Part $5$: Business Valuation for Purchase $$ Complete quantitative analysis in Excel and qualitative analysis in WORD. $(35$ marks$)[$CLR $7]$

Background

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.

$($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$)$

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.