Exploring the benefits of working with a private investment firm
There comes a time in the life of every family run business when its owner begins to wonder if it’s time to sell. In many cases, a business owner gets to a point where he or she is unable to take the business to the next level. Or, there is no one in the family or in the company who can be groomed to take the helm. As a wealth advisor, I have dealt with many former business owners—each one had different challenges and used different strategies as they went through the following three phases of selling their businesses:
- Preparing to sell;
- The selling process; and
- Life after the sale.
My experience has taught me that there are some business owners who choose to sell to the highest bidder, take one big bite out of the apple that they grew from a seed, and move on to a life of leisure. Then there is the owner who wants to remain involved in his or her company for a host of different reasons, such as:
- They enjoy working, but want a bit more leisure time and a lot less stress.
- They want to make sure valued employees continue to have job security.
- They want to have a role in shaping the future of the company and benefit from its potential growth.
- They want to make sure they grow their wealth to better provide for their family and heirs.
In any case, and for whatever reason, a business owner should have a team of professionals they can turn to for advice when it comes to making high-quality decisions about the future of their firm and their personal finances. That team should include their accountant and lawyer, in addition to an experienced wealth manager who can help them understand just what to expect during each phase of the sales process. If necessary, the team can also help business owners explore ways they can stay involved with the company after the sale.
One way a seller stays involved in his or her company is by working with a private investment firm who, along with its investors, will acquire a controlling or substantial minority position in a company. The private investment firm will then bring capital and, if necessary, add professional management to a business so it can look to maximize the value of that investment. It also lets the business-owner-turned-seller remain with the company in some high-level capacity, thereby letting them sell without saying goodbye.
To get a firsthand account of what it’s like to work with a private investment firm and uncover ways a wealth manager can add value throughout the three-step process of selling a business, I interviewed several current and former business owners. Most recently, I had an opportunity to interview Chris Michalik, co-founder and managing director of Kinderhook Industries, a private investment firm based in New York City with $770 million of total capital. He detailed the business relationship from his perspective. Here are excerpts from that conversation.
Scott Mahoney (SM): What motivates owners to sell?
Chris Michalik (CM): The most frequent circumstances include any or all of the following.
- Business owners are seeking outside capital to help diversify personally. We have encountered many business owners who have leveraged themselves through the roof personally to build their businesses. This leverage often comes with personal guarantees and cross-collateralization of both personal and professional assets held by the owner. The reality is that they have done a great job building the business, but they want to take some chips off the table so they can be secure in their personal lives. They want to be free to focus on growing the business rather than worrying about the second mortgage. We understand that desire. It takes a long time for an independent business owner to get to the point at which they have access to additional capital from a lender without posting a personal guarantee. We have strong relationships with many regional and national banks with whom we’ve completed multiple transactions. They don’t require personal or corporate guarantees and we don’t require an owner and/or partner to personally guarantee any portion of the financing provided by either Kinderhook or our lending partners.
- Business owners are seeking to accelerate growth and build their team. Many times, owners don’t want to take on the personal risk of dramatic expansion and remain unsure of where to turn to hire the staff capable of driving growth. As they have grown their businesses over the years, they have built industry relationships, customers, etc., but they have reached a point at which they need more capital, outside relationships or advice to take their companies to the next stage of development. Kinderhook, for instance, currently has 45 operating partners with whom we work to accelerate growth across our portfolio. All of the operating partners have been successful CEOs, CFOs, COOs or heads of sales. They are available to advise the CEO and help recruit industry contacts prepared to take up permanent residence in a company to immediately add the skills required for success.
- Business owners are seeking to transition out of their businesses while protecting their legacies.An owner may have reached a point where they want to retire or simply transition into the next stage of their life; however, they face a dilemma, as they don’t have family involved in the business in a capacity that would enable them to “pass the torch,” so to speak. At this point, they decide there is an opportunity to sell their single biggest asset and provide financial security for their family. At the same time, they face the question of how to transition the business to a firm they trust will do right by the business that they, or maybe even their parents, founded.When seeking a private investment firm, a business owner should look for a team that has experience in all these situations. At the end of the day, each person and each transaction has a unique set of needs. They (the business owner) have spent years developing a culture and forming concrete ideas about their business and the private investment firm should respect that.
SM: What considerations ought to be taken into account when selling?
CM: Let’s not kid ourselves—you are putting away your life’s nest egg here and price is always an important factor, but it isn’t the only factor that should be taken into account. We believe there are several additional factors that should be considered.
- Information risk. As you will be opening your books to a stranger, or many strangers, all of your confidential business secrets will be at risk. The broader you go in search of a buyer, the greater the chance your competitors will learn these secrets. Partnering with a trusted investment firm limits the dissemination of information and ensures that there is a substantial organization standing behind the confidentiality agreement such that any inadvertent release of information doesn’t occur.
