multiples of three or four times. Depreciation expense equals 50,000 per year. What value should you recommend Jason put on the company?

b. The current owner of Toys Things indicated to Jason that he would not take less than five times 2006 EBITDA to sell out. Jason decided that based on what he knew about the company, the price could not be justified. However upon further investigation Jason learned that the owners wife was paid 100,000 a year for administrative services that Jason though could be done by a 50,000 a year assistant. moreover, the owner paid himself a salary of $250,000 per year to run the business, which Jason thought was at least 50,000 too high based on the demands of the business. In additon, Jason thinks that by outsourcing raw materials to Asia, he can reduce the firms COG 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?

Please use the attached spreadsheet

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Solution Summary

The expert examines normalizing EBITDA.

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