TIMING THE SALE OF A BUSINESS: An article in the January, 2005 FOCUS Newsletter written by FOCUS Partners Doug Rodgers and Mark Capaldini predicted that 2005 may be a particularly good year for sellers of businesses.

The article below, “Timing the Sale of a Business for the Best Return,” written by John Slater, a new FOCUS Partner, demonstrates how important timing can be for achieving maximum value from a business sale. Please note that the economic assumptions used are not a prediction of future events, nor should they be viewed as the author's economic forecast. They do, however, represent one of a number of possible scenarios that fit well within the bounds of historical norms.

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Active FOCUS Deals

Although our firm has over 23 years experience across many verticals, FOCUS currently has active transaction engagements in the following specific business sectors:

• Business Services
• Call Center Software
• Construction (multiple assignments)
• Consulting
• Digital Printing Services
• Government contracting (multiple assignments)
• Healthcare Business Services
• Information Management
• IT Outsourcing (multiple assignments)
• IT Services (multiple assignments)
• Leisure
• Library Services
• Luxury Residence Club
• Media
• RFID Technology
• Security (multiple assignments)
• Software

Our transaction process provides us with up-to-the-minute market knowledge in these sectors that may be corporate development of interest to you.

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Applied Digital Solutions, Inc. Has Acquired eXI Wireless, Inc.

FOCUS initiated the transaction, acted as financial advisor to, and assisted with the negotiations as the representative of eXI Wireless, Inc. (CDNX: EXI.V), a pioneer in wireless identification, control, and location technologies that protect, track, and locate individuals and assets. Applied Digital Solutions, Inc. (NASDAQ: ADSX) develops innovative security products for consumer, commercial, and government sectors worldwide, including RFID applications, end-to-end food safety systems, GPS/Satellite communications, and telecomm and security infrastructure, positioning the firm as the leader of Security Through Innovation. Applied Digital owns Verichip Corporation. Click here for the eXI Wireless/Applied Digital Solutions Web Tombstone.

Kirmac Automotive Collision Systems (US), Inc. Has Acquired Certain Assets of Thoroughbred Collision Centers

FOCUS acted as financial advisor to, and assisted with the negotiations as the representative of Thoroughbred Collision Centers, operators of a chain of collision repair centers providing high quality services to consumers and insurers in the Seattle area for more than ten years. Kirmac Automotive Collision Systems (US), Inc. is a wholly owned subsidiary of The Kirmac Group, Vancouver, BC, operators of 17 collision repair locations including a previous US location in Auburn, WA and 10 locations in Vancouver, BC. Click here for the Kirmac/Thoroughbred Web Tombstone.

Timing the Sale of a Business for the Best Return

By John Slater, Partner, FOCUS Enterprises, Inc.

As with every human endeavor, timing is a critical element in the sale of a business. Often timing is driven by essentially involuntary factors such as an owner reaching retirement age, resignation of a key employee, an offer out of the blue from a prospective buyer, or, in a worst case, financial desperation. Lack of control over the timing of a business sale can be tremendously expensive, as the example below will illustrate.

Assumptions

For purposes of the discussion, we will make several very simple assumptions. First, we will assume that the seller -- "Acquireco, Inc.” -- is a profitable and growing manufacturing concern in an attractive industry. We also will assume that Acquireco's industry is somewhat cyclical and that cyclicality affects both the rate of growth and the profit margins of the business. We also will assume that the market for businesses of this sort is driven totally by the earnings of the acquired company.

After suffering a downturn in 2001 and 2002, Acquireco, has for the past two years, experienced a sales growth of 10 percent annually and a pre-tax profit margin of 15 percent. The company expects to enjoy comparable growth and profitability in 2005. For purposes of our example, we also will assume that in 2006 as interest rates continue to rise, Acquireco's industry will go into a downturn.

While Acquireco will do better than its industry peers, no sales growth will occur in 2006 and Acquireco's margins will drop from 15 percent to 12 percent pre-tax due to increased domestic and foreign competition. After a relatively brief slowdown in 2006 there will be a shallow recovery in 2007, but profit pressure will increase. As a result, Acquireco will see sales growth in 2007 of 5 percent, but margins will shrink further to 10 percent.

What a Difference a Year Makes

Below, we have analyzed the effect of a one-year delay on the likely sales price of Acquireco. Purchase price multiples are currently at historically high levels for good companies such as Acquireco. With rising interest rates and a slowdown in growth, we assume for this example that multiples will decline to levels more consistent with historical norms.

For simplification we have assumed that a profitable, growing company such as Acquireco might in the current market attract bids as high as 6.5 times earnings before interest, taxes, depreciation, and amortization (EBITDA) or in some cases even higher, while in other environments, similar companies would have commanded significantly lower multiples. Additionally, companies experiencing a decline in profitability are likely to attract lower bids in relation to historical earnings than are companies experiencing profit growth.

