Private Equity at Work Purchasing Cake Masters

8/16/2019 Private Equity at Work Purchasing Cake Masters

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Bake Arts Private Limited

INTRODUCITON

Keath Miller took off his glasses and rubbed his eyes. It was August 24, 2005, and he had beenreviewing the business plan for Bake Arts, a commercial bakery specializing in high-end dessertitems, based in Barrie, Ontario, not far from Toronto. Although he had initially planned to submita bid to acquire the business the next day, he was still unsure how much to offer, and in what formof consideration. In fact, he was not entirely sure that he wanted to bid at all.

If Miller’s bid were accepted, he would begin the process of acquiring a business to which he hadcommitted to his investors he would devote his full attention to operating for at least the next five years. ―five years is a long time‖, Miller thought, especially for a 30-year-old who had walked awayfrom a lucrative Bay Street job and incurred a great deal of student debt to get an MBA from a topschool. If this bakery did not turn out to be everything he hoped for, would Miller be stuckrunning a business for a fraction of his former salary while struggling to keep his lenders at bay?

The owner was asking for $5 million1 in cash on closing, with no debt to be assumed by the buyer.Miller knew that this was a high asking price, but he was very excited about the growth prospectsfor this business. If these growth prospects materialized, Miller ’s decision to leave the advisory world of Bay Street and begin a successful career as a business owner could bear fruit.

KEATH MILLER

Miller grew up Oakville, Ontario. He studied history at the University of Toronto before beginninghis career in the investment banking division of a major Canadian bank. He had tremendouslyenjoyed the challenging work and fast pace of investment banking, but increasingly felt that he would prefer making business decisions for himself rather than advising others. Something of anentrepreneur, Miller had started a small business while in investment banking. The business had

grown but would never be a platform for the size of company Miller wished to run. Nevertheless,the experience of building this business had convinced Miller that his future lay as a businessowner, not as an advisor. Miller left investment banking and entered a top MBA program. Hisintentions were twofold: first, to develop his knowledge of marketing, strategy and operations tocomplement his finance experience; and second, to develop a network of potential investors andadvisors to help him find, acquire and ultimately operate a small business.

1 All currency in Cdn$ unless otherwise specified.


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THE SEARCH PROCESS

Upon graduation, he focused his efforts on finding a business to buy or some other opportunity to

become a senior manager with equity in a small business. He chose to self-finance his search bytaking on consulting projects rather than attempting to raise a search fund 2. He believed that manyof the opportunities he might find would not be suited to the large group of investors required fora search fund, and he believed that raising a search fund from typically conservative Canadianinvestors could be difficult.

Instead, Miller first cultivated a list of eight ―friendly‖ investors— wealth investors who knew Millerpersonally and could see through his limited operating experience and recognize his potential as amanager. Each investor could tolerate a reasonable amount of risk given their considerable wealth. When Miller explained to these investors that his goal was to generate returns of 20 per cent to 30per cent per year, the investors expressed willingness (but not a commitment) to invest up to$500,000 each in a deal led by Miller. Miller guessed that three-quarters of these investors wouldactually sign a cheque when a deal was ready to be closed.

After meeting with these investors, Miller began to seek out and review opportunities that fit hiscriteria: a stable if somewhat under-managed business with at least $500,000 in EBITDA 3; goodmiddle management and/or an owner willing to complete a proper transition to a newinexperienced manager; a head office located in or near the Greater Toronto Area (GTA) in orderto leverage both the large local market and Miller’s local network; and a few solid growthopportunities. He focused on light manufacturing, service and distribution companies—simplebusinesses that he could understand without requiring too much specialized knowledge. Milleravoided businesses either threatened by cheap offshore imports or whose performance wouldsuffer disproportionately in a recession.