- Certainty of close. Selling a business is a difficult process. Most likely, you only want to experience it once. Therefore, you should aim to deal with the most reputable buyer and/or partner who has developed a long-term track record of successful execution. The only way to reference this is to make calls to former sellers. Ask the potential buyer to allow you to speak to the last five sellers from whom they have acquired businesses. If they can’t give you five completed deals, then their experience is in question. If they won’t give you the last five, then look elsewhere.
- Partnership/legacy.Every seller should begin by asking themselves the following: “What are my thoughts on the future of my company and my involvement?” By asking themselves this question, they can begin thinking about who they would like to have as their partner. Every seller should remain cognizant of the fact that their future partner will play an integral role in determining the seller’s legacy and their involvement in the business going forward.Ultimately, everyone wants to ensure that they get a fair price, but finding the right partner that will minimize information risk, maximize certainty of close and protect their legacy going forward is just as important.
SM: What does a private investment firm like Kinderhook look for in an opportunity?
CM: Our overarching goal as an investor is to find an exceptional management team with a defensible business that has growth potential.
First, we seek a management team who has an established history within an industry and has created a culture of success within their company. We look for a desire to accelerate growth, which can be communicated from the executive team at the top all the way to the employees on the shop floor. Overall, our approach relies heavily upon a mantra we have used as the groundwork for all of our deals since founding Kinderhook: “Partner with management and people because they are what ultimately drive growth and create value.”
Aside from a management team we can partner with, we tend to like businesses that are in niche industries. Niche companies often have strong operating margins, defensible market positions and manageable capex requirements allowing the company to grow through internally generated cash flow. We are a bit unique in our space, as we don’t believe in using much leverage to acquire our businesses. We rarely borrow more than 50 percent of a purchase price and, as a result, invest free cash flow into growth, as opposed to interest and principal payments. Niche businesses are often in a position at which they can grow either organically or through acquisition when given the right management and capital.
Starting with organic growth, we have encountered companies in the past that have developed excellent organic growth plans (improved marketing, product line extensions, geographic expansion, etc.), but can’t execute because of a lack of capital or perhaps the need for additional management resources. We can help in both areas. For example, in our investment with Nurse On Call, a Medicarelicensed home healthcare agency, we partnered with the owner of the company, Dale Clift, and provided the capital necessary to fund Dale’s nurse and sales force expansion strategy. The company has achieved staggering organic growth through its execution of a well-developed sales strategy that expanded the business to become, under our ownership, the largest Medicare home healthcare provider in the state of Florida.
Similarly, growth can be created by aggressively pursuing add-on acquisition opportunities by utilizing both management’s and our extensive network of business intermediaries and contacts. To better facilitate acquisitive growth, we (Kinderhook) lead the acquisition process, which includes negotiating letters of intent, financial modeling, completing due diligence (with assistance from management on operational matters), arranging financing and negotiating final equity and debt documentation so that management can focus on what they do best: running the business. Several of our current portfolio companies have executed this strategy and accelerated their growth substantially postclose. For example, our tonneau company, THI, has acquired three companies since closing in late 2007 and is now the market leader in the soft-tonneau space.
SM: What is the seller’s responsibility going forward?
CM: Sellers are typically involved in a capacity that they find both desirable and comfortable. That being said, they can seek board-level involvement, as well as an active role with large customers. More or less, any of the roles that can be characterized as “at the front of the business,” like attending trade shows and meeting with customers, are things that sellers should be involved in post-close. Quite frankly, most sellers enjoy staying in this role. Sellers will no longer need to get caught up in the minutia of the everyday operations if they don’t want to be —they will no longer be required to manage the shop floor operator or the finance staff. We recognize and are sensitive to the delicacy of relinquishing control, so we work alongside sellers by helping them transition into their new roles.
Aside from involvement in their companies post-close, we have found great mutual success in working with sellers as operating partners. An operating partner, for Kinderhook, is a seller who has a desire to leverage their industry-specific knowledge or perhaps their management experience by working with us on future investment opportunities and mentoring younger executives within our portfolio. One of the most valuable assets we have to offer any potential seller is our extensive operating partner network.
A perfect example from our portfolio is Pat Perrin at DDI. DDI, formerly Perrin Manufacturing, was founded in 1932 by Pat’s grandfather. By 2007, Pat had built a very successful company, but was looking for a partner to recapitalize the business, bring in a seasoned management team to run the day-to-day operations, while allowing him to still remain active in his family’s legacy. Over the past four years, we have grown DDI more than 400 percent. Pat is currently involved in strategic initiatives, as well as trade shows for DDI. Plus, he’s an operating partner of Kinderhook, yet he’s free to focus the majority of his time on his personal interests.
Running your life after the sale
Whether a business owner sells and walks away or sells and stays on with the company, they will still have to remain the CEO of their personal financial assets. Like running a company, choosing the right people to put in charge could help you turn a profit. And, as every business owner knows, the sooner you begin the search, the more prepared you will be, when the time comes, to hopefully take multiple bites out of that apple and savor the taste of success.