lCARLTON POLISH COMPANY
What should Charlie Carlton do?
Mr. Carlton should first evaluate the company to see how much it is worth. If he finds that fifty percent of the company is worth more than $2.5 million he should buy the shares from Mr. Miller and run the company as he plans.
He can use two methods to determine the value of the company: discount cash flow (DCF) approach and /or comparison with similar companies, which are publically traded.
He should also consider relevant non-financial factors such as his family’s history in this company and his parents’dependence on the success of the business.
What is the polish/cleaning suppliers market like?
The total market for industrial and institutional cleaning services and supplies is about $4.5 billion. The segment that Carlton Polish competes in is account for 20% of this or $900 million. By the information given we could easily see that the market is growing.
Carlton’s positioned very in the market, well because the company keeps a good profit margin and they have a very good distribution record. Carlton does have 4 major competitors in the market and all four are strongly implemented in the market.
Would you finance the buyout if you were the bank? Why or why not?
By looking at the case and the information provided we will analyze the buyout action through two different criteria:
Well one of the major points to start with is that Carlton Polish hasent had a quarter or year where it has made a loss since its opening in 1883. This is a very impressive fact, considering the four major tough competitors Carlton shares the market with.This result is quite impressive and it is a very good point for us.
Even if the pro forma financial data are an expected financial statement, they expect an increase of 10% per year of the revenues which is enormous. This is another good point for Carlton Polish.
The only bad thing is concerning the investment itself. In fact, if Carlton buys the company’s stock from his partner, he will have to borrow money from the bank, and after 3 years he will have to “borrow” the rest of the money from his partner (leasing). This is a bit dangerous because he will have to pay 2 different loans at the same time.
Carlton is a very enthusiastic person who has a lot of ideas on how to improve the company performance. He knows the company and he has a strong vision of what has to be done in the future. This is very important for us to know that the owner of the company has a clear vision of the company’s future.
Another important thing is that the company was created by relatives of Mr. Carlton, so the company has a real meaning for him and we know that he will never abandon this familial “dream”.
The only problem concerning Mr. Carlton is his age; we know that in 5 years he will have to relinquish the company (to the family or to a new manager). But the loan is spread on a 5 years scale so the risk is minimum for the bank.
The bank probably would lend money to Mr. Carlton for the following reasons:
The bank loan would be senior to all other debts of Carlton Polish. *
Charlie Carlton will co-sign the loan making him responsible to pay if the company defaults. *
Carlton Polish has been in the Carlton family for more than 100 years. In all this time, it has never reported a loss. *
However, the bank may be concerned that the company also will have 2 other loans outstanding: $1,228,000 debt (long-term debt); and “a note” of $1 million to Mr. Miller, which will begin paying interest of 14% in 3 years. This note must be repaid 12 equal annual payments of $83,333.
If you were the banker, what terms would you require on the loan?
Exhibit 5 spells out the terms and Covenants of the Proposed Bank Loan, we agree with all of these terms.
In addition the bank...
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