It was a cold Wednesday morning in January $2008$ and Doug Cook was on his way to have his usual Starbucks grande soy latte with an extra shot in Chicago's Old Town neighborhood.Cook had been awake all night wrestling with one of the most important career decisions of his life: Which one of three seemingly promising businesses should he acquire: Luxury Tassels, Inc.;Feldco Window and Doors, Inc.; or Coyote Consulting Company? Each acquisition was a viable opportunity and each of the companies had the potential to be a successful business. Cook, however, had heard numerous disconcerting stories about other entrepreneurs who had been deceived during the due diligence period and later discovered various documents had been "doctored" to inflate earnings. The owners with whom Cook was talking had different reasons for selling, and he wanted to be sure of their true motivations.As Cook left Starbucks, he realized that until this time the biggest purchase he had made in his life was a $$250,000$ condominium in downtown Chicago. Acquiring one of these companies would require a financial and personal commitment greater than anything he had ever attempted.He felt a window of opportunity was closing. If he did not act now he might find himself in the corporate world forever.Purchased for use on the Finance $($BS$)),$ at Emory and Henry College.Taught by Emmett Tracy, from $15-$Aug$-2022$ to $30-$Dec$-2022.$Order ref F$461080.$Usage is permitted only within these parameters otherwise contact info@thecasecentre.orgThe Search to Buy a BusinessSix months earlier, Cook had sat at his desk on the $41$st floor of the Leo Burnett building in downtown Chicago and wondered if he was going to work there the rest of his life. His position as an account executive with Cox Broadcasting provided him an opportunity to excel at sales and advertising $($Exhibit $1)$ with a high level of job security. Since receiving his MBA from the Kellogg School of Management part$-$time evening program in June $2006$ he had been actively searching for a company to buy. His search, however, was proving to be more difficult than he had imagined as a student in Professor Steven Rogers's Entrepreneurial Finance course. Professor Rogers had made the idea of becoming an entrepreneur sounds arduous and thrilling at the same time. Cook's search had been arduous and thrilling, but the arduous part had become more than he anticipated.He had spent three hundred hours reviewing more than sixty business summary reports in the past eighteen months and devoted the majority of his free time to visiting businesses all over the Chicagoland area. The problem was not finding businesses for sale$--$there were hundredslisted every day in the newspaper, on Web sites, and in various trade publications the problem. was that most listings did not offer what Cook was looking to buy. Or$,$ if the listings did seem attractive, they were out of his price range. He again reviewed his one$-$page criteria sheet $($Exhibit $2),$ an assignment that he completed in Professor Rogers's class. It was unchanged since he had first written it on a snowy day in the "Quiet Study Room," and he questioned if he was being too narrow in his search. Initially, Cook had felt that he should stick to his criteria, but now he was beginning to wonder.Throughout his search, he used every personal contact he had from Cox Broadcasting, the Kellogg School, and a lifetime of living in Chicago to search for a quality business to purchase.He had also spent a great deal of time on the Internet looking at hundreds of businesses for sale at Business Trader $($www$.$biztrader.com$),$ U$.$S$.$ Business Exchange $($www$.$usbx.com$),$ Great Western Business Services $($www$.$gwbs$.$com$),$ and the Chicago Tribune Website $($Exhibit $3),$ where he found uninteresting laundromats and pizza shops. The more Cook looked at the businesses available, the more he became disappointed and frustrated. It was at this point that he called an old family friend, Bob Buchanan, who for more than twenty years had run a very successful restaurant in the Gold Coast area of Chicago.Buchanan was happy to hear from Cook. He had coached Cook's youth hockey league team in Wilmette, Illinois, and was intrigued by Cook's business search. "Well, you could always buy me out," Buchanan joked when Cook asked him about finding a business for sale. Cook asked him about how he had found his original restaurant. "I used to be a business broker back then, some guy I looked up in the phone book who was selling an old Italian restaurant that was on its last legs. I ended up overpaying for the business and making major changes to become profitable, but I probably would never have found this place if it were not for the broker." Cook listened carefully and thanked Buchanan for the advice. It was too bad "eatery" did not fit his criteria, or Cook might have purchased Buchanan's restaurant then and there.Hiring a Business BrokerWhile