BUSINESS DESCRIPTION

ORIGIN, OWNERSHIP AND CONTROL

 

Central States Supply, (hereinafter referred to as the “Company”) was started as a C corporation and was incorporated in the State of Kentucky on September 1, 1992 by Mr. Leonard Shuster, et al.

As of the date of this valuation the corporate shareholders and officers are:

Mr. Leonard Shuster, 50% stockholder, age 60, (President/Operations Manager)
Mr. William Shuster, 25% stockholder, age 62, (Vice-President/Sales Manager) - brother of Mr. Leonard Shuster
Mrs. Libby Shuster, 25% stockholder, age 58, (Secretary/Financial Manager) - spouse of Mr. Leonard Shuster

The Company’s headquarters are located at 132 Industrial Park Road, Bowling Green, Kentucky.

The Company’s Federal Employer Identification Number is: 43-1625426

The Company’s accounting firm/statutory agent is Thomas C. Davis, CPA, 432 Elm Street, Suite 5, Bowling Green, Kentucky

 

 NATURE OF THE BUSINESS

 

The Company’s primary business is the acquisition and reselling of used industrial truck parts, principally engines and associated parts. The Company last year purchased more than 2,500 used engines from a wide variety of sources across the United States. Employees routinely travel within a 1,000 mile radius of the Company's headquarters in Kentucky to purchase and/or deliver truck engines. Commercial freight services are also used for pickup and delivery of engines. The main buyers are Leonard and William Shuster. Each week, these two individuals travel to established trade areas primarily to purchase inventory which is returned to the Company's warehouse where it is inspected, inventoried and readied for resale. Essentially no refurbishment is accomplished. Running engines are left intact and sold to a regular client base of purchasers, many of whom have verbal agreements to purchase a certain number per month. Certain types of non-running engines are also sold intact, while  the other engines are broken into parts; the salable used parts are then categorized and stored on the Company's premises for future sale. Any non-usable parts are sold for scrap metal value.

The Company has developed a significant competitive advantage in finding good quality engine cores by offering to buy all qualities of cores (poor through good) and most importantly, paying the suppliers on the spot. 
 

PRIMARY CUSTOMERS

 

As with the supplier base, the customer base is large and diverse and national (and to some extent, international) in scope; and some of the suppliers are also customers. This large customer base ensures the Company will have reliable outlets for its inventory, enabling it to acquire engines and parts with less concern for selectivity than its competitors. This fact seems to be one of the keys to the Company’s success; it has the proven sales outlets to give it a more confident and aggressive buying approach. The customer base includes independent engine rebuilders; large corporations such as Caterpillar, Cummins, Mack, International and Ford; various truck body shops and certain parts exporters.

The owners indicate there are about 400 accounts on their books, of which about 25% tend to be active on a given billing cycle. The largest account is the Caterpillar Corporation which represents approximately 12% of the Company’s revenues and several others fall in the 5%-8% range. All major accounts are reported to be active and prospects for continued relationships appear sound. The Company reports that they are one of only three primary suppliers of engine cores to Caterpillar and that the business relationship is excellent and arm’s-length in nature.

The Company exports a small (less than 10%) of its products to Canada, Mexico, and South America. The Company does not have an export license and sells through intermediaries.

 

 

PRIMARY PRODUCTS AND SUPPLIERS

 

One of the several keys to success for the Company has been its development of a large, diverse base of suppliers who provide a steady flow of used engines and parts. These suppliers include a variety of independent repair shops, trucking companies with in-house service departments, salvage haulers and salvage yards, other core suppliers and small local scrap dealers.

The Company has developed a reputation within its industry as a dependable purchaser for both running and rough used industrial engines. Unlike many of their competition, they will offer to “take the good with the bad” at a fair price. The Company’s owner and the other buyer/salesman are typically in the field and each travel a route with a tractor/trailer, picking up engines for resale and delivering sold items. Although some of the Company’s engines are purchased outside of its travel area (approximately a 1000 mile radius), the majority of its used engine core buys are accomplished in person by a Company employee.

The business had its start with the seller buying salvage engines and parts, developing reliable continuing sources and nurturing trusted relationships with those sources. The Company continues to operate in the same fashion today and most engine cores and parts are picked up and paid for on the spot.

Marketing efforts in the past year have been expanded to include a direct mail campaign, Yellow Pages ad, web site (under construction) and the addition of another full-time salesman/buyer (in addition to the owner). Even with these efforts, the sellers believe there is much room for expansion of the business through addition of sales personnel for the conventional market and an increased emphasis on the export market as well as other opportunities.