In addition, Miller avoided businesses with less than $2 million in sales because he knew that asignificant portion of his total compensation would come from the sweat equity that he would buildin the business. If the business were very small to begin with, Miller believed his seat equity —or theequity granted to him by his investors for finding the deal and then operating the business— wouldnot amount to much, given the five-year timeframe he had allowed for himself. With regard tosweat equity, Miller believed that he could negotiate owning 20 per cent of the business over time,pa rtly as a finder’s fee for bringing his investors a quality deal and partly as an incentive to run thebusiness well. He also anticipated receiving a $100,000 annual salary.

When Miller discovered Bake Art, he was immediately excited. Bake Art sold high-end fresh

cakes to premium restaurants and coffee shops in the GTA, and it had recently begun targetinggrocery chains across North America. It exceeded his $500,000 EBITDA requirement, and it hada strong track record of rapid growth. This growth, coupled with the fact that the owner was not

2

The search fund model involves young entrepreneurs raising a small fund from several wealth investors to cover the

expenses of searching for a business to buy and operate. Once the business is found, investors receive a right of first

refusal to invest a larger stake in the acquisition. These larger investments fund the actual acquisition. Regardless of

whether they do so, investors receive equity in the deal based on their having funded the search process.3 Earnings before interest, taxes, depreciation and amortization


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very active in the business, hinted at a strong middle management team. Miller believed that freshbaked goods would never come under threat from foreign importers, and he saw high-end bakedgoods as the type of affordable luxury item that people would treat themselves to, even in arecession. Subsequently, Miller requested and received a letter of interest from a major Canadianbank suggesting that it would loan Miller up to $2 million at an interest rate of 8 per cent for an

acquisition of Bake Arts. The loan would be secured by the assets of the business.

Miller was seeing several deals per week, but most of them fell short of his criteria. Whileexamining the information package he had received on Bake Arts, he had signed confidentialityagreements to receive further information about two other interesting businesses: an industrialproducts distributor with $450,000 in EBITDA and a third-party pallet management business withmore than $1 million in EBITDA. Although both businesses seemed promising, without anyinvestigation on Miller’s part, it was too early to tell if either business held the promise that Millersaw in Bake Arts.

THE BAKERY INDUSTRY

The bakery industry could be broken down into several segments: by type of product (breads versus desserts); by intended time to consumption (fresh baked for immediate consumption versusbaked and then frozen for a longer shelf life) and by sales channel (retail and in-store bakeries whosold fresh baked goods directly to customers versus commercial bakeries who sold wholesalethrough retailers and the hospitality industry). In the United States, the bakery industry generatedsales of US$33 billion in 2002/03. Miller did not have access to research about the Canadianbakery industry but thought about using 10 per cent of the U.S figure as a starting point.

Baked goods were primarily sold through the following channels: mom-and-pop retail bakeries,supermarkets and grocery stores, convenience stores, and restaurants and hotels (the hospitality

industry). Discounters, such as Costco, also sold baked goods.

The bakery industry was a mature industry with below-average capital, labor and technologyrequirements. Barriers to entry were low. Equipment (except for the most specialized machinery)and talent were readily available. All but the largest competitors (who had sales in the tens ofmillions per year) targeted local or regional markets. The primary purchased inputs in this industry were food ingredients, such as flour and sugar, and packaging. Baking equipment tended to last formany years.

Based on the Dun & Bradstreet research Miller had read, bakeries with fewer than 100 employeesgenerated 16 per cent of industry sales with 32 per cent of industry employees. Bakeries with 100

to 250 employees generated 50 per cent of sales with 22 per cent of industry employees. Bakeries with more than 250 employees generate 34 per cent of sales with 46 per cent of industryemployees4.

The Greater Toronto Area

4 Estimated from D&B analysis of U.S. market for SIC code 2051, “Bread, Cake, and Related Products”.


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The Greater Toronto Area (GTA) was a leading center in the North American bakery industry.Due to its multitude population, the GTA brought together a wide variety of tastes. It had the thirdlargest concentration of food workers in North America, after Chicago and Los Angeles 5. TheGTA was home to a strong, flexible co-packaging and private-labeling industry 6 , and well-

developed, cost-effective transportation links to the rest of North America.