resuming his search for opportunities, Cook kept the thought about a business broker in the back of his mind. He visited several different companies that had advertised in the Tribune. Collins Manufacturing, a small Milwaukee$-$based manufacturer of airline parts, had a potential owner of the company tell Cook that he was making an enormous event selling his entire product line to Southwest Airlines. Better yet he was driving his competitors out of business or in price. Once the competitor closed the owner felt he could make his company profitable. Relentlessly who's there I was supposed to go to company,Whitaker & Sons Sports Equipment Inc. had $$1$ million inEBITDA. The owner was asking $$10$ million, which did not include the small assembly facility in Schaumburg, one of Chicago's western suburbs. Any new buyer would assume a five$-$year lease for an additional $$200,000$ per year. The owner had advertised the business for sale after recently receiving an unsolicited offer from a prospective buyer.One day Cook spotted an ad in a newspaper for a seminar on how to purchase a business $($Exhibit $4).$ The ad appeared full of promise. One of the seminar faculty members was Mike Adhikari. Cook hoped Adhikari might be the resource he needed to find his long$-$awaited business. He heard that Adhikari had a database that could be customized to his purchase criteria. a cook called Adhikari and proposed they meet for lunch at an upscale seafood restaurant downtown. For two hours Cook listened intently as Adhikari talked about the process of finding a business to buy. Adhikari informed Cook that he typically was hired by a seller. On the rare occasion that a buyer hired him, they already had identified a target company and hired him for the final negotiation. Adhikari also asked interview questions about how much money Cook was looking to spend, where he would get the money, how serious he was in his search, and what he was looking for in a business. It seemed easy enough. As Adhikari picked up the tab, Cook asked him what kind of broker fees would be involved. Adhikari replied that typically he used the"Lehman" Formula $($Exhibit $5).$ Also, to Cook's surprise, he learned that Adhikari had been a regular guest speaker in Professor Barry Merkin's Entrepreneurship and New Ventures class at the Kellogg School.The Business OpportunitiesAfter Cook signed up with Adhikari, doors quickly opened to companies he had not been able to find during his independent search. The new exposure yielded several viable businesses that Cook eventually narrowed to the following three companies:Luxury Tassels, Inc.Luxury Tassels, Inc. was founded in $1980$ in Rockford, Illinois. The original owners saw an opportunity to sell decorative tassels in the local market. In $1992$ new owners took control and moved the business to Chicago.The product line consisted of: Cushion and pillow tassels Graduation tassels Religious institution tassels Limited selection of decorative trimCustomers for tassel products were typically made up of regional distributors who promoted tassels and decorative trim using specialized "product books."All of the products were made and housed at the company's plant in Rockford. Luxury Tassels manufactured each order when received, which ensured that the right product was delivered to each customer. The operation process that enabled the company to accomplish this was complex and time$-$sensitive$,$which contributed to relatively high production costs. Also, two employees had been injured in the manufacturing plant and had taken legal action against the company. However, the system allowed the company to have a higher quality product and was its main competitive advantage.One other advantage that allowed the company to maintain its position in the market was its sales focus on end users. Many of its distributors appeared too busy to focus on selling Luxury Tassels's products to potential end users. Luxury Tassels had a dedicated salesperson who assisted its distributors in communicating the products' benefits to tassel buyers. This gave an apparent advantage in the market and established a lot of goodwill with the distributors.Cook discovered more about tassels than he ever imagined. Tassels had adorned clothing, draperies, and religious items for millennia, going back to the days of decorating tombs in the Egyptian pyramids. He started to see tassels everywhere: on military uniforms, at university ceremonies, on flags, and pillows and curtains in his own home. Tassels hung on many rear$-$view mirrors in vehicles to commemorate high school graduations.The tassel industry was solid, and Luxury Tassels's good reputation allowed it to capture a competitive share of the market. The total national tassel market was estimated to be $$1\mathrm{.