Midterm Instructions: Answer each question below in essay form, based on the principles and cases that we have reviewed so far this semester (i. e. , Recognizing the Opportunity, Marshalling Resources). No. 1: Evaluate John Taylor and Marty Grayson’s effort to identify the opportunity. Are they the right people for this opportunity? Why or why not? John Taylor and Marty Grayson had both always had the interest of being entrepreneurs and when they met eachother is when their search for a venture began. They only had a few criteria in deciding on what kind of company that they wanted to buy.
The first criteria was that the business must have a high gross margin to allow from maximum benefits from building sales. They decided it had to be a one step manufacturing process or be a distribution business. Sales had to be between $3 and $10 million, and not involved in retail sales. They had a couple of opportunities that they almost closed before the Precision Parts opportunity came up but the deals ended up falling through. The opportunity that they decided on was with Precision Parts when they had heard that the owners had not spoken to eachother for over a decade.
They recognized that the company had good revenues and most importantly they had little competitors in the industry. Precision Parts was one of seven companies in the industry and they had 15% market share. I feel like they are the right business and consulting side of this business but they definetly need to bring in someone who knows the industry. Neither of them have ever owned and ran a business of their own, and they have no knowledge of the elecotro-mechanical component market. They need to bring someone in who had experience in this market to help them appropriately make a business model.
They did a decent job of marshaling their resources. They personally came up with a lot of the money needed in, and went to family and friends for the rest, after they looked the VCs and banking financing opportunities. No. 2: What are the key factors for success if this acquisition is going to generate cash in the future? For example, how sensitive are the forecasted financials to changes in sales or costs? I feel like the first key factor in the success is if they can bring the right person into the company, that has experience and connections in the market.
They need to focus on their customers and competitors. From what I understood there are two main parts of the market, custom or standardized parts. I feel like they should choose to focus on the standardized part making section of the industry, because it has a market that is more broad, and more potential customers. The first thing that they looked at was how the industry was steadily growing over the years and based a lot of their projections off of what they think they can do. The forcasted financial numbers have a huge impact on sales and costs.
They need to be able to continue to grow sales and cut costs in order to be able to generate cash in the future. One way they can do this is by keeping their repeat customers happy, and gain more of their confidence and potentially their business in the future. Currently the cost of sales is accounting for roughly 60% of the net sales in the most recent year of operation. I feel like they need to lower that number as much as possible by breaking down each individual cost, and seeing what they can do about it. No. : Is there enough cash flow to service the debt? What is absolutely critical to future cash flow? The history of the cash flow to debt has been about $350,000 of total revenue in 1977 that has been growing and the most recent year was $644,000 in 1981. They need to be generating enough to pay back the sellers notes that will be in 12 equal payments of $193,363 over the course of the next three years. They will have two years payment free only having to make the interest payments, and the interest is 10% per quarter on amounts left outstanding.
With total interst they are going to have the cost of $203,013 in the first year of payments, $125,686 in the second and $48,338 in the third and final. With an earnings in the most recent year of $644,000 it appears that the company is going to be able to cover these costs as long as they continue to grow and reduce the costs. After all of this we also need to keep in mind the financing deals that they have made with the Patricorp Group of $312,500 In for 41% of the equity, and $625,000 in subordinate debt. That was the previous debt that I talked about in the previous paragraph.
As of the current revenues of the company, and considering the actual payments needed to pay they need to continue to grow the company to keep up and service the debt they will inquire. It is critical that they are successful with the growth, so that they do not fault on their agreement and have to give up more equity in the company so that they can retain ownership. No. 4: Would you pull the trigger on this deal? Why or why not? Yes I would pull the trigger on this deal for the company. The first reason is because this opportunity meets all of their prerequisites that they wanted in a venture, and more.
There are only 7 competitors when it comes to the industry and they already have 15% of the market share from a company that was beign run by two dysfunctional partners that were in their 60s. If they take an aggressive market strategy and bring in someone who has extensive knowledge of the industry, they can keep growing their share of the market. The last reason would be because of the actual and steady growth of the industry over the past six years of about an average growth of $2M a year. I feel like its not an easy market for competitors to jump on the bandwagon due to the extensive overhead required to enter.