Two well-known success stories suggested that the GTA was an attractive location relative to otherbakery centers. The President’s Choice brand, which originated in the GTA, was now recognizedacross North America for its high-quality, innovative products. Two-Bite Brownies, developed byGive & Go Prepared Foods in GTA, were now sold through retailers across Canada and theUnited States.

The Cake Segment

Miller described the cake segment as including all fresh cakes, pies and dessert bars, but excludingsnack cakes. He divided the segment into two channels: retail and hospitality (see Exhibit 1).

The Retail Channel

The retail channel included supermarkets, grocery stores and mass merchandisers. Miller omittedmom-and-pop retail bakeries because they tended to bake their own product. Miller estimated thesize of the retail cake market as follows:

Cdn millions, 2004

united States 5,880

Canada 588

GTA 147

Source: Mintel Research, June 2004

According to Mintel Research, at least three in 10 consumers bought a cake at least once a month.Purchasers of cakes in the retail channel were skewed heavily female and young. Forty-eight percent of 18 – 24-year-olds buyers bought a cake at least once a month, while only 18 per cent of

those over 65 did so. Sixty-six per cent of respondents bought cakes in the bakery aisle, 66 per centbought cakes at the in-store bakery and 44 per cent visited specialty bakery stores. Seventy-six per

5 Institute for Strategic Competitiveness, Harvard University, as noted in “Food Clustoers in North America, Top 10

Locations By Employment”, available at www.city.toront.on.ca/economic profile/food.html, accessed July 10,

2005.6 Co-packaging refers to an arrangement whereby a branded company provides a recipe and packaging to a bakery,

which then manufactures the product and packages it for the branded company. This arrangement is similar to

private labeling; however, in private-label arrangements, the bakery uses its own recipes.

http://www.city.toront.on.ca/economic%20profile/food.htmlhttp://www.city.toront.on.ca/economic%20profile/food.htmlhttp://www.city.toront.on.ca/economic%20profile/food.htmlhttp://www.city.toront.on.ca/economic%20profile/food.html


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cent of cakes were bought in the retail channel for special occasions, while 16 per cent boughtcakes to eat on a regular basis.

Retailers controlled 58 per cent of the channel through their in-store bakeries, with national brandsand locally baked items accounting for the rest. The four leading private brand manufacturers

accounted for about 18 per cent of the market. Miller estimated that the U.S. market wasrepresentative of the Canadian and GTA markets, with the possible exception that the private label was likely more dominated in Canada due to the strength of President’s Choice.

Dealing with retailers could be time-consuming. Retailers demanded quality goods, on-timedelivery and exerted considerable pricing pressure. One strategy employed by retailers was to takemarket share from successful branded products by launching their own cheaper private-label versions. That said, retailers were always on the lookout for innovative products to drive toplinegrowth.

Selling into the major chains could take months or years, but given the number of stores in atypical chain, getting a single product line placed could be very lucrative. A line of cakes could sellfor a few hundred dollars per week per store. Some chains, such as Loblaws in Canada and Krogerand Royal Ahold in the United States had more than 1,000 stores. Gross margins (after labor butbefore overhead) could range from 15 per cent to 40 per cent. But retailers often demanded thatsuppliers pay a one-time slotting fee of up to $100,000 per new stock keeping unit (SKU).

Months of effort could be required to get a meeting with a chain’s buyer, who then negotiatedprice, packaging, ingredients, delivery and other terms. If negotiations were successful, a productcould be rolled out in a trial to a single store. If it were successful, an order might be placed.Contracts did not guarantee minimum order sizes, and vendors must guarantee sales levels onmost occasions (e.g., offer to buy back unsold goods) in order to secure a contract. Once a product was placed in multiple stores, in addition to dealing with the chain’s buyer, the vendor needed to

provide support to the chain’s store managers as well.

The Hospitality Channel

The hospitality channel included restaurants, coffee shops and hotels. This channel generated totalsales of $37.5 billion in Canada in 20047, Miller did not have more detailed data isolating the foodcategory or the cake segment.