}4$ billion, including institutional, commercial, and retail channels. The institutional segment commanded a $48$ percent share of sales totaling $$672$ million. Commercial sales to interior designers, which held just over $18$ percent share of the total and $$252$ million, were considered to have the greatest growth potential. And retail maintained a $34$ percent share of the tassel market, with sales of $$476$ million.The luxury decorative tassel market, a subset of the commercial segment, was growing rapidly, reaching an estimated $$80$ million in $2007.$ It was expected that this market would grow $15$ to $20$ percent annually over the next five years. Direct competition fell into two categories: $(1)$ smaller companies that specialized in ceremonial products and had strong relationships with distributors, and $(2)$ a few large fabric manufacturers with national distribution of products sourced from North Carolina.Luxury Tassels was one of the few Midwestern manufacturers in this market and had gained a reputation as an innovator within the industry. This enabled the company to perform at levels greater than most of its competitors $($see Exhibit $6$ for Luxury Tassels's financial information$).$ The owners were asking $$3\mathrm{.}0$ million for the company, with the provision that it be a stock rather than an assetpurchase. The recent industry average EBITDA multiple was $4\mathrm{.}5.$Owners Akilah and Ariel Grant, ages $38$ and $35,$ respectively, were looking to move on to another project immediately after the company was sold. They wanted to retain $10$ percent of the company.Feldco Windows and Doors, Inc. $("$Feldco$")$Bernie Feld formed Feldco in $1966$ to sell and install custom replacement windows and steel patio and entry doors. The company's products were designed only for home improvements, rather than for new home construction. In addition to windows and doors, Feldco offered kitchen cabinet refacing, siding, and gutters. Advertising and marketing focused only on windows, doors, and cabinet refacing. Sales of other products were minimal at present and came as a result of customer inquiry. The company has been profitable every year since its inception.Each job was relatively small and was normally completed in less than one day.Like other window replacement companies, Feldco avoided projects that required structural changes to the home. Too many variables existed with structural work, and these kinds of projects generally took longer to complete. Feldcos policy required that all sales be strictly cash transactions. Financing, if needed, was provided by outside financial institutions. No projects were accepted until customer financing was in place; the company did not extend credit. Feldco required down payments on each project, and sales representatives attempted to secure $50$ percent. After receiving the down payment and approvals regarding financing, Feldco ordered windows from its manufacturer in Pennsylvania.All windows were custom$-$made, therefore several weeks passed from the time Feldco placed an order and completed the installation. When Feldo received the windows, customer service representatives scheduled the job $($often the same day the tie window was received$).$ The installer completed the work and collected the balance of the money due on the contract before leaving the job site.Feldco operated out of two showrooms, one in a northwest suburb of Chicago and one on the south side of Chicago. In addition to the two showrooms, Feldco operated a storage warehouse on the west side of the city.The window replacement industry was highly fragmented. Competition came from many different sources, ranging from large national home improvement stores to local construction companies. Cook noticed that in the recent Sunday Chicago Tribune, there were more than twenty$-$five ads for window replacement services.Building a brand name had been tough for Bernie Feld. Most sales were completed with new customers. Born in $1938,$ Feld had been involved in the home improvement industry most of his adult life, but in recent years he had found his motivation to run Feldco fading. All of Feld's competitors regarded him highly; they attributed Feldco's success to industry knowledge and strong spirit. Feld loved working at Feldco for part of the year; he lived in Florida from late November to late March.Feld had not set an asking price for the company; rather, he asked prospective buyers to submit a bid. He recently rejected a $$4$ million bid that asked him to finance $60$ percent at prime $(5$ percent$)$ plus $550$ basis points over seven years, with interest payments only beginning in Year $6$ and the total balance due at the end of Year $7($see Exhibit $7$ for Feldco's organizational chart and financial information$).