TAKING CHIPS OFF THE TABLE: Circumstances vary, but the issue is always the same: how and when does a business owner convert the wealth that has been created in the business into a diversified portfolio of financial or real estate assets? The issue is one of diversification, liquidity, and being able to sleep at night.

In the article below, "Taking Chips off the Table: Creating and Building Personal Financial Wealth from Business Assets,” Michael R. Zook, a FOCUS Partner, contrasts the characteristics of successful and unsuccessful transitions. He also describes a new service, the FOCUS Wealth Transition Advisory, which includes an in-depth, four-session training regime for business owners.

Before joining FOCUS, Mr. Zook was a Managing Director at MASI, Ltd. where he completed divestitures in the printing, software, business services, and distribution industries. He also worked for Capital for Business, an SBIC and wholly owned subsidiary of Commerce Bank in St. Louis, and was a Senior Vice President for The Northern Trust Company.

Please feel free to forward this newsletter to friends, colleagues and networking contacts. (Go to www.focusbankers.com for newsletter archives.)

Active FOCUS Deals

With over 24 years of experience across many verticals, FOCUS currently has over 30 active transaction engagements in its four offices in Atlanta, Chicago, San Francisco and Washington, DC in the following specific business sectors:

• Business Services
• Call Center Software
• Construction (multiple assignments)
• Consulting
• Government Contracting (multiple assignments)
• Healthcare Business Services
• Information Management
• IT Outsourcing (multiple assignments)
• IT Services (multiple assignments)
• Leisure
• Library Services
• Media
• Medical Devices
• Networking Home Automation
• RFID Technology
• Security (multiple assignments)
• Software
• Transaction Management Services

Our transaction process provides us with up-to-the-minute market knowledge in these sectors. Are any of them of corporate development interest to you? Give us a call or drop us a note.

Inquiries should be addressed via e-mail to info@focusbankers.com, by telephone to 202-785-1961 or by fax to 202-785-9413.

FOCUS Western Region Closes Four Deals

Global Document Solutions Inc. Has Acquired Best Strategy, LLC
FOCUS acted as financial advisor to and assisted with the negotiations as the representative of Best Strategy, LLC, located in Fremont, CA. Best Strategy provides integrated digital communication, marketing, and management solutions to financial services and technology companies including documentation and manuals, one to one billing statements, and customized print mail solutions.

Global Document Solutions Inc., headquartered in New York, provides technology enabled document outsourcing services, such as statement processing, web-to-print applications, digital variable printing, and electronic document delivery targeted specifically to financial services, telecom, advertising, publishing, political, and government industry sectors. Click here for the Best Strategy, LLC/Global Document Solutions, Inc. Web Tombstone.

Largest Shareholder of Evnine Vaughan Associates, Inc. Has Acquired All Remaining Shares
FOCUS acted as financial advisor to the shareholder and assisted in the negotiations. Evnine-Vaughan Associates, Inc., founded in 1992, is a privately held, registered investment advisory firm dedicated to developing and applying quantitative techniques in investment strategies with high reward/risk ratios. The firm, headquartered in San Francisco, manages funds for a variety of international institutional investors. Click here for the Evnine-Vaughan Associates, Inc./Shareholder Web Tombstone.

Minority Shareholder of Western Shower Door, Inc. Has Acquired All Remaining Shares
FOCUS acted as financial advisor to the selling shareholders and assisted in the negotiations. Western Shower Door, Inc., a privately held, 40-year-old company located in Fremont, CA, is the largest provider of shower enclosures and mirrors to residential homebuilders in the Western US. With nine branches in California and Nevada, the firm installed its products in more than 40,000 housing units during 2005. Click here for the Western Shower Door, Inc./Shareholder Web Tombstone.

Western Shower Door, Inc. Has Obtained a Credit Facility from PNC Business Credit
FOCUS arranged the financing and assisted in negotiating the term of the loan. Western Shower Door, Inc. is the largest provider of shower enclosures and mirrors to residential homebuilders in the Western US. PNC Business Credit, the asset-based lending arm of PNC Bank, NA, and a member of The PNC Financial Services Group, is one of the nation's top asset-based lenders and manages more than $10 billion in commitments. It develops creative financing solutions to resolve complex and often unique issues. Click here for the Western Shower Door, Inc./PNC Business Credit Tombstone.

