An opportunity has presented itself to Ken for a snow removal service company that is for sale. The company seems to have a good reputation in the community. Ken meets with the current owner, Bjorn, who is 53 years old. Bjorn tells Ken he’s been clearing snow for 30 years and its time to slow down and enjoy winters. Bjorn’s company has two trucks with shovels, two snow blowers, and an assortment of tools. Bjorn has two part-time workers who he says reliably show up every winter and like the part-time work structure, hours, and pay. He doesn’t foresee any problems if Ken were to become the new owner and their new boss.

Bjorn tells Ken that the landlord of the small storage unit that also has an office, is very easy to get along with and hasn’t raised the rent in ten years. He and Bjorn have become good friends. Ken thinks that the unit would be perfect to operate out of year-round as Bjorn currently has personal items in the unit that would be removed, such a motorcycle and a snowmobile. Bjorn tells Ken his company has made around $55,000 - $60,000 for the past three years, which is pretty good for winter work. With the company’s good reputation, he would want $200,000 for the business.

Ken tells Bjorn he is interested in purchasing the business. However, he first would like to review Bjorn’s financial statements for the past 5 years. He will also contact a mechanic to review the trucks and other equipment.

1. 
   
   

   1. (i) Calculate the value of Bjorn’s business using the asset-based method (8 marks)

      (ii) Calculate the value of Bjorn’s business using the earnings-based method. (17 marks)

2. 
   

   1. Using the quantitative calculations from part (a) comment on Bjorn’s asking price of $200,000 for his business.

   2. Then use the quantitative calculations and add qualitative analysis to provide what you believe would be a fair price for the business. Provide at least three good reasons why you feel this price would be a fair price

      
      

      The following information was pulled from a companies current annual financial statements
      Account	Values
      Depreciation Expencse - Trucks	$10,000
      Revenue	$150,000
      Accumulated Depreciation - Trucks	$70,000
      Accounts Payable	$10,000
      Cash	$2,000
      Wages Expense	$40,000
      Accounts Receivable	$70,000
      Trucks	$100,000
      Gas Expense	$20,000
      Other equipment and tools	$4,000
      Rent Expense	$24,000
      Other information:
      - Income for the previous 4 years oldest to most recent:
      Year 4- $25,000; Year 3 -$30,000; Year 2 - $50,000; Year 1 - $55,000
      - 3% of the company's accounts receivable is considered uncollectible
      - The market rate for rent for similar units is $2,200 per month
      - The mechanic says the trucks are in good shape and should last at least another 3 years
      maintenance expenses should run $5,000 per season
      - A review of current contracts shows one for the town municipal properties
      for the past three years is ending and will not be renewed.
      The value of the contract was $30,000 per season
      - Conversations with Bjorn reveals he charges personal gas expenses to the company
      'The amount is approximately $4,000 per season
      Ken would like a 25% rate of return on his investment.

1. 
   
2. 
   

Answer rating: 100% (QA)

Asset Based Valuation As per Assetbase Valuation model total realizable value of assets less value of outstanding liabilities is considered as valuati... View the full answer