Franklin Covey Case

Franklin Covey Case - Franklin Covey Case Franklin Given...

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Unformatted text preview: Franklin Covey Case Franklin Given Information Given Purchase Price of $32mm Revenue of $100mm 60% Gross Margin 12% EBITDA Margin Balance Sheet Details Franklin Covey Products Model Account Balances Thousands (000) 2006 2007 2008 Cash and Cash Equivalents Trade Accounts Receivable Inventories Other Current Assets Total Current Assets $55 $3,500 $16,500 $2,500 $22,555 $45 $4,500 $15,500 $2,600 $22,645 $45 $6,500 $12,500 $2,300 $21,345 Property, Plant & Equipment $5,300 $7,600 $6,200 $7,000 $8,500 $340 $15,840 $5,700 $7,800 $300 $13,800 $5,800 $6,700 $300 $12,800 Current Assets: Current Liabilities: Accounts Payable Accrued Liabilities 2200 UNEARNED REVENUE Total Current Liabilities Assignment Assignment Create a plan for financing the purchase How much debt? How How much equity? How What kinds of debt? What How will the debt be structured? How How will the equity be structured? How How much will management own? How Are there different classes of stock and if so, what are the Are types and terms? types What will the capitalization table look like? What Where will you get the financing? Where DSCG > 1 Cash flows should be able to pay down debt Some of Our Initial Questions Some What types and amounts of debt financing can What the business get? the What is the cash flow of the business and what What can it support in debt payments? can What are our IS projections for the next 5 What years? years? How will we incentivize the executive How management team? management Learnings from Executive Summary Learnings Reducing inventory levels Increasing gross margins (core paper and software Increasing planning) planning) 5.4% sales volume growth Ongoing required CapEx lowering Internet-based tracking tool: 25% growth per month Estimated sales of $10mm by 2012 International growth opportunities Eliminating unprofitable stores to a core of 40 stores Have already taken it from 186 stores to 91 stores Debt Financing Debt What type of debt can we get? Traditional options: Cash Flow loan: given today’s economic environment, we Cash think this is a slim possibility think Sale Leaseback: the company doesn’t own it’s real estate. Sale The equipment is too specialized to warrant an equipment sale leaseback (we think) sale Term Debt Seller Note Revolver Structuring the Deal Purchase Price EBITDA Multiple 32,000 2.67x Term Debt Term Since the equipment is paid for, we may be able to get Since term debt based on a 60% LTV (this is just an assumption) We believe that the Book Value of the PP&E We understates Fair Market Value by $1m (this will be Book Value of PP&E 6,200 confirmed by an appraisal) confirmed FMV Adjustment 1,000 FMV of PP&E 7,200 Terms we assume: 60% LTV 4,320 Payable over 4 years in equal annual payments $1.08mm annually 6% interest So, we could borrow $4.32mm via term debt Seller Note Seller We believe we can negotiate a 1x seller note 1x seller note = $12 million Terms: Payable over 5 years Interest of 7% Annual payments of $2.4mm So, we could borrow $12mm via a seller So, note note Revolver Revolver The company does not have a revolver, currently We believe we can get a revolver (line of credit) We based on inventory and AR based We assumed a borrowing base calculation of: 85% of Trade AR 50% of Inventory We decide that we can draw down 35% of the We availability (leaving enough room for future borrowing needs) borrowing In this case, we can finance $4.12mm via a In revolver revolver Debt Summary Debt In total, we can borrow $20.4mm to finance In the purchase the The remaining $11.6mm will come via equity Purchase Price EBITDA Multiple 32,000 2.67x Amount ($) Term Debt Seller Note Room on Revolver Required Equity Purchase Price Summary 4,320 12,000 0.4x 1.0x 4,121 0.3x 11,559 32,000 1.0x 2.7x Equity Financing Equity We assume that the equity buys preferred shares We also assume that executive management will contribute We $1mm of the equity $1mm The remainder of the equity balance will come from us After the purchase, we issue a 10% option pool (common After shares) for key managers and employees shares) Fullydiluted Ownership Ownership 0.91 0.91 0.09 0.09 1.00 1.00 Primary Round 1 Dolphin Management Team Contribution FMV 10,559 10,559 1,000 1,000 11,559 11,559 Shares $/Share 10,559 1.00 1,000 1.00 11,559 Primary Round 2 Contribution FMV Dolphin Management Team Options 10,559 1,000 Shares 10,559 1,000 0.00 $/Share 10,559 1,000 1,284 12,843 1.00 1.00 1.00 Fullydiluted Ownership Ownership 0.91 0.09 0.00 1.00 0.82 0.08 0.10 1.00 Pro-forma Income Statement Pro-forma Assumptions Sales Growth Gross Margin EBITDA Margin Revenue Gross Profit Gross Margin EBITDA EBITDA Margin 2008 0.05 0.60 0.12 2009 0.06 0.61 0.13 Actual 100,000 60,000 0.60 106,000 64,660 0.61 12,000 0.12 13,780 0.13 2010 0.07 0.62 0.14 2011 2012 2013 