Doug Cook: Acquiring a Business (B)

Abstract

Doug Cook, an MBA graduate, was wrestling with one of the most important career decisions of his life: Which one of three seemingly promising businesses should he acquire? Each acquisition was a viable opportunity, and each had potential to be a successful business. Cook, however, had heard numerous disconcerting stories about other entrepreneurs going through this process. He realized that until this time the biggest purchase he had made in his life was a $250,000 condominium in downtown Chicago. Acquiring one of these companies would require a financial and personal commitment greater than anything he had ever attempted. He felt a window of opportunity was closing. If he did not act now, he might find himself in the corporate world forever. Cook began by writing up a personal criteria list for his acquisition, then researching online and media sources for businesses for sale. Frustrated with that process, he hired a business broker. With the broker’s help, Cook found three promising candidates from which to choose: Luxury Tassels, Inc.; Feldco Windows and Doors, Inc.; and Coyote Consulting Company. The (A) case includes income statements, pro forma forecasts, balance sheets, and organization charts for each company, in addition to Cook’s financial analyses and valuation of each company. The (B) case features the letter of intent that Cook gave the owner of the company he selected. Ultimately he did purchase the company, and in the (C) case, Cook examines pathways to growing his newly acquired company.

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

Resources

Exhibit 1: Doug Cook’s Letter of Intent to Purchase Feldco

June 2, 2008

Mr. Bernie Feld

Feldco Windows and Doors, Inc.

754 S. Wabash Ave.

Chicago, Ill. 60605

I am pleased to submit a revised proposal for your consideration. Hopefully, we can work out a mutually satisfactory agreement between us and proceed to a quick closing.

This letter confirms the terms upon which a new entity to be formed by me (“Buyer”) will purchase the assets required to run the business of Feldco (“Purchased Assets”) consisting of those owned by Feldco and the office equipment leasing company (collectively the “Seller”) and you.

Purchase Consideration

The Purchase Consideration for the Purchased Assets and other agreements such as consulting, non-compete, etc. will be $2,500,000 plus the assumption of “Assumed Liabilities.” The Purchase Price shall be paid as follows:

Cash at Closing:

$1,875,000

Note:

$412,500

This note will be paid over a period of four years, beginning six months after the closing in sixteen equal quarterly payments of principal and interest. This note will earn an interest of 10% per year. This note will be personally guaranteed by me.

In addition to the Purchase Price, the consideration will include a payment of $150,000 under the General Manager Employment Agreement and additional Consulting Agreement payments of $62,500.

Earn Out

In addition to the Purchase Price, the Buyer will pay Seller an earn-out at the end of four years. The earn-out payment will be 50% of the “Excess Gross Profit.” Excess Gross Profit will be the positive difference between “Buyer’s Cumulative Gross Profit” during the first four years of operation less the “Benchmark Gross Profit” of $9,350,000. Gross Profit will be calculated in a consistent manner using the Seller’s current method. The Benchmark Gross Profit is based on Seller’s Gross Profit of $2,067,000 for the year ending 11/30/2007 increased by 5% per year for four years. The earn-out will be treated as an expense to the Buyer and as an ordinary income to the Seller. The total earn-out payment is not to exceed $110,000.00.

Purchased Assets

For the consideration to be paid, Buyer will receive all the tangible and intangible assets required to run the business of Feldco including, but not limited to, assets as recorded on Seller’s balance sheet and shown in Schedule A, brand names, trademarks, customer lists, prospect lists, contracts, product designs and formulas, processes, brochures, literature, backlog, jobs in progress, etc.

Assumed Liabilities

Buyer will be responsible for Assumed Liabilities of the Seller as shown in Schedule A. Buyer is not assuming any liabilities of the Seller except the Assumed Liabilities. Seller will be responsible for all liabilities not assumed by the Buyer, including product warranty claims in excess of the ordinary course of the business.

Facilities Lease

Seller will assign over to the Buyer the existing leases on the various facilities with current terms and conditions, if acceptable to the Buyer.