It appears to this writer that the fundamental requirement for the past and future success of this Company is a continuing supply of resalable diesel engine cores. It seems that the market for used diesel cores is very large nationally and global in nature so continued demand for the Company’s product doesn’t appear to be an issue. Maintenance and expansion of the Company’s business base will depend on its ability to continue to locate and purchase engine cores at favorable prices. The Company appears to have developed a successful three-facet business model to accomplish this:

 

�         Cores are primarily acquired through a face-to-face transaction between a Company employee who is empowered to make an immediate purchase decision. (The Company owner and one other carefully trained employee).

�         On-the-spot  purchases are made at favorable prices to the Company by offering immediate payment and removal of the engines.

�         The Company purchases all quality of engine cores from the suppliers who see an opportunity to generate immediate cash and rid themselves of questionable engine cores that may not otherwise be salable.

 

COMPETITION

 

The Company reports its primary competitors are:

•��� Tom’s Truck Parts, Ohio
•��� Lake City Truck Parts, Tennessee
•��� World Trucking Supply, New Jersey
•��� Truck Rebuilders Supply, Florida

 

The Company doesn’t envision any problems with increased competition from any of its competitors. They feel that there is more than enough business to go around and that many of the competitors specialize to a degree that works in the Company’s favor. For example, some competitors deal only with Cummins or Caterpillar engines, some are only interested in engine tear-downs and the ability to rebuild the engines, etc. The Company's primary competitive advantage is that it handles essentially all engine types.

 

EMPLOYEES

The Company has ten full-time employees including the three owners. The husband-wife ownership team (Leonard and Libby) are both active in the business on a day-to-day basis with the husband serving as both the Operations Manager and one of three engine buyers/salesmen. The wife serves in an accounting/bookkeeping capacity. She is the Corporation’s Secretary; he is the President. William Shuster is Leonard's brother and works as an engine buyer/salesman.  It appears that Leonard Shuster is the primary reason for the Company’s apparent business success. The staff include:

Engine Disassembly (3) -$10-$12 per hour
Shipping/Receiving (1) -$12 per hour
Operations/Sales Manager (1) -$500 per week plus commissions
Product Buyer/Salesman (1) - $500 per week plus commissions
Facility Manager (1) - $50,000 annually
Accounting/Payroll (1) - $800 per week
Shop Help (1) - $10 per hour
Office Clerk (1) -$10 per hour

Employee benefits include health insurance and uniforms. There are no pension or profit-sharing liabilities and the Company is non-union.

The key employee (besides the owner, Leonard Shuster) is Mr. Jim Taylor, the Facility Manager. The Company owner (Leonard Shuster) reports that he has groomed Mr. Taylor to do everything that he himself is able to do in the key aspects of running the Company and favorably purchasing engine cores. Mr. Shuster reports that Mr. Taylor is well-satisfied with his employment arrangements and is willing to stay on with the Company under new ownership. Mr. Shuster believes an employment contract can be arranged with Mr. Taylor if a new owner wants it.

 

FACILITIES, PROPERTY AND LOCATION

 

The Company is located in Bowling Green, Kentucky, a mid-sized city. Bowling Green has been experiencing high economic growth due to its desirable location and general quality of life. The labor market is considered adequate for the current business and any possible expansion of the Company.

The Company operates from a two-building facility owned by the sellers and leased back to the Corporation. The main building is 20,000 square feet, brick and block, and houses the main warehouse plus shop, shipping and receiving operations. The second building is 5,000 square feet and houses the office plus additional storage space. The entire parcel comprises three acres of land, is properly zoned (industrial) for the Company's business, and offers significant physical expansion opportunity. There are two loading docks and enough paved area to allow the receiving of two full-size trailer trucks at one time. Mr. Shuster estimates that the business activity could increase by about 25% before additional space would be required.

The facility is located in an Industrial Park and is located within one mile of a major interstate highway.

The Company owners are willing to enter into a long term lease for the real estate with the purchasers, terms to be negotiated, as part of the business sale.

Due to the nature of the business involving automotive fuels and oils, the Company reports it is fully compliant with all local, state and federal environmental controls and conditions.