Customers included individual restaurants, chains of restaurants and coffee shops, and largefoodservice providers, such as Sysco, which catered to thousands of restaurants and hotels.

Consumers in the hospitality channel tended to buy cakes by the slice and dessert bars on impulse.Some typical transactions included dinners ordering dessert after dinner at a restaurant, and quickservice restaurant patrons ordering a sweet item with their daily coffee. According to MintelResearch, 30 per cent of men versus 17 per cent of women buy food with their coffee most or allof the time.

7 http://www.crfa.ca/research/2005/foodservice_sales_in_2004.asp


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In the cake segment, the hospitality channel tended to be served by local vendors who could shipfresh-baked goods to be consumed the next day, which was particularly important in the higher-end segments.

There were hundreds of bakeries in the GTA, ranging from small owner-operated bakeries to

large bakeries owned by firms such as Weston Bakeries. Miller was able to identify about half adozen competitors in the high-end cake segment by visiting local coffee shops, restaurants andupscale bakeries and asking the counter staff where their baked goods came from. His researchsuggested that all of these competitors shared the following characteristics:

Between $5 million and $15 million in primarily local sales

Operating for at least 10 years

Focused on the high-end dessert segment

He believed that these competitors were typically run by a baker-entrepreneur rather than aprofessional manager.

Miller believed that selling to the larger players in the hospitality would be similar to selling toretailers. The foodservice companies wanted top value for their dollar and a good product list fortheir customers. They too had begun to develop their own private-label products. The largerrestaurant chains would be able to place large regular orders, but wanted low prices in return. Theselling process could be just as time-consuming and complicated for these players as for the largeretailers.

Selling to small chains and single location business would be very different. Miller believed thatless formal relationships, unpredictable order frequency and receivables, small order sizes andhigher margins (30 per cent to 40 per cent) characterized this segment.

Recent Trends

Miller identified several trends in the cake segment. The first was flash-freezing and par-baking.Flash-freezing was a method of rapidly freezing a baked good to substantially extend its shelf lifefrom a few days to more than a month. It required special freezing equipment but allowed bakedgoods to be shipped virtually worldwide. Par-baking referred to removing a baked good from anoven before it was completely baked and flash-freezing it. The item could then be shipped frozenand finished in an oven at the point of sale in order to offer the freshest possible baked good. Thepar-baking method was slightly more expensive than shipping fresh as the item had to be bakedand handled twice.

A second trend was private labeling of baked goods. In baked goods private labeling, a retailer would typically find a manufacturer to reproduce a successful branded product that was currentlybeing sold in their stores. They would introduce this private-label product under their own housebrand to compete with the branded product, relying on preferential shelf locations and lowerpricing to cut into the sales of the branded product. The private label had long been established inthe food business, and baked goods were no exception. It gave small food manufacturers the


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opportunity to generate rapid sales growth without having to develop their own brand, or paymarketing. But margins on private-label goods tend to be tighter than on branded goods.

BAKE ARTS Limited

Bake Arts was located in Barrie, just outside the GTA. It was founded 20 years ago by Eugene Arts. An accomplished baker, Arts attributed his early success to his grandmother’s upside-downpineapple cake recipe. He slowly grew the business by providing high-end cakes to hotels andrestaurants in the GTA. After losing his right hand in a tragic kitchen mishap five years earlier, Artsfocused more on the sales side of the business. He hired Angeline Dupre, an executive chef who was very well regarded for her innovative products, which were relatively low in fat and also tastedexceptionally good. Two years Arts inherited a small English inn, and he began to transition out ofhis sales role in order to spend more time in England. Arts hired Jared Fawlty, a former hotelmanager, to maintain his accounts. Fawlty managed the existing clients better than expected andhad pursued opportunities to sell into the retail channel as well. Now aged 62 and with nochildren, Arts wanted to sell Bake Arts and retire to the English countryside as quickly as possible.

