Case Analysis: Fabricare, Inc.

There are several methods that we used in arriving at a range of price options for the purchase of Fabricare, Inc. from Roy Tyson’s perspective:

  1. Cash Flow Valuation: Present value of future stream of cash flows from the point of view of Fabricare’s current management 1
  2. Cash Flow Valuation: Present value of future stream of cash flows if management of Fabricare is acquired by Roy Tyson 2
  3. Earnings Valuation: Using Price-to-Earnings multiple of 8x for publicly-traded building maintenance firms 3
  4. Revenues Valuation: Using Price-to-Earnings Ratio of 65% for publicly traded maintenance firms 4

In negotiating for the price of Fabricare, we recommend that Roy Tyson start with a bid which represents the opportunity cost of managing Fabricare from the point-of-view of the current owners. We therefore ask, “How much is the business (Fabricare) worth to its current owners?” with the objective of matching the said opportunity cost with an offer. One might inquire, why not start the bid with $154,000 which represents the book value of the assets of Fabricare, since this would present a lower cost for Roy Tyson? Although book value can be considered as the base price for valuation, we recommend Roy Tyson to use the same just as a guide for valuation, but not to make an initial offer using the same. Book value represents the accounting value of Fabricare’s assets, but does not represent the intrinsic value of the firm. It includes real assets, but excludes the intangible assets offered by Fabricare (as compared with a start-up company) the more significant of which would be Fabricare’s existing client base and Fabricare’s experienced employees.

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We thus valued the initial offer at $214,5781. We used a growth rate of 5%, as this represents the maximum growth of Fabricare had it been run by its current owners. We decided to make the initial offer based on the highest growth rate since we want Roy Tyson to present a win-win situation to the selling party. It is a win for Fabricare’s owners, because it already represents a cash flow stream with maximum growth of 5%. When this offer price is compared with the book value of assets totaling $154,000, the difference of approximately $60,000 can be ...

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