Jason Kidwell is considering whether or not to acquire a local toy manufacturing company, Toys'n Things Inc. The company's annual income statements for the last 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 2010 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 additions, 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 in thebusiness?

Transcribed Image Text:

2010 2,243,155 2,001,501 2,115,002 1458051) 300 976 1374.751 785101 200.525 40251 2009 2008 Revenues Cost of goods sold Gross profits Depreciation and administrative Expenses Net operating income 104 00525 740 251 574,316 550,150) 561500) 210789 150375 178751