Capital Ventures

When MasterCraft Boat Co. went up for sale in the late 1990s, the senior management team had plenty of passion and a strong desire to assume ownership. What they didn’t have was plenty of cash.
Enter Pouschine Cook Capital Management, a New York venture capital firm. Pouschine Cook and the management team formed an ownership group and purchased the boat company in March 2000. Under their agreement, the team continued to run the business and implement the growth plan, while Pouschine Cook supplied the capital and strategic input.
The partnership was so successful — with millions of dollars invested in strengthening the company, resulting in millions gained in valuation — that when Pouschine Cook put its shares on the market in early 2004, more than 80 companies expressed a serious interest.
U.S. Equity Partners, the buyout arm of Wasserstein & Co., New York, assumed ownership of Pouschine Cook’s equity shares last November.
That transaction was just one more in a stream of acquisitions, mergers and consolidations to occur within the industry over the past few years. While some may be unsettled by this trend, others see it as an indication of the health of the both the industry and the economy as a whole.
“In general, the merger and acquisition, or M&A, market literally gets better every day,” says Bradley Schreiber, vice president of capital markets group, RSM EquiCo., a M&A specialty firm headquartered in San Francisco. “We’re seeing more buyers looking for information on our clients, we’re getting more offers for our clients, and we’re seeing better pricing.”
Those shopping the M&A market fall into three categories: strategy players, as Schreiber calls companies looking for acquisitions within their own industries; large conglomerates, many of which are international; and private equity firms, such as mutual fund managers and venture capital firms that invest in a portfolio of companies.
Strategic players, as noted, limit their purchases to their industry. Buyers in the other two categories, however, are less interested in the industry than in finding the right deal. For these investors, the marine industry is looking pretty good these days.
The preponderance of privately owned companies certainly is a factor. At the same time, the strength of the few publicly held companies, such as Brunswick, has banished the misconception among outsiders that profitability is a seasonal venture.
But the most obvious reasons for the increased attention are the same indicators typically cited by dealers optimistic about the future.
“The demographics as the baby boomers come into their peak earning and retirement years, the renewed focus on the family post 9/11, lower interest rates, greater consumer confidence … all of these factors are fueling a strong recreational and leisure economy, and naturally that will attract attention,” says Schreiber.
A new wave
For many independent boat builders, the idea of letting go of part of their equity triggers flashbacks of the late 1980s when a rash of acquisitions resulted in the gutting of once healthy businesses.
But times have changed, says MasterCraft’s president and CEO, John Dorton. Rather than a threat, he believes that the private investment community should be viewed as a positive influence.
“I think that there is a misperception within the marine industry that the investment community wants to come in and take over, cut capital expenditures and tell managers how to run their companies,” Dorton says. “Nothing could be further from the truth.”
Had Pouschine Cook done that to MasterCraft, he adds, the company would not have attracted so many potential buyers.
“It is usually pretty evident when something has been cut to the bare bones and is just coasting on momentum,” says Dorton. “That was certainly not the case here, and it is to Pouschine Cook’s credit that they had the foresight to build the value of the business.”
Although MasterCraft is Wasserstein & Co.’s first marine acquisition, the company is very interested in the industry.
“When you have an attractive industry that is populated by a number of high-quality, independently owned companies, it is definitely ripe ground for equity companies looking to make an investment,” says Robert Fogelson, a managing director of Wasserstein.
Fogelson points to MasterCraft’s core competencies in boat design, engineering and lean manufacturing processes as well as the mystique of the brand as the basis of Wasserstein’s interest in the company. The management team’s capabilities cinched the deal.
“We like to invest in companies with strong management teams that excel in their industry,” says Fogelson. “Upon getting to know John and his team, and getting a closer view of the company, we grew increasingly excited about the opportunities for long-term value creation.”
According to Schreiber, the recent surge in investor attentiveness to the marine industry won’t stop anytime soon.
“This isn’t a fad,” he said. “The boat companies that can differentiate themselves are going to be seeing a lot more interest.”
Dorton calls that “a welcomed new wave. It gives the independent boat builder a way to compete against the large consolidations.”
But are the independents ready to take advantage of the opportunity?
Due diligence
One of MasterCraft’s most attractive assets for both of its venture capital investors was its strategic plan. The management group was able to tell potential investors what it wanted to do, how it wanted to go about it, and why it was a good idea.
