lCARLTON POLISH COMPANY 1. What should Charlie Carlton do? Mr. Carlton should first evaluate the company to see how much it is worth. If he finds that fifty percent of the company is worth more than $2. 5 million he should buy the shares from Mr. Miller and run the company as he plans. He can use two methods to determine the value of the company: discount cash flow (DCF) approach and /or comparison with similar companies, which are publically traded. He should also consider relevant non-financial factors such as his family’s history in this company and his parents’dependence on the success of the business. 2.
What is the polish/cleaning suppliers market like? The total market for industrial and institutional cleaning services and supplies is about $4. 5 billion. The segment that Carlton Polish competes in is account for 20% of this or $900 million. By the information given we could easily see that the market is growing. Carlton’s positioned very in the market, well because the company keeps a good profit margin and they have a very good distribution record. Carlton does have 4 major competitors in the market and all four are strongly implemented in the market. 3. Would you finance the buyout if you were the bank?
Why or why not? By looking at the case and the information provided we will analyze the buyout action through two different criteria: Financial Analysis Well one of the major points to start with is that Carlton Polish hasent had a quarter or year where it has made a loss since its opening in 1883. This is a very impressive fact, considering the four major tough competitors Carlton shares the market with. This result is quite impressive and it is a very good point for us. Even if the pro forma financial data are an expected financial statement, they expect an increase of 10% per year of the revenues which is enormous.
This is another good point for Carlton Polish. The only bad thing is concerning the investment itself. In fact, if Carlton buys the company’s stock from his partner, he will have to borrow money from the bank, and after 3 years he will have to “borrow” the rest of the money from his partner (leasing). This is a bit dangerous because he will have to pay 2 different loans at the same time. Entrepreneur Analysis Carlton is a very enthusiastic person who has a lot of ideas on how to improve the company performance. He knows the company and he has a strong vision of what has to be done in the future.
This is very important for us to know that the owner of the company has a clear vision of the company’s future. Another important thing is that the company was created by relatives of Mr. Carlton, so the company has a real meaning for him and we know that he will never abandon this familial “dream”. The only problem concerning Mr. Carlton is his age; we know that in 5 years he will have to relinquish the company (to the family or to a new manager). But the loan is spread on a 5 years scale so the risk is minimum for the bank. The bank probably would lend money to Mr.
Carlton for the following reasons: * The bank loan would be senior to all other debts of Carlton Polish. * Charlie Carlton will co-sign the loan making him responsible to pay if the company defaults. * Carlton Polish has been in the Carlton family for more than 100 years. In all this time, it has never reported a loss. * However, the bank may be concerned that the company also will have 2 other loans outstanding: $1,228,000 debt (long-term debt); and “a note” of $1 million to Mr. Miller, which will begin paying interest of 14% in 3 years.
This note must be repaid 12 equal annual payments of $83,333. 4. If you were the banker, what terms would you require on the loan? Exhibit 5 spells out the terms and Covenants of the Proposed Bank Loan, we agree with all of these terms. In addition the bank could require the company build up cash reserves to insure that money will be available to pay off the loan. 5. Assess the financial strength of the company: * The company has never reported a loss for more than 100 years * The proforma financial data in the case indicates an increase of 10% per year in sales. Carlton Polish is a stable company not significantly affected by the economic cycle. * Growth rate is higher than the industry’s growth rate for each of last 10 years. * The main concern is that the company would have a lot of debt if they have to borrow money from the bank, continue to pay Charlie Carlton’s parents, and pay off the $1 million debt to Mr. Miller. 6. Assess whether the pro forma projections are reasonable or not? The pro forma projections seem reasonable for the following reasons: * From 1976 to 1982 the compound annual growth in net sales was 18. % and the compound annual growth of after tax profit was 25. 9%. Therefore, a 10% net sales growth shown in the proforma financial data seems reasonable. * In addition, the market is expected to keep pace with the general economic in the future. 7. What will shareholder’s equity look like after the transaction? Shareholder’s equity would be lower than that shown in 1982 ($318,000) because the company has to pay off interest and principal for many loans. There will be little money left for shareholder’s equity. 8. What is a reasonable estimate of the company’s worth?
Economic Laboratory (EL) manufactures and sells cleaning sanitizing products as the Carlton Polish. Of the four competitors listed, EL seems to be the closest match to Carlton Polish and can be used as a benchmark. Using comparable company analysis, we can use price per earnings (PE) ratio to estimate the market value of the Carlton Polish company. The average PE ratio for EL is 9. Using this PE for Carlton Polish, we come up with a market value of close to $4 million. Price/earning = 9 > Price = 9*$441,000 (Carlton Polish’s earnings in 1983) = $3,969,000
Since the value of the company is the sum of the market value of the firm’s equity and the market value of the firm’s debts: V = E + D (p. 385), we must add for long and short term debt, which is $2,240,000 (current liabilities+ long term debt in 1982). So, the total market value of Carlton Polish would be about: $6,209,000. 9. What new business strategies, if any, do you see or could be achieved? Carlton Polish could: * Increase market share by entering new geographic areas (expanding to the west) * E. g. uild new manufacturing facilities to limit freight costs. * Increase sales to distributors by helping them to increase their market shares * Acquire more one or more distributors to achieve vertical integration and get closer to the end users. * Could sell directly to end users in some markets. * Expand and improve its product lines through internal means or by acquisition. Conclusion: Based on an estimate the market value of $6. 2 million, Charlie Carlton should feel confident paying $2. 5 million for Mr. Miller half of the company.