Taking Chips off the Table:

Creating and Building Personal Financial Wealth from Business Assets

By Michael R. Zook, Partner, FOCUS Enterprises, Inc.r

Growing a healthy company requires dedication, passion, and countless hours of effort by a management team. The path to building value in a company is stressful, exhausting, and limits the number of hours that a business owner can devote to personal and family activities. At some point, or at various times during an entrepreneur’s business career, the business owner will have to confront the issue of converting the ownership interests in a company to cash or liquid investments.

The Need to Think About Change

The reasons that push business owners toward such a decision are many and varied. The reasons are often personal and are prompted by a wide range of issues including personal health, burnout, the desire to spend more time with the family, the desire to retire, and the overall need to control more of one’s time. A privately held company is a demanding mistress.

In a sense, investment bankers are like surgeons. At the heart of their trade is a transaction that converts business assets into cash. It may be an outright sale of the company to management, a strategic buyer or a private equity group. It may be minority investment that allows the owner to remove some cash from the company and to not reinvest personal funds as a means of getting the company to the next level. Or it may be part of a plan to transfer control of the company to a future family generation.

Today the underlying structure of such transactions is varied and often complex. An entire industry, including private equity and investment banking has grown up around this issue. As explored here, the engagement of an investment banker to complete a transaction should not be at the beginning of the process, which often takes six to nine months, but rather toward the end.

Owners are Specialists in Running the Business--Not in Steering Transitions

Most business owners spend the majority of their time running the business. It is not easy and takes many hours. The transactions that result in the conversion of business wealth, which is by nature illiquid, to cash are infrequent. Some business owners devote their entire careers to building a company then sell it – a one time event. Others may be involved in a series of companies and transactions. But, for most business owners, such occurrences are infrequent and only occur a few times over a career.

The visible part of the process of converting business assets to cash is a tombstone, announcing a transaction. Or, it is a discussion at the country club in which a friend or acquaintance announces that he or she has just sold their company for a considerable amount. But, these announcements do not provide others with much information about the process or issues that had to be addressed to reach this end result.

The tombstones and country club announcements are usually about success. The unfortunate truth is that not all of the efforts by business owners to create personal wealth and liquidity are successful. The question we asked ourselves is why certain transactions are successful and why others are failures.

Characteristics of Transition Successes and Failures

What are the characteristics of the successes? What are the traits of the failures?

Successes are characterized by:

• The sale of or investment into the company when relative prices for private companies are high.
• A transaction or investment structure that results in low taxes overall; and the least taxes paid by the business owner.
• Bullet-proof due diligence: the price on the term sheet is the price at closing.
• A thorough and careful identification of potential investors or buyers.
• A period in which company performance is sustained over the period in which in the investment or sale takes place.
• A company that has been structured with a strong continuing management team that inspires new investors with confidence in the future profitable growth of the company.
• Strong accounting and control systems that result in a high level of integrity and build the confidence of all concerned.

Failures are characterized by:

• An attempt to sell a company when the quality of earnings is poor or suspect.
• Erosion or shrinkage of a purchase price because of poor tax or estate planning.
• Perception that the business owner’s involvement is the source of the business success.
• Weak or non-existent management team.
• Financial statements that have been prepared for internal eyes only, that are not in GAAP format and that will not withstand due diligence.
• Investment advisors who are not capable of structuring and executing an investment strategy for large amounts of proceeds.
• Financial performance that deteriorates in the midst of the investment or sale process.

Why Are Transitions Difficult?

Why do these things occur? Essentially, the team required to run the company on a daily basis is not necessarily the team that can or will succeed in attracting investors or purchasers. Proficient teams are hard to assemble because the skills required to create personal liquidity for the owners of a privately held company are not those that the company requires to run effectively on a day-to-day basis. This may include outside advisors, such as accounting firms, attorneys, and investment advisors.

Transactions that we have observed in the past demonstrate both the successes and failures of capital transitions: for example:

• Sale of a software company serving the banking industry at four times sales: Both the market timing of the transaction and the identification of a key strategic buyer contributed to a superior price. The purchasing company also provided growth capital six months before the purchase took place.
• Attempted sale of a company providing specialized millwork for the laboratory industry: The project failed because of poor financial performance while the company was being marketed and unrealistic price expectations on the part of the seller.
• Positioning of a regional distributor of stone and tile building products with accelerating sales and earnings: If this operating strategy can be sustained, the price of the company will triple over three years.
• Collapse of a seller note against a holdback reserve: The accounting for inventory by a distributor of boating supplies to individual boat dealers was not complete when the letter of intent was negotiated. This resulted in a lower EBITDA multiple than outlined in the letter of intent.
  