Unfortunately, many privately held companies don’t have a clear-cut growth plan in place. They need to make this a priority sooner rather than later, even if a sale isn’t in their immediate plans. Not only will it help potential buyers understand the value of the business, it will also give the owners and their management an understanding of the opportunities ahead and a roadmap for getting there.
Such planning is the only way to determine the true value of the business, as well.
“Buyers are buying the future, not the past,” says Schreiber.
Failure to recognize that distinction has resulted in many a company undercutting themselves by undervaluing their businesses.
“A lot of our clients don’t realize the value of what they have,” says Schreiber. “It could be patents, processes, proprietary ideas that haven’t been patented or processed yet, methodologies of production … anything that differentiates a business has value. Our goal is to help our clients identify what it is about the business that will have the most impact on the buyer.”
There are other steps owners can take to better position their companies for a sale as well — for instance, ensure that their financials are in order. RSM always recommends that clients have their financial systems audited.
John Celentano, president of Global Ventures Group, Inc., Wilton, Conn., agrees.
“Privately held companies aren’t required to have their finances audited,” he says, “but I recommend it, especially if they are looking to be acquired by a publicly held company. It is something that the potential buyers can identify with, and it speaks to an increased level of confidence in the transaction.”
Celentano also suggests that owners consider recasting their financials, that is, adding back in to the bottomline owner perks, such as country club memberships, cars, bonuses and so on.
Reporting systems are an additional area to review before talking to potential buyers. Do they know the margins on their different product lines and accessories? What lines should possibly be dropped? What lines are carrying the company? What’s the order shipment and backlog by unit?
“A lot of people run their businesses by the seat of their pants,” says Schreiber, explaining that they need to get the proper management tools in place before seeking an investor. “Today’s buyers spend a lot of time scrutinizing their potential acquisitions before deciding to make an offer.”
Of course, M&A isn’t only about the attractiveness of the seller. Owners need to do due diligence on the buyers as well.
Options galore
Having gone through it before, Dorton had a pretty good idea what would be involved in finding another private equity firm to recapitalize MasterCraft. His only surprise during the seven-month process was the intense interest.
Steve Vogel had a similar experience. President and CEO of Bennington Marine, Elkhart, Ind., Vogel anticipated a strong interest when the boat company decided to bring in a private equity partner a few years ago. The award-winning boat builder was a good investment, no doubt about it. But rather than the expected four or five very good offers, Bennington had about a dozen.
Bennington’s shareholders, who brought in RSM to help identify potential buyers and negotiate terms, entered into an agreement with Summit Partners, Boston, in November 2003.
“They are great strategic partners,” says Vogel. “I wanted a strong board of directors who would understand the nature of our business and who wouldn’t come in and start asking us to do things that would put us at risk, and that’s what they’ve been.”
While his new board lets the management team run the company, it also has been known to push them. For instance, the board encouraged them to set bigger goals for Bennington’s new Azure brand.
“They encouraged us to reach in terms of what we believed we could do with this brand, and they were willing to inject the capital,” Vogel says. “So, we invested more into this product line than we might have. And we’re getting great reviews. We think that we are going to be a major player in the runabout and deckboat business in the future.”
Before deciding to seek an outside investor, Bennington faced a situation familiar to many privately held companies. A major shareholder was nearing retirement and wanted to cash out at least some of his holdings. At the same time, an infusion of cash would help the boat builder better position itself for future growth.
The shareholders believed that a merger, while doable, risked muddying the culture, something they wanted to be sure to preserve. They also considered the possibility of an international investor, but didn’t pursue that when it became evident that there was more than enough interest domestically.
Given the demand, it isn’t surprising that Bennington’s shareholders received a higher value for the company than they expected. What might surprise some, however, was that they turned down a bid that was $10 million more than Summit’s.
“We made sure that we got the right partner,” says Vogel.
MasterCraft also went with the right partner rather than the highest bidder.
“Nearly all of the competitive bids were within a little bit of each other,” says Dorton. “At the end of the day, we went back to Pouschine Cook and said, ‘We like these guys [U.S. Equity] the best.’”
There’s a lot to be said for good chemistry when facing volatile business environments. During MasterCraft’s tenure with Pouschine Cook, for instance, the group endured 9/11, fuel increases, a recession and war, among other things.
“Through it all, we never considered compromising the product or the business in any way,” Dorton says. “If we took some lumps for a quarter or two, we took them.”
