Harry Finch’s distribution company (Finchco) has been for sale since the year 2007. Finch deals in distribution of industrial materials handling equipment in Ontario and Quebec where it has harnessed 20 percent of the industrial equipment market estimated to be worth $500 million annually. It is one of the five competing companies that have held a 90 percent share of the industrial market for the last 20 years.
The industry has enjoyed steady growth till the economic crisis set in between the year 2007 and 2009. With the prices of equipment ranging from $15,000 to $250,000, equipment breakdown translated to slower operations hence after-market service became an influential factor to consider in their purchase.
Manufacturers from the United States, Korea and Japan benefited by dealing directly with large regional dealers like Finchco. The most successful regional dealers had command and reach of a wide geographical area that enabled them to provide after-market services and secured significant proportion of larger customers.
Finchco began in 1938 under Finch’s father, Gerald, in Montreal. Finchco has grown to be a big company employing approximately 400 people. The company holds three large U. S. and Japanese original equipment manufacturers (OEMs) amongst other smaller manufacturers. The agreement with the OEMs is, however, annual and gets considered at year’s end for renewal based on the satisfactory performance of the distributor. The supplier can nullify the agreement after the 60-day notice. That depends on the case of sale of key assets, conviction of a felony, insolvency, change of ownership and failure to meet payments to the supplier in time.
Finchco provides maintenance, parts and servicing for the product lines and other equipment. It gets operated through a network comprising 14 branches (12 in Ontario and 2 in Quebec) with the corporate headquarters situated in Markham, Ontario. The structure, however, worked with most decisions being made by the president and vice president at the Markham head office. The company allows for both purchasing and leasing/renting of equipment.
The company has four major competitors dealing along the same line of products and services in both Ontario and Quebec. In order for a new firm to enter the market, it would require capital, a contract with a large reputable company and a broad network of clients. Finchco experienced thin profit margins as an aftermath of allowing large volumes of discounts.
The company’s revenue for the year 2010 was $76.8 million which was a 19.8 percent decrease in comparison to 2009. Finchco has noticeably decreased in debt exposure. It has created more than $3.1 million in free cash flow in the fiscal year 2010. A 40 percent debt ratio would form a realistic target for Finchco.
The company forecasts increased revenue in the year 2011 similar to that of the fiscal year 2009. It aims to achieve a 7.9 percent growth in 2012 and 3.2 percent growth in the subsequent year. The growth in sales is also projected to increase at the rate of 3 percent annually with the gross profit margin increasing to 33 percent. The Bank of Canada forecasted a slow return to economic health. The company pays corporate tax 16.5 percent on the first $0.5 million of the profits and 33 percent on any profit above that margin.
Finchco being a private company should attract a liquidity premium of 6 percent. It purchased its equipment from U. S. suppliers in US dollars and sold exclusively to Canadians in Canadian dollars. That exposes the company and makes it reliant on the fluctuating nature of foreign currency exchange rates. Precedent transactions grading of Finchco could not be feasible since none of the prior transactions exceeded $1 million. Since none of the competitors were publicly traded, it was compared to Toromont that was the closest match to it. Toromont had a return on equity of 15.5 percent on revenues of $1.8 million, 64.9 million shares, and a total book value equity of 1.2 billion. It also had a high annual trading value with a price-earnings ratio of 14.94.
Finchco has recently been presented with a huge opportunity to sign a contract with Alliance distributors. Collaborating with Stemco on servicing Baring equipment has equipped the company with the essential knowledge and opportunity to win over Alliance’s customers by offering them better deals. The company’s shares are exclusively owned by Finch. He has almost all his wealth tied up in the business. If he received shares from a private company (the acquiring company), they would be difficult to liquidate.
Potential Questions
- What is the financial situation of Finchco in comparison to other companies?
- How would the selling of Finchco impact the suppliers’ contract?
- What factors would guarantee the realization of company’s projections?
- Is buying Finchco a good investment? Support your answer.
- Is Finchco able fund its operations without incurring large amounts of debts?
- How will change in ownership affect the clients?
- What is the current relationship between Finchco and other competitors?
- What does the projected future of Finchco look like?
