However the son who wants to operate the company doesn’t want to that solution, because that leverage can catch up with growth of the company.
2. Assess how each alternative addresses the family needs and key concerns of each alternative (buyout, leveraged rationalization, private-PIP). A. Buyout : It can’t be good solution, because a private company doesn’t have liquidity. It means buyout fund have difficulties to make the money from a private company B.
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Leveraged rationalization : As mentioned, this is foremost solution if they want to solve their problems on their hands.However this is too risky for the company. They should grow fast as fast as they can, but the big leverage can be big problem. C.
Private-PIP : I think this is best solution, but that is also big problem to those who runs the company because of warranty. Heritage partners should protect themselves because they are minority shareholders, so they made warranties. However that warranty can take control power from CEO when CEO don’t maintain their growth.
In that case CEO can make the estimation lower, but that means they can be valuated lower by Heritage partners. . What is the fair market value of the firm considering the Heritage proposal? Use DC analysis?specifically, the adjusted present value method.
Discount cash flows at the firm’s unleavened cost of equity (calculate cost of equity using the comparable public firms provided), and discount interest tax shields at the firm’s cost of debt. $MOM * – $MM $MOM /$MOM : discount rate in PIP companies 120% : private companies disadvantages /$MM : there is no management premium 4.What is the fair market value of the firm using comparable transactions? Use the market-to-book and equity-to-net income ratios. Equity-to-net income ratios : SSL MOM the problem of liquidity : -$MOM there is no premium : S-MOM MOM 5. Is this situation common for family owned businesses? Is the private-PIP a better solution than the other alternatives? Think that a history of family is very difficult, so there is a better problem when they are harmonious. Private- PIP is best solution for those who wants to finish the inheritance problem.However the biggest problem of private-PIP is losing their control. Don’t want to say that is not fair, but no matter how management team’s ability, the market situation is also very important.
Sometimes they can’t retain their growth, but they can overcome their problems later. Therefore my best solution is revenue sharing with brothers and sisters in a set period. If they can share their revenue(it can be % or fixed money), CEO don’t need to run a risk that losing control, and his brothers can get a incinerating.