 

REASON FOR SALE

 

The Company owners are hands-on and detail-oriented which results in long workdays. This management style, combined with their choice to continue traveling as an  engine buyer/salesman, have resulted in many six and seven day weeks over the past fourteen  years and the owners are experiencing some personal burn-out as they approach retirement age. Also, they seem to be unsure of their ability to provide the marketing and management expertise needed to take the business to a higher level. Leonard Shuster has agreed to staying on for a substantial transition period (up to one year) with a new owner in a separately compensated operations management role or other capacity to be negotiated to help ensure the Company's continued success.

The principal owner also reports that he has other non-competitive  and less taxing business interests in the area that he would pursue part-time in the event of a Company sale. All three current Company owners will enter into a Non-Competitive agreement with the new owners. Based on this, the owners' ages (60, 62, 58) and the stated desire for semi-retirement, I conclude that the sale of the Company will be financially motivated with the requirement for a substantial amount of up-front cash by the buyer. However, the Company owners are willing to finance up to 60% of the purchase price at terms to be negotiated.

 

DEAL STRUCTURE

 

This valuation includes the following Company tangible and intangible assets:

• Furniture/Fixtures/Equipment customary to the normal operation of the business.
• All customer lists and information and past/present sales and marketing data.
• All proprietary Company information and methods of doing business.
• All rights/patents/trademarks for the Company’s proprietary products.
• All rights to the Company trade name and Web site.
• All Goodwill and other intangible assets not specifically listed.

This valuation does not include the following tangible assets and liabilities:

• Cash and cash equivalents
• Accounts receivable
• Prepaid expenses
• Inventory (at cost at the time of sale)
• Liabilities
• Real Estate

Additionally:

• The Company will be sold as a corporate stock sale and the present owners will enter into a "Hold Harmless" Agreement to indemnify the new owners against any potential liabilities arising from past operations.
• The seller will provide up to 60% financing of the negotiated sales price, for a period of time and interest rate to be negotiated.
• All property and equipment normally used in the conduct of the business will be included in the sale, except for the corporate auto (2003 Mercedes) which will be retained by Leonard Shuster at the time of sale.
• The seller will provide the buyer with a Covenant-Not-To-Compete Agreement (details to be negotiated).
• The seller will remain with the Company after the sale as a paid employee/contractor /on-demand consultant for a period of time to assist with the transition of ownership (compensation and period of time to be negotiated).

 

FUTURE GROWTH POTENTIAL

 

This Company has an excellent outlook for future growth using its current business model. This conclusion is based on its consistent revenue and available cash flow (ACF) growth for the past five years, a growing market in which the Company competes and viable plans within the Company of expanding its customer reach. The Company has a very secure product and/or services mix that will discourage new competition based on:

1. The Company�s primary product refurbishment process is protected by patent number 5,534,759 issued by the U.S. Patent and Trademark Office (USPTO) on July 9, 2014 and which has five years of remaining life. The Company believes that a new patent pending application will essentially extend the useful protected life of its current basic process by an additional 17 years.
2. The Company�s primary raw product (engine cores) consists of a proprietary acquisition method which is not well known and is expected to inhibit future competition.
3. The Company has a well-known name protected by local common usage laws and a high quality reputation earned within its market area.
4. The Company�s product production requires the use of significant capital equipment and specialized unique tooling not easily replicated by a new competitor.

The Company has a new product that is expected to contribute significantly to the future revenues and earnings growth:

1. The Company has a new proprietary product developed as part of its ongoing operations but not yet deployed. This new product is expected to contribute significantly to the future revenues and earnings growth beginning in 12-24 months. Please refer to the Confidential Addendum for more information describing this new proprietary product. This Addendum is available from Mr. Thomas Davis, Accountant, Bowling Green CPA Offices upon acceptable execution of a Non-Disclosure Agreement. This new proprietary product has not yet been launched because of the following:
   1. The Company does not have the necessary capital required to successfully introduce the new product to the expected market without taking on new financing which is counter-productive to the owner�s plans to sell the business and retire.
   2. The Company owners have elected not to introduce the new product to the expected market due to their retirement plans within the next year.
2. The Company also has a new marketing and sales approach that has been tested and is forecasted to increase market share and to be begin contributing significantly to the future revenues and earnings growth beginning within the next 24-36 months.
   1. The new marketing and sales approach will target an entirely new segment of the market for their existing products. Test marketing has revealed that there is a large potential for overseas sales in rapidly developing economies such as India and China.
   2. Early test marketing has shown that the acquisition of used engine cores and the sale of refurbished engines is potentially profitable even with the increased cost of transportation and in-country sales and marketing.

 

LITIGATION

The Company reports that it is not a defendant in any litigation nor is it aware of any claims pending or which may be asserted against the Company.