Operations and Facilities

Bake Arts employed 54 people. The front office housed a controller, three administrative staff andtwo account coordinators who managed the daily order flow. Dupre had an assistant chef whooversaw the production process. There were 44 non-unionized, hourly wage workers: 40 inproduction, two in shipping and receiving, and two maintenance workers. One eight-hour shift wasrun every day, five days per week.

Bake Arts currently rented a 15,000-square-foot facility in Barrie, 45 minutes north of Toronto.

Fixed assets included ovens, mixers, racking and conveyor belts. The operation was partiallyautomated, and the facility was modern and well-suited to the business. Bake Arts had closerelationships with a few key suppliers.

Customers and Products

Miller understood that Bake Arts had provided Arts with a steady, comfortable income until hehired Dupre, after which the business surged. Dupre’s creations captured the interest of Franco’s,a major upscale restaurant chain owned by a publicly listed U.S. company. Franco’s sourced morethan half of the cake lines for its Ontario operations from Bake Arts, and Franco’s represented

almost two-thirds of Bake Master’s sales. By the end of 2004, Bake Arts was shipping $15,000 perday to Franco’s. The Franco’s cha in had grown 20 per cent for the last few years, and the parentcompany projected continued growth at that rate. There was no enforceable contract withFranco’s, as per industry norms.

The remainder of Bake Master’s sales included two hotel chains at fiv e per cent of sales each, andthe remainder in single store accounts. With the recent focus on selling cake into retailers, 10 per


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cent of sales were going to the retail channel. Exhibit 2 provides Bake Arts’ financial statements forthe past five years.

Bake Arts offered a catalogue of 20 to 25 cakes. Fifteen cakes were permanent offerings, and therest were seasonal special items. On occasion, Franco’s enlisted Dupre’s help to develop unique

cakes for its exclusive use as a seasonal item. Otherwise, every item was available to customers.

Growth Projections

Fawlty had begun to develop the retail channel by offering Bake Master’s existing line, and earlyindications suggested that they would sell well. However the two retail chains that had commencedshipments were also interested in having Bake Arts produce a par-baked slab cake that could befinished by a grocery store’s bakery department. This product was very low -margin (15 per centgross margin) item, and it required an investment of $500,000 in flash-freezing equipment. Thetwo chains represented 750 stores in total, and had expressed an interest in ordering 20 frozencakes per month per store at a price to Bake Arts of $5.00.

Price competition would be ruthless for this product, Miller believed, as it had no points ofdifferentiation. However Miller felt if a relationship could be developed with other retail chainsusing the par-baked slab cakes, perhaps Bake Arts could eventually sell its high-end cakes into thischannel. Fawlty was excited to increase sales with this product, but Dupre took a dim view offrozen slab cakes relative to her high-end creations.

In addition to the par-baked product, Arts had forecast substantial growth for Franco’s, based onhistorical growth rates. Arts’ projections for the business are included in Exhibit 3.

Valuation

Miller considered two approaches to valuation. First, he identified several precedent transactions inthe baked goods industry from his days as an investment banker, but he was not sure which (if any)of them would be appropriate precedents for Bake Arts (see Exhibit 4).

Second, Miller thought it prudent o perform a discounted cash flow analysis. In this analysis, thefuture cash flows generated by the business and the terminal value in the final forecast year wereestimated and then discounted back to today’s dollars using a discount rate. Miller had collectedsome information to help estimate the weighted average cost of capital (WACC). Miller estimateda required return on equity of 26 per cent (i.e., also the cost of equity in the WACC calculation) in

part because the implied premium would be substantially higher than for similar public companiesdue the small company discount 8. Miller’s assumptions can be found in Exhibit 5.

Miller recognized that the above methods would value the company as a whole, but not the cashflows accruing directly to his investors. He knew that a calculation of his investors’ internal rate of

8 The small company discount recognizes the limited liquidity of small, non-public companies and adjusts the

discount rate upwards to reflect this increased risk factor.


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return (IRR) would be critical to their decision to back him on this transaction. In this analysis, thetotal cash flows in each year accruing to the investors, less any cash flows related to debt incurred, were calculated. The IRR, or discount rates, was then calculated based on these cash flows.

