Mitten Manufacturing Ltd
Overview
Mitten Manufacturing Ltd.’s (MML) sole shareholder and owner, Angela Mitten, has made the decision to sell her ownership in the business in order to be able to retire in the near future.
MML produces children’s mittens and scarves.
Prospective buyer, John Kachurowski, feels that this purchase would result in synergies and economies of scale with his current company that manufactures winter jackets. If this acquisition does go through, it is quite likely that the share price would increase due to the synergy of the merger. Generally, mergers occur for the purpose of improving financial performance for shareholders – making the likelihood of this potential merger ideal.
Angela has offered to sell MML to John for the book value of equity, based on the 2014 year.
MML’s financial statements are in accordance with IFRS.
John has asked for our help as professional accountants with the firm of Lebeau and Liang LLP (L&L) to assist in determining an estimate of the purchase price. In order to do so we must first address the accounting issues with MML’s current financial statements. It should be noted that MML’s financial statements were prepared for internal purposes and have not been audited.
John will want MML’s financial statements to be accurate before agreeing to Angela’s suggested purchase price so that he is not overpaying. He will also want accurate financial statements to accurately determine MML’s debt/equity ratio, going concern, and other important ratios/factors.
Angela may be biased towards keeping her current balance sheet numbers as they most likely overvalue assets and undervalue liabilities, making the sale of her ownership a better deal for her, but not necessarily a better deal for John.
As John’s accountants we must approach this conservatively in order to ensure that he is not overpaying for the company, focusing primarily on the book value of equity which is to be the selling price.
Analysis and Recommendations
Issue: $500,000 loss
Mitten Manufacturing Ltd.’s (MML) sole shareholder and owner, Angela Mitten, has made the decision to sell her ownership in the business in order to be able to retire in the near future.
MML produces children’s mittens and scarves.
Prospective buyer, John Kachurowski, feels that this purchase would result in synergies and economies of scale with his current company that manufactures winter jackets. If this acquisition does go through, it is quite likely that the share price would increase due to the synergy of the merger. Generally, mergers occur for the purpose of improving financial performance for shareholders – making the likelihood of this potential merger ideal.
Angela has offered to sell MML to John for the book value of equity, based on the 2014 year.
MML’s financial statements are in accordance with IFRS.
John has asked for our help as professional accountants with the firm of Lebeau and Liang LLP (L&L) to assist in determining an estimate of the purchase price. In order to do so we must first address the accounting issues with MML’s current financial statements. It should be noted that MML’s financial statements were prepared for internal purposes and have not been audited.
John will want MML’s financial statements to be accurate before agreeing to Angela’s suggested purchase price so that he is not overpaying. He will also want accurate financial statements to accurately determine MML’s debt/equity ratio, going concern, and other important ratios/factors.
Angela may be biased towards keeping her current balance sheet numbers as they most likely overvalue assets and undervalue liabilities, making the sale of her ownership a better deal for her, but not necessarily a better deal for John.
As John’s accountants we must approach this conservatively in order to ensure that he is not overpaying for the company, focusing primarily on the book value of equity which is to be the selling price.
Analysis and Recommendations
Issue: $500,000 loss