Taking both these factors into account we can assume that a purchase multiple of 5.5 times EBITDA would not be unreasonable for 2006 and that further decline to 5 times EBITDA might occur in 2007 as funds are pulled from the market by equity investors disappointed from the returns on their mid-decade acquisitions. While this may seem extreme, it is not inconsistent with adjustments that we have seen in slowing markets in the past.

Yearly Fluctuations in Sales Price

The sales price assumes an unleveraged balance sheet. As can be seen below, the additional assumption that Acquireco has $10,000,000 in debt would result in an even more dramatic reduction in purchase price on a percentage basis.

Three Factors Can Affect the Value of a Business

In reviewing the tables above, it becomes immediately apparent that three factors are at work that can dramatically affect the value of a business over the course of the business cycle. The first, company sales growth and profitability, are to some extent within the control of management. The other two -- industry performance and the business cycle -- are not. Even relatively small fluctuations in growth and profitability resulting from the interplay of these factors can, over time, have truly dramatic impact on the value of a business in the acquisition market.

The example above does not assume disaster, either in the economy as a whole or for Acquireco. The predicted fluctuations in sales and earnings are relatively mild for a private manufacturing company over the course of the business cycle. Further, the increase in purchase multiples is consistent with that experienced in many industries over the past several years.

The predicted decline in 2006 and 2007 merely brings these multiples back to levels witnessed frequently over the past thirty years. Yet even with these relatively benign assumptions, the demonstrated swing in value of almost $14 million from 2005 to 2007 is dramatic. Should a severe recession occur over the next year or two, the reduction in Acquireco's value could be even more dramatic, with purchase multiples potentially dropping as low as four times cash flow, or even less as occurred in the early 1990s.

2005 May Be a Watershed Year for Company Valuations

For many companies and many industries, 2005 may represent a watershed year in terms of company valuations. If your situation has parallels to that of Acquireco, it may be time to weigh the economic uncertainties and consider a sale at today's unusually attractive purchase multiples.

John Slater, a FOCUS Partner, lives in Memphis and works with the FOCUS Southeastern Regional Team in Atlanta, serving clients in the mid-South and mid-Continent. He can be reached at John.Slater@focusbankers.com.

FOCUS Adds Eighteenth Partner--John Slater

FOCUS Enterprises, Inc., a national investment banking firm providing merger, acquisition and corporate finance services to middle-market and emerging companies, announced the addition of an eighteenth Partner, John Slater, who lives in Memphis, TN. Slater will work with the FOCUS Southeastern Regional Headquarters team in Atlanta, serving clients in the mid-South and mid-Continent.

Marshall Graham, Chairman, FOCUS Enterprises, says, "We are extremely pleased that John is joining our firm. He has completed numerous merger and acquisitions transactions during his professional career and brings to FOCUS deep domain expertise in the information technology, digital media, business services, manufacturing, and distribution logistic segments."

About John Slater

Before joining FOCUS, Mr. Slater was Managing Principal of Slater & Company and its predecessor, Asset Services, LP, which he founded to provide investment banking services focused on middle market private and public companies.

During this time he also served as President of M&A International, an international network of independent merger and acquisition firms. Mr. Slater helped shape the organization into a vibrant worldwide network with offices in thirty-seven cities in twenty-four countries. Mr. Slater championed the use of advanced communications technologies to create a real time, worldwide deal-making capability before anyone coined the term Intranet.

John Slater graduated from Princeton University with a degree in Economics in 1970 and the University of Virginia Law School in 1973. For nine years Mr. Slater had a successful law practice...more

FOCUS Web Watch: Services

Learn about the full scope of FOCUS capabilities in the SERVICES section of the newly-designed Website (www.focusbankers.com). In the red navigation bar at the top of the Home Page, the SERVICES button is second from the left. Click there to go directly to the following information:

Services

Over the past two decades, FOCUS has consistently served the needs of middle-market and emerging businesses with a range of services carefully attuned to their needs.

Under SERVICES, you will find the following sections:

• Merger, Acquisition, and Divestiture
• Corporate Finance: Debt and Equity Financing
• Strategic Advisory Services
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• Corporate Valuations
• Corporate Development Consulting

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 and emerging companies. FOCUS specializes in transactions for entities with $5 to $100 million in revenues, serving entrepreneurs, corporate owners, public companies, private companies or operating units and various types of investors.

For 23 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.

Operating nationally and internationally, twenty FOCUS Partners, Senior Advisors and Principals provide over two centuries of C-level operating experience in a variety of industries.

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