case

11-97. Hellemn Candy is a small candy manufacturer located in Defiance, Ohio. Founded in 1912, the company offers a full line of candy products to the marketplace, including its popular HoHo lollipops, Christmas candy canes, and various chocolate treats.

company Background

Operating from state-of-the-art manufacturing facilities, Hellemn employs 275 full-time associates. The company pays competitive wages and is noted for its employee-focused approach to daily operations. Its motto is, If our employees are happy, our customers will be happy. Because of this, the company has never experienced an effort to unionize.

Competitive advantages for Hellemn include its brand name products, state-of-the-art manufacturing facilities, highly liq- uid balance sheet, a proven management team, an abundant supply of nonunion labor, and its loyal customer base. Dis- advantages are its size (Hellemns total assets are about 8% of Tootsie Rolls and 2% of Hersheys), its limited presence in certain candy product lines, and fewer available dollars

to devote to research and development. Due to its relatively small size compared to competitors, the company also has

chapter 11 | Fundamentals of Business Valuation 359 low buyer power and cannot achieve significant economies

of scale.

Major customers include all the major retail chains. While these are important customers, Hellemns sales are not concentrated with any one retailer. Indeed, the company works hard to maintain excellent working relationships with each of its suppliers and customers. Sales are seasonal, with about 75% of sales occurring around Halloween, Christmas, and Easter. Throughout the remainder of the year, sales are fairly consistent from month to month. Hellemn is able to adjust its payroll according to operational needs. Manufac- turing lead time is four months, and most of the companys products have an average shelf life of about six months.

Hellemn Candy is a family business. President Dale Hellemn is a fourth-generation descandant of the founder, and the chief financial officer, Vicki Hiler, is a third-generation des- candant. Dale Hellemn owns 52% of the companys common stock, and six other family members each own 8% as shown in the following table.

Compensation for key employees (as shown in the previous table) was determined by competitive market surveys.

Officers/Key Employees	Title/Compensation	Responsibility/Function
Dale Hellemn	President and CEO Shareholder (52% interest) Member Board of Directors Annual Comp. 5 $250,000	Responsible for all company operations and is Chairman of the Board of Directors
Donald Hellemn	VP in charge of Operations Shareholder (8% interest) Member Board of Directors Annual Comp. 5 $165,000	Responsible for all manufacturing operations
Letha Hellemn	VP/Human Resources Shareholder (8% interest) Member Board of Directors Annual Comp. 5 $100,000	Responsible for all human resource functions
Vicki Hiler	Controller/Treasurer Shareholder (8% interest) Member Board of Directors Annual Comp. 5 $125,000	Responsible for accounting and financial management
Jason Hiler	Marketing Director Husband of Vicki Hiler Annual Comp. 5 $105,000	Responsible for all marketing functions
Other Hellemn family members	Three other family members own 8% interest	They do not participate actively in company management but serve as board members.

360 Forensic Accounting

Financial data

Financial information for Hellemn Candy is set forth in the following tables.

Income Statements Hellemn Candy	For the years ended December 31 ($000 omitted)
	2012	2011	2010
Sales	$53,250	$52,150	$49,900

Cost of Goods Sold Operating Expenses Other Income (Expense) Provision for Income Taxes

$36,625 $10,840 $300 $1,700

$35,050 $10,650 $900 $2,050

$32,050 $10,600 $175 $2,100

Gross Profit

$16,625

$17,100

$17,850

Operating Income

$5,785

$6,450

$7,250

Income Before Income Taxes

$6,085

$7,350

$7,425

Net Income

$4,385

$5,300

$5,325

Balance Sheets Hellemn Candy	As of December 31 ($000 omitted)
	2012	2011	2010
Current Assets:

Cash and Equivalents

$7,875

$11,600

3,750 800 22,540 2,660

4,850 8,200

$9,099

4,600 850 21,100 2,600

4,700 8,000

Accounts Receivable, net Investments 1,100 Total Current Assets 20,895 Other 1,605 Current Liabilities: Other Current 4,770 Long-Term Debt 8,500