DECISION

Miller struggled with his decision. He wondered about Arts ’ $5 million asking price and about hissales projections—especially in light of Dupre’s recent reluctance to develop a par-baked line.

Miller needed to keep his investors happy, and he wondered if Bake Arts could provide them withthe returns they were looking for. However, he also needed to consider his own goals. Given thathis search was self-financed, pursuing a deal that ultimately failed to close could be tremendouslydamaging. If addition to taking up a great deal of Miller’s time, the due diligence process couldcost Miller up to $50, 000. These expenses would be paid back by his investors, but not until heclosed a deal. Thus, a failed deal could cost Miller a substantial amount of money. It was earlyafternoon on August 24, and Miller knew that Eugene would be awaiting his response first thingthe next morning.


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Exhibit 1

CAKE SEGMENT, RETAIL CHANNEL

U.S. and Canadian Markets

( millions)

United States United States Canadian GTA

US Cdn Cdn Cdn

1998 3,318 4,148 415 104

1999 3,548 4,435 444 111

2000 3,847 4,809 481 120

2001 4,062 5,078 508 127

2002 4,237 5,296 530 132

2003 4,403 5,504 550 138

2004F 4,704 5,880 588 147

2005F 4,996 6,245 625 156

2006F 5,301 6,626 663 166

2007F 5,629 7,036 704 176

2008F 5,954 7,443 744 186

Notes:

All figures at current prices (i.e. not adjusted for inflation)

Canadian market is estimated to be 10 per cent of the U.S. market

US$1 = Cdn$0.80

Greater Toronto Area market is estimated to be 25 per cent of the Canadian market

Source: Mintel Research


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Exhibit 2

BAKE ARTS

HISTORICAL FINANCIAL STATEMTNS

2000 to 2005E

( 000s)

Income Statement 2000 2001 2002 2003 2004

Revenue $2,950.0 $3,687.5 $4,406.6 $5,243.8 $5,768.2

% Growth Rate 25.0% 19.5% 19.0% 10.0%

Labor 1239 1475 1762.6 2045.1 2191.9

42.0% 40.0% 40.0% 39.0% 38.0%

Materials 1062 1253.8 1542.3 1730.5 1903.5

36.0% 34.0% 35.0% 33.0% 33.0%

Gross Margin 649 958 1101.7 1468.2 1672.8

22.0% 26.0% 25.0% 28.0% 29.0%

Other Expenses

Selling Expenses 118 154.9 185.1 236 299.9

Office & Admin Expenses 52 272 326.1 403.8 415.3Rent and Maintenance 55 55 75 75 145

Management Salary 50 100 100 100 100

Total Other Expenses 275 581.9 686.2 814.8 960.2

% of Sales 9.3% 15.8% 15.6% 15.5% 16.6%

EBITDA 374 376.1 415.5 653.4 712.6

EBITDA Margin 12.7% 10.2% 9.4% 12.5% 12.4%

Amortization 100 100 102.5 107.3 111.5

Interest Expense 18 18 18 18 18

EBT 256 258.1 295 528.1 583.1

Taxes (38%) 97.28 98.078 112.1 200.678 221.578

Net Income 158.72 160.022 182.9 327.422 361.522

Net Margin 5.4% 4.3% 4.2% 6.2% 6.3%

ash Flow Statement 2000 2001 2002 2003 2004

Cash From Operations

Net Income $158.7 $160.0 $182.9 $327.4 $361.5

Amortization 100 100 102.5 107.3 111.5

Change in Working Capital (50.0) (163.6) (104.4) (112.2) (25.8)

Total 208.7 96.4 181.0 322.5 447.2

Cash Flow From Investing

Capital Expenditures 100 125 150 150 150cash Flow From Financing

Senior Debt

Change in Cash 108.7 -28.6 31.0 172.5 297.2

Opening Cash Balance (35.0) 73.7 45.1 76.1 248.7

Ending Cash Balance 73.7 45.1 76.1 248.7 545.9


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Exhibit 2 (Continued)

