Davis Boatworks

Executive Summary

Carson "Buddy" Davis started Davis Boatworks in 1973 and by 1999 was one of the leading players in the industry. The company did not spend time or resources on traditional marketing strategies. Though they participated in two or three trade shows a year, they mostly relied on repeat customers, word of mouth and Buddy Davis himself to attract customers. The company had focused on the manufacturing and sales side of business for years. The company was basically run out of a checkbook and there were no formal accounting controls until John Altizer was hired as the CFO.

The sport fishing boat industry in 1999 was booming and Davis Boatworks had more orders than their current manufacturing facility could handle. An expansion of manufacturing facility would cost then $3 million. They also needed an infusion of $2 million to improve their net working capital. In order to achieve this Carson Davis was contemplating selling part of his stake in the company to an investor. Most of Carson Davis's personal wealth was tied up in Davis Boatworks as equity. Buddy Davis hoped to take $5million to $10 million personally from this transaction.

To find the value of the firm, we have reviewed the recent financial statements including actual income and balance sheet from FY1996 - 1999 and projected income and balance sheet with and without expansion from FY1999 - 2003. We also considered historical rate of return data for the analysis.

We employed the Capital Asset Pricing Model (CAPM) with this data to find the value the firm to be $1.69million - $2.89 million.

The Problem

Carson "Buddy" Davis started Davis Boatworks in 1973 making a single 46' boat for a customer in Manteo, North Carolina. Over the next twenty-six years, Davis earned a reputation as one of the most knowledgeable people in the sport fishing industry. Throughout the history of his business, it had been not only the quality of the Davis Boatworks products, but also Buddy Davis' personal involvement in the sale of nearly every boat that had helped the business grow. The opportunity to visit the manufacturing plant and receive a personal tour from Davis continued to draw prospective customers. Davis Boatworks was more than just a boat builder; the company was the manufacturing arm of the Buddy Davis "brand".

Though the company participated in two or three trade shows each year, it did not spend much time or resources on traditional marketing. Instead Davis Boatworks relied on repeat customers, word of mouth and Buddy Davis himself. Fully 50% of Davis Boatworks sales were repeat customers. Given that most first time Davis customers did not purchase the larger 61' to 78' boats, it was important to be able to offer them an "entry level" Davis boat in the 50' range. These initial sales were the foundation of the company's future sales as customers looked to "trade up" on their next boat purchase.

The customer bases consisted of a diverse group of individuals who had a significant personal wealth in excess of $50 million and were willing to pay a minimum of $1 million to purchase a sport fishing boat. Customers purchasing decisions were influenced by a number of factors including length of construction time, customization, amenities and price.

Prior to the 1990 government implementation of the luxury tax, there were nearly 20 competitors vying for the market share. By 1999, the number of industry players had dwindled to only six notable manufacturers. Viking Yachts was the most formidable competitor. Their signature was the 55' boat. They were regarded as the second highest quality manufacturers of sport fishing boats in the world and had a meaningful international presence. Ocean Yachts was known for producing lower prices boats that offered outstanding value for owners. Their signature boast was a 56' boat. Post Yachts competed in the mid priced boat segment. They concentrated in the 50' category. They controlled less than 5% of the market and had not made any moves to increase capacity in recent years. Bertram Yachts and Hatteras Yachts had a combined market share of less than 25%. Bertram Yachts had not introduced any new models since 1992, was forced to move to Miami and was being controlled by its third different group of owners in less than seven years. Hatteras on the other hand was based on New Bern, North Carolina and had introduced two new products in the recent years and was rumored to be looking for new ownership.

Industry wide sales for 1999 was expected to be over 100 boats accounting for over $400 million in revenue. Though the number of competitors had declined significantly and demand for sport fishing boats had increased dramatically, the likelihood of competition from new entrants was low due to the significant investment in research and development, manufacturing infrastructure and branding needed to succeed. Davis Boatworks had focused on the manufacturing and sales side of business for years. The company was basically run out of a checkbook and there were no formal accounting controls until John Altizer was hired as the CFO.

The current demand for Davis Boatworks products provided an opportunity to expand capacity and modernize production. Buddy Davis was particularly interested in adding capacity for the 50' and 58' boats that had been put on hold due to current production constraints. Davis new plan called for the 50' and 58' boats to be produced on a production line basis rather than using the company's traditional semi production process. The company believed that demand for these boats alone was in the 20 boats per year range and that a production line system would allow the company to better meet the existing and forecasted demand. Buddy Davis and his managers estimated that sufficient production capacity could be added at a cost of $3 million to $ 4 million and that it would take slightly less than one year before boats could be produced for sale. These boats would be sold for around $ 1.2 million each generating revenue forecasted in 2000 to be over $18 million.

Buddy Davis also needed to shore up the company's working capital position so that Davis Boatworks had more "breathing room" in its operations. The long product lead times, inability to collect sufficient payments before construction and disruptive change orders created cash flow difficulties on a month to month basis. Altizer and Davis hoped to inject $ 2 million from the equity sale to provide a working capital "buffer".

Davis wanted to achieve some personal liquidity.