4,190

Inventory

7,170

5,670

5,650

Other Current

560

720

901

Property, Plant, Equipment, net

21,300

21,600

22,100

Total Assets

$43,800

$46,800

$45,800

Accounts Payable

$1,100

$1,000

$900

Total Current Liabilities

5,870

5,850

5,600

chapter 11 | Fundamentals of Business Valuation 361

Balance Sheets Hellemn Candy	As of December 31 ($000 omitted)
	2012	2011	2010
Stockholders Equity	29,430	32,750	32,200

Total Liabilities and Equity

Additional Information:

Dividends Paid

Shares Outstanding

Depreciation and Amortization

the Industry

$43,800

$1,850

6,000

$2,050

$46,800

$1,810

6,000

$1,910

the economy

$45,800

$1,800

6,000

$1,800

The industry is dominated by several large manufacturers, such as Barry Callebaut and Nestle in Europe; Hershey, Mars, and Tootsie Roll in the United States; and Ferrero in Italy. These companies, as well as their smaller counterparts, operate in three segments: (1) those that manufacture choco- late from beans, (2) those that use manufactured chocolate to make candy, and (3) those that manufacture nonchocolate candy.

Demand for candy products is primarily driven by consumer tastes and preferences and population growth. Candy manu- facturers reinvest about 5% of sales in research and develop- ment in an effort to meet both changing customer preferences and to provide healthier products to customers. Similar to many industries, profitability is driven by manufacturing ca- pability, the ability to maintain supply chain efficiency, and branding and other marketing considerations. The industry is concentrated, and economies of scale exist for large compa- nies. Smaller firms compete by offering specialized products in niche markets. Analysts estimate that U.S. consumers eat about 25 pounds of candy per capita per year.

Annual global industry sales exceed $150 billion, with U.S. sales comprising about $9 billion of that amount. Since this is a mature industry, sales are expected to grow at about 3% per year into the foreseeable future. Revenue com- ponents include the following: 50% from purchased choco- late, 30% from nonchocolate candy, and 20% from chocolate candy. The nonchocolate candy segment includes products such as hard candies, marshmallow products, and gum, to name a few.

The economy is growing slowly. Gross domestic product (GDP) in 2012 grew at an annualized rate of 2%. This growth is slightly higher than the average growth over the previous two years (1.7%). Interest rates remain at historically low levels. The December 2012 three-month T-bill rate was .09%, while the 30-year T-bond rate was 3.00%. The inflation rate was 1.75% in 2012 and is expected to reach 2.3% in 2013. The specific risk premium is 1.00%.

the Assignment

Hellemn Candy is considering a sale to a major candy manu- facturer. In order to negotiate a sales price, Hellemn Candy wants to estimate its fair market value. As a forensic ac- countant, you have been retained to perform a valuation of Hellemn Candy as of December 31, 2012.

Your engagement is defined as follows:

Hellemn Candy Earnings Analysis (20082012), $000 omitted
Year	2012	2011	2010	2009	2008

Income from Operations Net Cash Flow from Operations

$5,785 $5,050

To assist you with this effort, the following earnings data are provided:

$6,450 $7,250 $6,250 $5,975 $8,300 $7,700 $7,530 $5,700

1. Engagement Purpose: 2. StandardofValue:

3. InterestBeingValued: 4. Type of Engagement: 5. Premise of Value: 6. Valuation Date:

Prospective sale

Fair Market Value (but Hellemn understands that Investment Value may be relevant to the buyer)

100% Valuation

Going Concern December 31, 2012

Net Income

$4,385

$5,300

$5,325

$4,737

$4,529

362 Forensic Accounting Using Ibbotson SBBI, you have determined that an appropriate

equity risk premium is 5.00%, the firm size premium is 4.00%, and the industry risk premium is 1.75%.

To complete your assignment, you will need to perform the following phases of analysis:

Phase One:

Phase Two: Phase Three: Phase Four:

Analyze Hellemn Candys financial statements

Determine a capitalization rate Determine a proxy benefit Calculate an indication of value