John Case Company

Overview

Early in 1985 Mr. John Case, owner of the John Case Company informed his senior management that he was planning on selling his company. The sale price was $20 million dollars with $16 million immediately available in cash. Mr. Johnson was unsure about placing his future in the hands of an unknown control, and decided it would be a great opportunity to purchase the John Case Company and turn a profit in the company's equity. Mr. Johnson persuaded several other members of the senior management to join him, August Haffenreffer, William Wright, and Richard Bennink. Also, Mr. Johnson had requested that Mr. Case not attempt to sell the company until he had accepted or rejected the proposal from the senior management.

Valuation

The question comes up as to whether the John Case Company is worth the $20 million price that Mr. Case is asking for. In deciding on the value of the company, Mr. Johnson used the P/E Market Multiple Approach. In this approach the average net income of the case company is multiplied by an average P/E ratio of companies that are comparable to the John Case Company. The average net income for the Case Company is $2.012 million dollars, and the average P/E ratio for comparable companies was 10.25. Therefore, the value of the company can be seen by multiplying these numbers together to get a value of $20,626.42 for the John Case Company. Based on this method of valuation, the company is worth the $20 million that Mr. Case is asking. The complete valuation calculation can be seen in Appendix A.

Financing

Mr. Johnson and his colleagues can finance the purchase of the John Case Company. The four senior managers have $500,000 between them, and a term bank loan of $6,000,000. Also available is $4 million dollars from cash currently held in the company. The remainder of the upfront cash would have to come by way of a subordinated loan from a venture capitalist at the amount of $5.5 million. The amounts above equal the $16 million that Mr. Case is asking for. The rest of the money will be in a sellers note to Mr. Case to the amount of $6 million, bringing the total to $22 million; a reasonable price that meets Mr. Case's expectations. The full financing worksheet can be seen in Appendix B. Another important note is that because the Venture Capitalist is financing the company through debt, the full ownership of the company is kept with the senior management.

Value for the Bank

The First Bank of Delaware has offered a $6 million loan to Mr. Johnson. They believe this to be a safe loan based on the forecasted cash flow and income statements. The amount of the loan was to be paid back within 6 years. All interest will be paid every year on the amount of the loan which is not paid off. Based on the cash flow statement the loan will be paid off in four years (Appendix C). In year one, $818 thousand will be paid off, in year two, $1.181 million, year three, $1.98 million, and year four the remainder, $2.021 million will be paid. Therefore the bank will receive its money back sooner than it anticipated, four years instead of six. Also, the bank feels secure about the loan because it will be the first creditor that will