Value plus
Bennington’s search for an equity partner took about 18 months, in part because the boat builder was growing so fast that the transaction had to take a back seat on occasion.
“We thought we’d get the deal done in about a year,” said Vogel, “but we were growing at the rate of about 25 to 30 percent, and we just couldn’t respond as quickly as we would have liked to at times.”
That growth is only helped by the boat builder’s partnership with Summit, says Vogel, and in ways beyond the increased capital. For instance, someone from Summit Partners comes in each month to mentor some of Bennington’s midlevel managers. Vogel also draws on the expertise of other companies within Summit’s portfolio of investments.
“Summit brings a lot of resources to the table that really help a midsize company like ours to grow into a much larger company, and that’s what we wanted,” says Vogel.
The same holds true at MasterCraft.
On the other hand, don’t discount the value of the capital resources. “We are now able to accelerate our plans for the future because we have a significantly larger investment group than we had before,” says Dorton, adding that acquisitions of their own are sure to be considered.
While he acknowledges that sharing equity might be seen as too much of a trade-off for some private companies, Dorton reiterates that his belief — and his experience — is that it is well worth it. Not only does an outside investor offer a shot in the arm of both cash and ideas, but the injection is good for the entire industry.
“The companies that choose to go this route become smarter businesses and that will ultimately deliver greater value to consumers,” he concludes, “so I see it as a real positive trend.”

Recent Marine Industry Acquisitions
March 2, 2005
– Albemarle Boats by Brunswick Corporation
Feb. 4, 2005
– Intelligent Energy Holdings by Dickie Walker Marine Inc.
– Bischoff Marine Electric, Inc by BEP Marine Ltd.
Jan. 7, 2005
– Extreme Marine Specialists’ by Trafalgar Marine Insurance Services
Jan. 3, 2005
– Sea Boss, Sea Pro and Palmetto boat lines by Brunswick Corporation
Dec. 2, 2004
– Merrill-Stevens Dry Dock Co. by Hugh A. Westbrook and Carole Shields Westbrook
Nov. 2004
– Travis Boats & Motors Inc. (remaining shares) by Tracker Marine LLC
– Rolla SP Propellers SA by Twin Disc Inc.
Oct. 21, 2004
– Sailmath by B&G, a subsidiary of Simrad
Sept. 28, 2004
– boats.com and YachtWorld.com by Trader Publishing Co.
Sept. 15, 2004
– Trend Marine Products by Taylor Made Systems
Aug. 17, 2004
– eAngler.com by Ritz Interactive
August 2004
– David M. Arndt & Co. Inc by Southco Marine
– Color Art’s by DuraTech Industries
July 6, 2004
– Freedom Fenders by Taylor Made Products
June 25, 2004
– EverTrust Financial Group Inc. by KeyCorp
June 8, 2004
– ProQuest Business Solutions by Automatic Data Processing Inc.
May 2004
– Techsonic Industries (Humminbird fishfinders) by Johnson Outdoors
April 7, 2004
– Marine Innovations Warranty Corp by Brunswick Corp.
April 2, 2004
– Lund, Crestliner and Lowe boats by Brunswick Corp.
March 2004
– UsedBoats.com by World Trade Publications

Is leaving on your mind?
With all of the merger and acquisition activity these days, it’s to be expected that at least a few owners of privately held companies are wondering if they should be selling some or all of their equity. Whether you are a dealer, supplier or manufacturer, if thoughts of change are on your mind, here are some things to consider.
Clarify your goals: What’s driving the need for change? Do you need more capital to meet your strategic goals? Are you ready to retire, but lack an exit plan? Do you want to get out of your business completely, or are you just tired of your level of involvement? Is it strategically smart for you to sell now rather than later, given the market? There are lots of good reasons for selling. You just need to be clear what yours are.
Prepare for a sale even if one isn’t imminent: Do you have a strategic plan in place? Do you have a succession plan, or managerial bench strength? Most investors are looking for strong companies with well-defined growth paths. In addition, take care of the nuts and bolts. Have your books audited, make sure your reporting is up-to-date and don’t forget that first impressions count. Is your facility in need of a fresh coat of paint?
Get help: It has been said that up to 80 percent of sellers without professional representation leave substantial value on the table. If you are serious about selling your business, seek advice from a merger and acquisitions specialist or regional investment banker. They can help you understand what your business is really worth and who is the best buyer or investor for your situation.