BM409-L01 Envirolawn

BM409-L01 Envirolawn - T he Case of Enviro-Lawn: Valuing a...

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The Case of Enviro-Lawn: Valuing a Local Business Richard W. Anderton and James C. Brau Marriott School, Brigham Young University; Provo, UT 84602. Journal ofBusiness Education, Vol. 2, Spring, 2001, pp. 23-30. At the beginning of2000, two brothers are selling their lawn-care business. They have owned the company for three years while they have been college students, but now they are graduating. One oftheir acquaintances has offered $15,000 in cashfor the business. The brothers want to estimate a value for the firm to determine if this is a fair offer. They have asked theirfriend and employee, Jason Andrews (who also happens to be an undergraduate finance major), to price the business. Key Words: company valuation, finance education, case methodology Disciplines of Interest: Finance, Entrepreneurship INTRODUCTION In need of part-time school jobs and wanting business experience, John and Andy Miller decided to start a lawn-care business as opposed to working a minimum wage student job. In February 1997, they formed an s-corporation and obtained a $13,000 loan at an interest rate of 10% from John's brother-in-law, Bill. In addition to the 10% interest, Bill received a 10% ownership stake in the finn. John contributed his old Toyota truck valued at $1,800. His wife, Sue, contributed work hours valued at $1,800, and Andy gave $500 in cash and $1,300 worth oflabor. Figuring that John, Sue, and Andy contributed an equal amount, ownership was divided as follows: John and Sue together, 60%; Andy, 30%; and Bill, 10%. John was to run the business until he graduated in August of 1998. Then Andy would take over until he too finished college in April of 2000. At that point, the business would be sold or liquidated, and the proceeds would be divided to each owner based on percentage ofownership. Enviro-Lawn's first year's business activities focused on spring aeration, power raking, and lawn mowing. They even found themselves laying sod. At the end oftheir first season, most oftheir equipment was destroyed in an auto accident. The $8,000 of insurance money was used to invest in a larger lawn sprayer and to buy two used trucks. By focusing more on lawn spraying and pest-control, the business began to grow. Customer contracts further increased revenues and soon Enviro-Lawn grew from a part-time, side job, into a healthy small business. Now after three years of operations, Andy, who is currently running Enviro-Lawn, is graduating and wants to divest the business either through liquidation or by selling the business as a going concern. Andy is concerned, however, that he will not be able to sell the business for enough to pay offthe $10,000 debt that is currently owed to Bill. Pete Williams, an acquaintance who owns a local landscape business, surprises Andy by offering him $15,000 to buy Enviro-Lawn as a going concern. Payment would be up-front and he would assume the business before the 2000 spring season, releasing Andy from any further work.
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This offer has caught Andy off guard. Pete's offer does not include the assumption of debt, but
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This note was uploaded on 11/22/2011 for the course FINANCE BUS M 409 taught by Professor Bryansudweeks during the Fall '11 term at BYU.

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BM409-L01 Envirolawn - T he Case of Enviro-Lawn: Valuing a...

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