Notes 0.03 Projecting continued growth for the next 3 years 0.65 Slight increase (due to exec summary description) 0.16 Increase EBITDA margins but kept it flat at 16% (2012 and on) 0.05 0.63 0.15 0.03 0.64 0.16 Projections 113,420 119,545 70,320 75,313 0.62 0.63 123,609 79,110 0.64 126,699 82,355 0.65 19,777 0.16 20,272 0.16 15,879 0.14 17,932 0.15 Debt Schedule Debt We want to confirm that the company can We meet its debt payments meet Based on our debt schedule, our DSCR (debt Based service coverage ratio) is acceptable service 2009 Seller Note Term Debt Revolver Interest Debt Service Operating Income DSCR Principal Principal 2010 2011 2012 2013 (2,400) (1,080) (4,076) (1,099) (8,655) (2,400) (1,080) (2,400) (1,080) (2,400) (1,080) (2,400) 0 (866) (4,346) (634) (4,114) (401) (3,881) (168) (2,568) 13,780 15,879 17,932 19,777 20,272 1.59 3.65 4.36 5.10 7.89 This was all given to us Projections 2 2009006 2007 2010 Adjustments Opening 20112008 2012 2013 Notes BALANCE SHEET Current Assets: Cash / (Revolver) Trade Accounts Receivable Inventories Other Current Assets Total Current Assets Property, Plant & Equipment Investment in OldCo 4,333$55 $3,500 6,890 $16,500 11,250 $2,500 2,300 $22,555 24,773 14,938 $45 26,713 $45 40,581-$4,121 56,264 $4,500 7,770 $6,500 8,035 7,372 8,235 $15,500 10,125 $12,500 10,125 10,125 10,125 $2,600 2,300 $2,300 2,300 2,300 2,300 $22,645 46,909 $21,345 61,041 34,735 76,924 32,000 32,000 -$4,076 $6,500 Grew this with sales growth $12,500 $2,300 $17,224 Borrowings on a revolver 2006 - 2007 saw a $2.3m increase. Lowered the next year. $6,200 Assumed PP&E CapEx of $2m each year $32,000 32,000 32,000 $32,000 $5,300 10,200 $7,600 12,200 $6,200 14,200 8,200 32,000 These adjustments get us to an opening balance sheet 16,200 Our purchase price Current Liabilities: Accounts Payable Accrued Liabilities 2200 UNEARNED REVENUE Total Current Liabilities $7,000 6,578 $5,700 6,934 $5,800 7,169 6,148 $8,500 6,700 $7,800 6,700 $6,700 6,700 6,700 $340 300 300$300 300 $300 300 $15,840 $13,800 $12,800 $13,148 $13,578 $13,934 $14,169 7,349 6,700 300 $14,349 Grew this with sales growth $5,800 Kept this flat $6,700 Kept this flat $300 $12,800 Seller note of $12mm Long Term Liabilities: Seller Note Term Debt Total Long Term Liabilities 9,600 7,200 3,240 2,160 $12,840 $0 $9,360 4,800 1,080 $0 $5,880 2,400 12,000 0 12,000 that these are paid down Note 0 4,320 0 t4,320 mentioned earlier. erms $0 $16,320 $0 $2,400 based on the Term Debt of $4.3mm Owners Equity: Stock Retained Earnings Current Period Earnings 11,559 11,559 11,559 11,559 11,559 11,559 14,745 79,113 12,015 27,426 16,445 42,438 14,745 59,736 12,681 0 15,012 20,104 0 17,298 0 19,377 Owners Equity and Liabilities: Test (should = 0) 64,973 107,241 27,855 76,935 30,245 91,109 27,545 00 0 0 0 0 0 125,124 0 Stock remains flat, because we don’t put This is the equity we put more 11,559 money in. 14,745 Retained 0 earnings (previous retained earnings plus previous period earnings) 55,424 0 up Cash Flow Cash Cash balance goes to the balance sheet Adjust for non-cash items and cash items not shown on Adjust Income Statement. Generally: Income Depreciation Debt payments CapEx Other changes in Balance Sheet items CASH FLOW EBITDA Interest (enter as -) Depreciation Change in AR Change in Inventory Change in Other Current Assets Change in AP Change in Accrued Liabilities Change in PP&E (CapEx) Change in Seller Note Change in Term Debt Change in Cash Starting Cash Change in Cash Ending Cash 13,780 (1,099) 0 (390) 1,250 0 348 0 (2,000) (2,400) (1,080) 8,409 15,879 (866) 0 (482) 1,125 0 430 0 (2,000) (2,400) (1,080) 10,605 17,932 (634) 0 (398) 0 0 355 0 (2,000) (2,400) (1,080) 11,775 19,777 (401) 0 (264) 0 0 236 0 (2,000) (2,400) (1,080) 13,868 20,272 (168) Interest on seller note (7%) and term debt (6%) 0 Just assumed no depreciation to keep it simple (201) 0 0 179 0 (2,000) (2,400) 0 15,682 (4,076) 8,409 4,333 4,333 10,605 14,938 14,938 11,775 26,713 26,713 13,868 40,581 40,581 15,682 56,264 Exit Scenario Exit We use the same exit multiple as entry multiple The company has generated significant cash, which we The assume will be distributed to equity holders at the sale (i.e. enterprise value vs. equity value) enterprise In this scenario, our return would be 54% Use entry multiple Year 5 EBITDA Enterprise Value From our income statement projections Net Debt Equity Value 12/31/2008 Our cash (equity) investment 5 year time frame (2008-2013) 12/31/2013 Internal Rate of Return 2.67x 20,272 54,058 (56,264) 110,322 (10,559) 90,700 (Fully-diluted) 0.54 = Debt – Cash = $0 - $56,264 = -56,264 = Enterprise Value – Net Debt = $54,058 - -56,264 =110,322 = Equity Value * Ownership = $110,322 * .82 ...
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This note was uploaded on 03/06/2012 for the course BUS M 475 taught by Professor Gregpeterson during the Fall '11 term at BYU.

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