Purchase Price Adjustment

The Purchase Price will be adjusted on a dollar-for-dollar basis for the difference between the “Closing Balance Sheet” and the “Benchmark Balance Sheet.” Both balance sheets are to be based on consistent accounting methods as currently used by the Seller.

Allocation of the Purchase Price

$150,000 will be allocated to the fixed assets. Other tangible assets and liabilities will be assigned actual values. $500,000 of the closing cash is for the consulting agreement. The remaining purchase consideration will be allocated to goodwill.

Consulting and Non-compete Agreement

A three-year consulting and non-compete agreement will be signed by you and the Seller at the closing. Details of the consulting agreement will include adequate transition support and an ongoing consulting on an as-needed basis. $500,000 of the closing cash is for the consulting agreement. An additional $62,500 shall be paid in equal twice-monthly payments of $2,604.17, beginning the first month after the closing.

General Manager Employment Agreement

Buyer will provide Doug Stein with an employment agreement. Such agreement will have customary terms and conditions to be mutually agreed upon by Buyer and Doug Stein. This agreement will include $150,000 of bonuses tied to the repayment of the $412,500 note to the seller.

Transaction Fee & Expenses

The Buyer and I will be responsible for paying all buy-side expenses relating to this transaction, including all fees to be paid to Mike Adhikari, accountants, attorneys, and any other advisors. The Seller and you will be responsible for paying all sell-side expenses relating to this transaction, including all fees to be paid to Mr. George Petrulis, accountants, attorneys, and any other advisors.

Closing Conditions

The closing of this transaction is subject to and conditioned upon:

  • Buyer being satisfied with the results of the due diligence investigation of the Seller to be conducted by Buyer, its representatives, and potential lenders.
  • Negotiation and execution of a satisfactory definitive Purchase Agreement to be drafted by Buyer’s counsel carrying out the terms of the transaction set forth herein. The Purchase Agreement shall include standard representations, warranties, covenants, and indemnities from you, Seller, and Buyer. Such indemnities may be satisfied by a set-off of the note.
  • Buyer being able to work out ongoing relationships with key employees and suppliers.
  • Buyer being able to get satisfactory transfer of real estate leases and obtaining necessary business permits and licenses.
  • Purchased Assets, as of the closing, shall be free and clear of all liens other than permitted liens related to Assumed Liabilities.
  • No material adverse change in the operation or the organization of the Seller.
Due Diligence Investigation

The Seller and you will permit Buyer, its representatives, and lenders to conduct an investigation and evaluation of the Seller, Purchased Assets, and Assumed Liabilities. The Seller and you will provide such assistance as is reasonably requested and will give access at reasonable times to all things related to the business and assets/liabilities of the Seller, including financials, tax returns, customers, suppliers, and employees.

Conduct of Business

During the period from the date set forth above to the date of closing, unless agreed to in writing by Buyer: (1) the Seller’s business will be carried on only in a manner consistent with past customs and practices, and (2) the Seller will not enter into any transaction other than in the ordinary course of the business.

Exclusivity & Timing

The Seller and you will not, as long as Buyer is proceeding expeditiously in good faith toward a closing, negotiate, discuss, or solicit the possible sale of all or any part of the stock or assets of the Seller with any other party or provide any information to any other party for a period of 90 days after the execution date hereof. Buyer and the Seller will use their best efforts to prepare expeditiously the definitive agreements necessary to consummate this transaction with a view toward closing by July 15, 2008. It is understood, of course, that this letter is only an expression of our intentions and that its acceptance by you will not constitute a binding agreement between the parties, except that this paragraph and the paragraphs labeled Transaction Fee & Expenses and Exclusivity & Timing shall be enforceable and binding upon execution hereof. Unless the Purchase Agreement is entered into (regardless of the reason for the Purchase Agreement not so having been entered into), none of the parties hereto shall be under any obligation to each other, other than for a breach of this paragraph.

If you are in agreement with the terms set forth above and wish to proceed on this basis, please sign this letter in the space provided below and return an executed copy by the close of business on Thursday, June 12, 2008.

Agreed and accepted:      Date:

_________________________      _______

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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