Employee-Owned Sawmill Purchase: First Nation Band's Economic Development Opportunity

The First Nation Band operates an industrial park, an area of land developed as a site location for factories and other industrial businesses. The businesses pay rent to the First Nation Band to operate from their industrial park location. One of the tenants operates a sawmill that process wood to be used in furniture. The business has operated for 10 years, however, for the last 4 years, operations have failed to produce net income after all expenses and dividends. The single owner has fallen behind on rent payments to the Industrial Park and unfortunately has recently filed for bankruptcy. The business employs 30 people from the First Nation Community.

The employees have approached the Band office through their economic development department as they wish to purchase the sawmill and operate the mill as an employee owned business. To make this happen, the economic development department of the First Nation Band would need to provide a $1 million loan that would be fully repayable.

The financial data of the sawmill is as follows:

• Sales for last three years from previous to recent were; $6.25 million, $5.4 million and $4.5 million.
• Cost of goods sold for each year was 60% of sales. All other operating expenses were 30% of sales for each year.
• The company had depreciation of $225,000 for each of the last 3 years. The depreciation expense amount is included in the operating expenses.
• The company purchased fixed assets of $250,000 during each of the last 3 years.
• The current owner and sole shareholder declared a dividend of 12% of sales for each of the last 3 years. Note, the dividend is in addition to the cost of goods sold and operating expenses.
• Total assets of the business have an original cost of $2.75 million.

Other important data to consider:

• The current owner was absent quite often, as the owner would go to his vacation property that is in a different country for extended periods of time.
• There is real growth opportunity for this business as there are only a few sawmills that can process this type of wood product used in furniture and the demand is expected to increase by 10% for each for the next 5 years.
• The First Nation Band has an economic development fund with a mission to generate and sustain employment. The Fund has $2 Million dollars for this year. Historically, the Band approves 10 economic development fund proposals in a year with an average loan amount of $200,000.
• The expectation is that it would be difficult for the existing 30 employees to find other employment.
• The 30 employees plan to set up a company and purchase the bankrupt business for $2 million, funded as follows: $1 million – First Nation Economic Development Fund, $700,000 – Bank Loan, and $300,000 from employees (each employee will invest $10,000). The funding from the Economic Development Fund and the Bank loan are repayable over 10 years.

1. Prepare an Income Statement for the past 3 years.  Explain the strengths and weaknesses with this Income Statement. Calculate the Dividend Payout Ratio and explain how dividends impact the retained earnings/equity of the company. Is there a problem if a shareholder declared dividends that were excessive?
   
   
2. Identify some of the expenses that a sawmill would have in cost of goods sold and in the operating expenses. Explain how you would determine if the expenses are in line or excessive/above average. How would you monitor the expenses for this business during a typical fiscal year?
   
   
3. Identify and explain the benefits and risks if the First Nation Band provided the $1 million loan for the employee purchase of the sawmill. If you were a member of the economic development committee, how would you vote and explain why.
   
   
4. If the employees are successful in their purchase of this sawmill, explain if the business currently has the ability to repay the debt. Calculate the total debt payment per month and for the year (assume 12 months of payments in the year) for the 1^st  Explain how the long-term debt is shown in the balance sheet and income statement.
   
   
5. If the employees are successful in their purchase of this sawmill, explain how the day-to-day financial affairs should be managed. Explain the difference between share capital and retained earnings.