$ He was willing to stay on after the sale to assist the new buyer. Two years ago, Feldco had ten fewer employees.Coyote Consulting Company $("$CCC$")$CCC was formed in $1998$ by the highly charismatic Dan Blair and his college roommate Matt Elner to assist affiliate television stations with strategy and business development. Before founding CCC$,$ Blair had been a former creative director at ESPN; Elner had been a partner for thirteen years at Boston Consulting Group focusing on the media and entertainment industries.CCC principals advised commercial and public broadcasters, cable television operators and programmers, equipment suppliers, trade associations, and financial institutions on business opportunities, market trends, and technological innovations in media and telecommunications.The company's consultants contributed to new venture start$-$ups, diversification efforts, sales support, fair market valuations, regulatory initiatives, and strategies for existing media to respond to new competitive challenges.$$There were three targetedbroadcasting,cable television,digital image capture and transmission. CCC assisted stations in small and large markets with developing transition strategies and building appropriate business models. For cable television providers, services included market analysis and research for new product$/$service pricing, packaging,and overall market and competitive positioning.CCC also developed a detailedcompetitive assessments and marketing plans for cable companies to match competition in specific market clusters. It also provided ongoing competitive analysis and monitoring as part of a monthly subscription$-$based service. CCC assisted new and existing cable programming services with business plan development, company valuation, economic feasibility analysis, and the development of affiliate sales strategies. Finally, CCC provided consumer and business$-$to$-$business market research services to cable programmers and cable operators domestically and internationally.More than fifty consulting firms, including the major strategy consulting firms, aggressively pursued this industry. CCC enjoyed a reputation as a leader in this segment among independent firms and had extremely low employee turnover.CCC employed twenty$-$five full$-$time professionals at its Chicago headquarters, Blair and Elner, the co$-$founders and current owners, were each $35$ years old. They said they were selling because they wanted to do other things such as travel around the world and spend more time with their families. Their asking price was $1\mathrm{.}7$ times the last calendar year's revenue in an industry in which the average sales price was $5$ times operating income. The price was determined by their estimated cash needs to retire permanently. They were willing to finance $50$ percent of the deal over two years at prime plus $200$ basis points $($see Exhibit $8$ for CCC$\text{'}$s financial information$).$Cook's DecisionAfter searching for almost two years, Cook had reached a critical junction. Which company should he buy?$$Exhibit $6\mathrm{.}1$: Luxury Tassels Balance SheetEACHHome$2024-2025-/$ Major ASsMaj BusOpened: :Due: Satu$200720062005$Current assets$23,541245,96620,993$CashAccounts receivable$826,938652,857615,646$Inventory$330,451260,291236,174$Prepaid expenses$47,87844,76286,259$Total current assets$1,228,8081,203,876959,072$Fixed assetsNet furniture and fixtures$52,92446,63135,572$Net machinery$122,628128,383137,549$Net dispensing equipment$297,567194,931101,610$Total fixed assets$473,119369,945274,731$Other assetsDep$/$pats$22,81521,50125,497$Total other assets$22,81521,50125,497$Total assets$1,724,7421,595,3221,259,300$Current liabilitiesAccounts payable$253,547430,944268,990$Other current liabilities$122,003116,04141,056$Notes payable$-$short term$123,929$Real estate taxes$-$payable$22,00022,46620,000$Accrued expenses$3,4082,2991,892$Total current liabilities$400,959571,750455,867$Long$-$term liabilitiesNotes payable$149,862204,565265,225$Total long$-$term liabilities$149,862204,565265,225$Stockholder equityCapital stock$141,500141,500141,500$Retained earnings$1,032,421677,507396,708$Total stockholder equity$1,173,921819,007538,208$Total liabilities and stockholder equity$1,724,7421,595,3221,259,300$Exhibit $6\mathrm{.}2$: Luxury Tassels Income StatementHelp$5-209-251($A$)200720062005$Solos$5,644,8535,021,0673,865,296$Cost of goods sold$3,527,9813,213,5872,769,541$Gross profit$2,116,8721,807,4801,095,755$Operating expenses$1,292,5731,056,313866,089$Operating income$824,299751,167229,666$Interest$50,00030,00020,000$Taxes$79,00061,00033,000$Depreciation$6,000$Amortization$5000$Home Dashboard My courses$2024-2025-$ Summer Foundations MB$,/$ Major Assessment: Financial DecisionsMajor Assessment:BusinessOpened: Saturday, August $10,2024$Due: Saturday, August $17,2024,11$:Major Assessment: Financial DecBased on the information provided $($google spreadsheet$/$excel$)$ inYour submission should evidence statements from all of the acquis assumptions about Future Cash Fmade and why.Exhibit $6\mathrm{.}2$: Luxury Tassels Pro Forma Analysis$2008200920102011$Sales$6,684,0007,486,0808,384,4109,390,539$EBITDA$1,214,0001,578,2001,972,7502,959,125$Other expensesSales expenses