Mini-Case 7-1: What's It Worth

Essay

Mini-Case 7-1: What's It Worth?
Lauren Holcombe has wanted to open her own clothing store since she was in high school. Her career interest and dynamic personality enabled her to get a part-time job at a small women's clothing shop in her hometown after school. When Lauren enrolled in the state university to major in retail management, she got a part-time job in the ladies' clothing section of a prestigious department store in the city. Lauren's supervisor was impressed with her business acumen and her congenial personality. "Lauren is one of the best workers we've ever had in this department. She's very bright, quite attractive, and very outgoing. Lauren is eager to learn anything she can about the business; she's always asking questions!"
During Lauren's senior year in college, her Aunt Bessie died and left her an inheritance totaling nearly $300,000. "I'll miss dear old Aunt Bessie, but have I got plans for my inheritance! Now, I'll be able to run my own clothing store just like I've always dreamed." Lauren immediately began planning to launch her business venture, but progress was slow. During a trip to her hometown over the Christmas break, Lauren discovered that a well-established ladies' clothing shop was up for sale. The shop was well known and quite successful, but the owner, Kathleen Todd, was quitting to retire in Tahiti. Lauren contacted Ms. Todd to discuss the sale of the business.
Ms. Todd hired a company to conduct an independent appraisal of the business, which concluded that tangible assets were $230,000 and assumable liabilities were $18,000. The appraisal estimated net profit for the next year to be $73,000 before deducting any managerial salaries. Lauren expects to draw $20,000 in salary since she believes this is the salary she could expect when working for someone else. Lauren estimates that a reasonable rate of return on an investment of similar risk is 25 percent. Ms. Todd has set a value of $85,000 for intangibles such as goodwill, and is asking $297,000 for the business.
-Based on the excess earnings approach, what do you expect the business to be worth?