Merger and acquisition: PRIVATE EQUITY AT WORK: PURCHASING CAKE MASTERS

Thèmes abordés

Merger and acquisition: PRIVATE EQUITY AT WORK: PURCHASING CAKE MASTERS Kuchen bakery industry valuation EBITDAs DCF EVALUATION IRR

Résumé du document

This paper deals with the wish of a 30-year-old MBA graduate named David Kuchen to acquire and operate Cake Masters, an existing bakery business located near Toronto in Canada. Kuchen expects to become a senior manager with equity in a small business and looked at this opportunity to acquire Cake Masters, a promising business. This 54-employees company is located in Barrie, Ontario, Canada from approximately 100 km of Toronto, Canada . A baker named Eugene Masters set this business up 20 years ago (in 2003!). His business is actually locally implanted around the GTA, supplying high-quality products to retail chains and hospitality. Today, Eugene Masters, still the current owner is offering a $5 million deal to David Kuchen for acquiring his business with no debt. Thus, this paper is going to start with Kuchen's personality and motivations. Then, it will be followed by an analysis of the bakery industry and a SWOT. We will continue with the company's valuation and finally we will make recommendations for helping Kuchen.

Extraits

[...] As we saw previously, Kuchen had exigent criterion to acquire a business. He actually found out two other interesting businesses besides Cake Masters and namely an industrial products distributor with $450,000 in EBITDA and a third-party pallet management business with more than million in EBITDA. The first company appeared to be lower than the $500,000 in EBITDA requirement, so that Kuchen rejected it, even if it seemed an interesting business. Concerning the second one, it definitely reached Kuchen's objectives with a higher EBITDA of million. [...]

[...] Through this high-level program, he also got the chance to enlarge his relationships with investors and advisors to support him acquiring a business. KUCHEN's Weaknesses There is no doubt that Kuchen has a previous experience of running a business but he is definitely full inexperienced in managing a 54-employees business like Cake Masters. Moreover, he can be full of doubts concerning financial support to acquire a business because he has actually no money to invest due to his expensive MBA financing. [...]

[...] In addition, the business he was seeking should respect several criterions: An under-managed business with at least $500,000 in EBITDA; A good middle management; An owner willing to complete a proper transition to a new inexperienced manager; A head office located in or near the Greater Toronto Area A few solid growth opportunities; A business which is not threatened by cheap offshore imports or whose performance would suffer in a recession; A business with a turnover reaching more than million. Above all, Kuchen wanted to find something he can handle easily without getting specific knowledge about the linked business. He also wants to own 20% of the business over time and wait for a $100,000 annual salary. To sum up, we cannot deny that Kuchen is very exigent and demanding regarding his search process. Alternative acquisition opportunities Kuchen actually looked at several business opportunities that fitted with his criterion. [...]

[...] Concerning the capital expenditure, it is stable for fresh cakes, as they do not need new investments. However, parbaked cakes need a newly purchased capital asset and more precisely new equipments to produce such goods. The working capital for fresh cakes and parbaked cakes will increase from 2005 to 2009, meaning that the company will be more and more able to pay off its short- term liabilities. This forecasted working capital could give Kuchen an idea of the company's underlying operational efficiency, which seems quite encouraging. [...]

[...] As a result, prices of such ingredients are quite the same for each supplier and easy to access, meaning that supplier power is quite low, around 3/10. BARRIERS TO ENTRY In this industry, barriers to entry are low due to few types of equipment to buy and the easiness to hire a good staff very quickly, so that any kind of investors can launch his own bakery business. This market is also mature with below-average capital and sustainable facilities. Moreover, the access to raw materials and the supply chain management are quite easy to implement. [...]