Balance Sheet 2000 2001 2002 2003 2004

Assets:

Cash $ 73.7 $45.1 $76.0 $248.6 $545.7

Accounts Receivables $ 442.5 626.9 749.1 812.8 807.5

Prepaid Expenses $ 73.8 92.2 110.2 131.1 144.2

Inventory $ 177.0 179.1 220.3 247.2 292.8

Fixed Assets $ 1000.0 1025 1072.5 1115.3 1153.7

1,767.0 1,968.2 2,228.1 2,554.9 2,944.1

Liabilities and Equity

Operating Line

Accounts Payable 159.3 200.6 277.6 276.9 304.6

Long-term Debt 200 200 200 200 200359.3 400.6 477.6 476.9 504.6

Contributed Equity 250 250 250 250 250

Retained Earnings 1157.7 1317.6 1500.5 1828 2189.5

1,767.0 1,968.2 2,228.1 2,554.9 2,944.1

Net Fixed Assets 2000 2001 2002 2003 2004

Opening Net Fixed Assets $1,000.0 $1,000.0 $1,025.0 $1,072.5 $1,115.3

Capital Expenditures 100 125 150 150 150

Less: Amortization 100 100 102.5 107.3 111.5

Closing Net Fixed Assets 1000 1025 1072.5 1115.2 1153.8

Opening Net Fixed Assets 1000 1000 1025 1072.5 1115.3

Amortization rate 10.0% 10.0% 10.0% 10.0% 10.0%

Amortization expense $ 100 $ 100 $ 102.5 $ 107.3 $ 111.5


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Exhibit 3

BAKE ARTS

FINANCIAL PROJECTIONS

2005F TO 2009F

( 000s)

2005F 2006F 2007F 2008F 2009F

Revenue - fresh cakes

Franco's 4637.7 5565.5 6678.2 8013.8 9616.6

Other accounts 2284.2 2512.6 2763.9 3040.3 3344.3

Revenue - parbaked cakes

Number of stores 750 1500 2500 3000 3500

Cakes per store per month 20 20 20 20 20

Price per cake $5 $5 $5 $5 $5

Revenue $900 $1,800 $3,000 $3,600 $4,200

Total Revenue $7,821.9 $9,878.1 $12,442.1 $14,654.1 $17,160.9

Gross Margin

fresh cakes 30.0% 30.0% 30.0% 30.0% 30.0%

Parbaked cakes 15.0% 15.0% 15.0% 15.0% 15.0%

Other expenses as % of sales 15.0% 15.0% 15.0% 15.0% 15.0%

Capex - fresh cakes $50 $50 $50 $50 $50

Capex - parbaked cakes $600 $150 $150 $150 $150

Working capital - fresh cakes $1,040 $1,140 $1,240 $1,340 $1,440

Working capital - parbked cakes $50 $100 $150 $200 $250

Tax rate 38% 38% 38% 38% 38%


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Exhibit 4

BAKE ARTS

PRECEDENT TRANSACTIONS

(000s)

Target company Date Sales* EBITDA* Price** Description

Artie's Artisan Breads Apr -98 $12,000 $1,300 $7,800 High-end specialty breads

Fresh Bakery Dec – 98 $2,200 $350 $1,225 Fresh cakes and squares

The Cake Shoppe Nov -01 $3,000 $600 $2,700 Wedding/special even customcakes

Bakeco June -03 $35,000 $3,000 $36,000 Private-label crackers and biscuits

Toronto Cakery Jul -02 $6,000 $750 $3,000 Fresh and frozen cakes andmuffins

Notes:*Sales and EBITDA are from the final year before the date of the deal.**Price assumes transactions are free of debt.Source: K. Miller’s research

Exhibit 5

Keath Miller’s iscount Rate Assumptions

Bank Debt (000s) $2,000

Interest rate offered on bank debt 8%

10-year government bond 5%

Tax rate 38%

Terminal Growth rate (g) 4%

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Private Equity at Work Purchasing Cake Masters