You’ve hit the nail on the head with the first question. So we’ll incorporate that in the presentation. I’ve listed my views on the remaining questions.
### How should Allen Lane Value Plas-Tek?
Pros:
- Gross margins of 40% (nonproprietary product)
- Well experienced staff with great customer knowledge & service
- Loyal customers
- Established company with more than 25 yrs of experience.
- Can grow business by including active salespeople
Cons:
- Liabilities associated with stock – including contingent liabilities (bank wants to settle the estate)
- Issue with shop foreman
- Allen has to put extra hours to “replace” customer service that Elson used to put in
- Potential liability for income tax: if IRS reclassifies the “excessive salary” Harry pulled out, into dividends
- PTI is divided in 2 types of companies
- HE manufacturing – straight corp; Plas-Tek Sales – Sub S
- Result: potential tax liability could increase further
- Accumulated earnings – IRS could decide that the many interest-earning assets of HE manufacturing should b classified as dividends.
### How much should he bid? Why?
- He should bid 550,000$ (give good reasoning about how $750,000 is a reasonable price based on PE ratios and Expected earnings but the bank is willing to sell if the bid is $600,000 or more which means it makes no sense to bid more than $600,000. 500k or 550k should be a good initial bid so it leaves a bit of negotiation gap to end up the deal at 600k.
- Get back up from reputable bank to get the bank to take back a note
- After much time, he found a business that may be a good fit – he should go for it
- He should not bid more because of cons listed above
### What conditions should he place on his bid?
- Explain the risk associated with potential liability associated with taxes
- Buying a certain % of the stock – not all of it – to reduce liabilities?
### How should he finance and structure the purchase?
- Dan Ray: 100,000$ equity
- Allen Lane: 100,000$ equity
- Rest: debt from bank
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