Creation of a New Service

These observations caused us to create a new service, the FOCUS Wealth Transition Advisory. FOCUS Partners involved in the delivery of this service have a unique skill set that includes a thorough knowledge of all of the financial services required by a privately held company including trust and estate services, bank credit, asset based lending, mezzanine, and equity financing and mergers and acquisitions.

Armed with these skills, FOCUS Wealth Transition Advisory professionals are able to act much as a personal trainer would with respect to the physical health of a client, except that our playing field is made up of all the capabilities necessary to help the owner of a privately held company maximize the structure and pricing of any alternative that provides liquidity to the owner of the business.

A second important ingredient is the fact that these advisory services are being offered from a full service investment banking firm. This means that the advisors are constantly participating in capital change transactions including buy-side, sell-side, and capital raising, and consulting transactions. In addition, a full time research staff, dedicated to research for private companies, supports the FOCUS Wealth Transition Advisory services as well as our traditional investment banking services.

The process used in the FOCUS Wealth Transition Advisory service involves four separate sessions of five hours each, which tend to take place over a two to three month period. The content of each session uses the material from the previous session. Sessions are educational for the business owner who learns the language that investors, buyers, and investment bankers use and the rules-of-the-road for such transactions.

Session I -- Defining the Issues and Constituents
In this session, all of the factors that determine company value are defined as well as the interests of all of the participants.

Session II -- Identifying Strengths and Weaknesses
This second session identifies those factors that will increase the value of the company to prospective investors or purchasers and ranks them by level of importance.

Session III -- Crafting a Position
The third session assembles the factors, identified, and ranked in the first two sessions, by type of investor or purchaser. The best possible approach is crafted for each type of potential investor or purchaser.

Session IV -- Preparing to Move Quickly
The fourth sessions acknowledges that “timing is everything” and prepares the business owner to move quickly, but only when and where he chooses.

Once completed, these sessions prepare the company to go to market in 45 days as compared to the 60 to 180 days required in a normal investment banking project. This is a crucial advantage in a time when the prices for privately held companies may change very quickly in a world dominated by crises and change.

A study of past transactions reveals that taking advantage of favorable multiples requires that companies move quickly to take advantage of favorable markets for valuing investments and sale transactions. Finally, these sessions permit the participation of attorneys, accountants and investment advisors to thoughtfully contribute to the process resulting in solid tax strategies and investment and estate planning.

If you, or a business owner you know, is contemplating a liquidity transaction in the future and would like to learn more about the FOCUS Wealth Transition Advisory service, please contact Michael R. Zook or G. Stanley Cutter, both FOCUS Partners working with the FOCUS Midwest Region team in Chicago. For more information about the service, contact your local FOCUS Partner, or, if you are in the Midwest, contact Michael at michael.zook@focusbankers.com or Stanley at Stanley.Cutter@focusbankers.com.

FOCUS Midwest Region Headquarters in Chicago Moves to New Offices

The Midwest Region Headquarters of FOCUS Enterprises, Inc. has moved to new offices in the John Hancock Building on Michigan Avenue. Working in the new offices will be William S. Lear, FOCUS Managing Partner, Midwest Region; G. Stanley Cutter, Partner; Michael R. Zook, Sr., Partner; and Paul Manzano, Principal. Address of the new FOCUS office is:

FOCUS Enterprises, Inc.
875 North Michigan Avenue, Suite 3100
Chicago, IL 60611
Office: 312-794-7888 / Fax: 312-794-7889

About FOCUS Enterprises, Inc.

Headquartered in Washington DC, with offices in Atlanta, Chicago, and San Francisco, FOCUS provides a range of investment banking services tailored to the needs of middle market companies. FOCUS specializes in serving businesses with revenue or transaction sizes between $5 million and $300 million, serving entrepreneurs, corporate owners, public companies, private companies or operating units, and various types of investors.

For 24 years, FOCUS has successfully integrated corporate development consulting and transactional expertise with its extensive research capability. The firm has long standing experience in completing mergers, acquisitions, divestitures, capital formation assignments, corporate development consulting projects, and financial advisory engagements.

Over twenty FOCUS Partners and Principals provide over two centuries of C-level operating experience in a variety of industries.

Please contact us at: info@focusbankers.com