Q1

Randy Dillingwater is the chief investment officer for Clearstone Capital. Clearstone is a private equity firm located in Orlando, Florida, that specializes in what Randy describes as make-over or fixer-upper investments. The firm tries to find privately held firms whose owners tried to grwo their business too fast and ran into liquidity problems. Clearstone has been in this business for eleven years and has had reasonable success.

Clearstone is now completing the investment of its second fund and considering the acquistion of a local manufacturing and distribution company, Flanders Inc. Flanders was founded by Mark Flanders eighteen years ago and grew rapidly. Recently, however, the firm made a large acquisition of a competitor firm, and the problems the firm encountered when assimilating the acquisition led to financial difficulties for Flanders. The owner has recently voiced his interest in a buyout proposal to his local banker, who notified Randy (his next-door neighbor) of the opportunity.

Randy contacted Mark, and the two decided to open a dialogue about the possible acquisition of Mark's firm. After several meetings, Mark decided to solicit an offer from Clearstone. In responset to Randy's request, Mark supplied him with the following set of pro forma income statements spanning 2016 to 2020:

Pro Forma Income Statements 2016 2017 2018 2019 2020 EBITDA $11,000,000.00 $12,100,000.00 $13,310,000.00 $14,641,000.00 $16,105,100.00 Less: (3,900,000.00) (4,300,000.00) (4,700,000.00) (5,100,000.00) (5,500,000.00) Depreciation EBIT $7,100,000.00 $7,800,000.00 $8,610,000.00 $9,541,000.00 $10,605,100.00 Less:Interest (6,300,000.00) (6,235,600.00) (6,040,288.80) (5,690,457.10) (5,159,103.90) Earnings $800,000.00 $1,564,400.00 $2,569,711.20 $3,850,542.90 $5,445,996.10 before tax Less: taxes (240,000.00) (469,320.00) (770,913.36) (1,155,162.87) (1,633,798.83) Net income $560,000.00 $1,095,080.00 $1,798,797.84 $2,695,380.03 $3,812,197.27