Brazos Case Essay

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Entrepreneurial Finance and Private Equity CASE 2: Brazos Partners: The CoMark LBO 1.Executive Summary: Brazos Equity, a middle market LBO group founded in 1999, was considering buying 73% share of Comark Building System Inc. at the cost of $40 million. Comark, had $35 million revenue in 2001, is a manufacturer of commercial modular Buildings and has a solid connection with government. Brazos thought Comark as a good deal because Comark had a good management, solid cash flow and was priced reasonably. Brazos was trying to decide a stock purchase or asset purchase. The asset purchase option will generate $700,000 million more tax obligation than stock purchase do. However, under the asset purchase method, the goodwill generated from this transaction could be depreciated over 15 years, or $900,000 annually over 15 years. To justify the price of $40 million, we adjusted an APV approach. We derived the unlevered beta from the comparable firm Modtech. Adding other assumptions to our valuation model, we concluded a firm value of $83.92 million, and 73% of the firm value is $65.17 million. According to the sensitivity analysis, the possible 73% firm value ranged from $54.62 million to $84.36 million. We recommend Brazos to go for this deal based on the following reasons. Comark was a well-managed company with steady increasing cash flows but had limited access to financing sources. Brazos got the chance to provide funding to Comark at a good price. In addition, the founders of Comark were in their late 50s and their children did not want to succeed the business. Therefore, it made Brazos a good choice for Comark. Finally, Fojtasek, the founder of Brazos Equity, had adequate experience in family business and was believed to resolve potential family and operational issues properly. 2. Background/analysis Brazos Equity Fund was a newly

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