Harrington Powerpoint Final V1

Topics: Venture capital, Corporate finance, Investment Pages: 20 (583 words) Published: February 26, 2015
Harrington Corporation
Harrison Wulsin
Jack O’Neill
David Williams
Will McKiernan

Summary of the business
 Operating Characteristics


Market dominant calendar company (est.
1920)



60-65% market share of industry @ $1314mm



Profitable past 4 decades



Return on avg. invested capital = >20%



Loyal customer base  98% re-orders



Impressive working capital management

Market Share
Harrington
Algonquin
Other

Issue at Harrington:
 Mr. Baring’s health is declining
 Asking price: Total Value= $10mm
Cash = $8mm
 Mr. Brooks and three other senior managers express concern  wish to preserve career continuity & foresee opportunity to turn a profit in firm equity

 How will the four managers meet Mr. Baring’s asking price?

Cold Call Question #2
 Is the $3mm advance from the VC’s adequate to
facilitate funding the $10mm purchase price…
and if so, where do they get all the $$$$?

Capital Requirements
Amount Needed

10,000,000

Bank Loan

3,000,000

Baring Note

2,000,000

Manager’s Money

250,000

Venture Firm

3,000,000

???????

1,750,000

Capital Requirements
Amount Needed

10,000,000

Bank Loan

3,000,000

Baring Note

2,000,000

Manager’s Money

250,000

Venture Firm

3,000,000

Cash on the Balance Sheet

1,750,000

Baring’s Note
 Covers $2,000,000 of Capital
 5 Year Note
 $3,000,000 Face Value paying 4% coupons

Cold Call Question #4
 What would be a fair estimate of the IPO value
and how arrived?

Deriving a Correct P/E Ratio
 Looked at a P/E Ratio based on $10 million sale

 We then looked at comparable companies to see if
this made sense

Deriving a Correct P/E Ratio

Deriving Correct P/E Ratio

 Clearly a good deal for management!!

IPO Valuation
 In order to see what percentage of our Company we
had to relinquish to meet the VC hurdle rate we had to
come up with a Value of NewCo at the point of sale
 We decided that since there were no changes in the
industry the same P/E Ratio was appropriate

Cold Call Question #6
 It seems strange that the Brooks group
seemingly omitted any provision for the
redemption of the debenture in their projected
cash flows…a mistake or else?

Venture Capital Funding
 However in Exhibit 7 of the case, it showed that NewCo
repaid no debt to the Venture Capital company
 Since VC company could earn 21% on a relatively safe
bet, we figured that Brooks was in the driving lane and
could negotiate terms as he saw fit
 Therefore he could wait until after 1976 and
incrementally pay off this debt through cash flows of
NewCo

Venture Capital Funding

NewCo Balance Sheet

Cold Call Question #8
 How best to evaluate the “unexploited business
opportunity” that the Brooks group wishes to
consider.

Unexploited Business
Opportunity

 Capex: Year 1 - $100,000, Year 2 and 3 - $225,000
 Year 1 Sales: $500,000
 Growth: Year 2 through 4 – 40%, Year 5 through 10 – 13.5%  Profit Margin: 6% of Sales
 Taxes: Used Cash Forecast for 1971-1976, then grew at
constant 1976 growth thereafter

Summary of Deal for Management

 Is this 75.7% return enough?
 Very Risky:


Owners are the last to get their money back so if they
don’t meet their earnings forecast they could be in trouble



The owners have drawn into their savings, refinanced
their mortgages, and liquidated other investments in
order to get this $250,000

Final Decision
 YES the owners should accept this deal
 Demand for the product is predictable and barriers to
entry are very high
 The deal ensures that they will have control over the
company and its sale
 They may have liquidated other investments but it
would be hard to find one that has a 75% return on
capital

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