Private Equity at Work: Purchasing Cake Masters Harvard Case Solution & Analysis

Mr. David Kuchen was a 30 year old MBA graduate, who wished to acquire a small business located in Toronto, Canada, named Cake Master, a small company engaged in the business of manufacturing confectionary and bakery items. Mr. Kuchen had the view of investing in the small business and efficiently and effectively managing it, by becoming Senior Manager for at least 5 years. He looked at this business as very promising and decided to acquire it with the investment of $5 million, a price tag labeled by Mr. Eugene, the person who set this business up around 20 years back. The bakery had 54 employees.

The business of Cake Masters revolved around supplying high-quality bakery item to retail chains. Mr. Eugene offered Kuchen to acquire his own business for a price tag of $5 million without any sort of debt.

As stated in the case, Mr. Kuchen also had another option available, with the business generating less EBITDA than the target set by Mr. Kuchen, but he opted for Cake Masters. He believed that the company will see growth in the near future and will bring positive cash flows. As requested, we have carefully analyzed and evaluated the Cake Masters’ historical financial statements and future projections.

SWOT ANALYSIS:

  1. The internal strengths and external opportunities which we had analyzed were good expected market for the bakery items, good recognition of the bakery in the area, low substitute’s involvement due to the inherent characteristics of the cake, price and image of the bakery among the customers were the key to the success.
  2. The internal weaknesses and external threats to the deal were that Mr. Kuchen was inexperienced enough to run the business, the industry has very low barriers to entry since there is easy access to the  manufacturing equipment and requires low amount of investment, low buyers loyalty and high price tag.

On the other hand, if we have a look at the financial propositions of the deal, it seems like if Mr. Kuchen goes for the deal, he should ask for lower price tag, since the net present value of the 5 years deal is bit negative, but with the high probability of increase in cash flows in the future, it is expected that the demand for the sweet dishes and bakery items will tend to increase with a constant rate of 17%.

If I were Mr. David Kuchen, I would have asked the seller of the bakery to bring down his price tag of $5 million to $2.5 to $3 million, as it is considering the SWOT analysis, DCF valuation and Comparison Analysis. The said price seems to be reasonable regarding all the positivity of the deal as we talk about Comparative Analysis; the Cake Masters was doing fairly well against the industry averages. So, it is suggested that, Mr. David Kuchen should go for the deal subject in order to lower the price tag and if the deal is intact on the original price tag, then he should consider managing the business for more than 7 or 8 years.

Appendices:

PRECEDENT TRANSACTIONS
($000s)
Target Company

Date

Sales* EBITDA* Price** Multiple of EBITDA Multiple of Sales
Artie's Artisan Breads

2-Apr

12,000

1,300

7,800

                         6.00

                     0.65

Fresh Bakery

Dec-98

2,200

350

1,225

                         3.50

                     0.56

The Cake Shoppe

1-Nov

3,000

600

2,700

                         4.50

                     0.90

Bakeco

3-Jun

35,000

3,000

36,000

                       12.00

                     1.03

Toronto Cakery

2-Jul

6,000

750

3,000

                         4.00

                     0.50

Industry Averages

                         6.00

                     0.73

Cake Masters

2004

5,768.20

712.5

4,403

                         6.18

                     0.76

($000s)

2004E

2005F

2006F

2007F

2008F

2009F
Revenue - fresh cakes            
Franco's

 $    4,638

 $    5,565

 $    6,678

 $    8,014

 $    9,617

Other accounts

 $    2,284

 $    2,513

 $    2,764

 $    3,040

 $    3,344

 $    6,922

 $    8,078

 $    9,442

 $ 11,054

 $ 12,961

Revenue – par baked cakes
Revenue

 $       900

 $    1,800

 $    3,000

 $    3,600

 $    4,200

Total Revenue

 $    7,822

 $    9,878

 $ 12,442

 $ 14,654

 $ 17,161

Gross Margin  $    2,212  $    2,693  $    3,283  $    3,856  $    4,518
Operating Expenses

 $    1,173

 $    1,482

 $    1,866

 $    2,198

 $    2,574

....................

This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution.

The entrepreneur has to decide whether to bid for the purchase of a commercial bakery, cake artists, given his goal in his quest and his investors expected return of 20-30 per cent. If he bets, he must decide how much the bet and what form of consideration. Students are introduced to the assessment methodology, and will assess the acquisition or opportunity to understand the process of acquiring a small company, to know how previous transactions are considered and learn about the discounted cash flow analysis. "Hide
by Craig Dunbar, Ken Mark Source: Richard Ivey School of Business Foundation 13 pages. Publication Date: June 21, 2006. Prod. #: 906N07-PDF-ENG

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