When it comes to selling a business, some opt to sell 100% to a third-party buyer and completely walk away. However, others find it more appealing to “take some money off the table” but keep a stake in the business, keep management intact, and share in future growth. Before rushing to accept an offer, seek professional advice to help you find the business buy-out solution that best fits your family.
In “Private-Equity Firms Eye Family Businesses” (Wall Street Journal, Sept. 19, 2022), Miriam Gottfried explores the world of private equity business acquisitions. A private equity firm is a firm owned by investors who pool their money to buy businesses. Initially known for billion dollar deals to take big public companies private, private equity firms are now shifting focus to smaller family businesses. Very commonly, the bulk of the family’s net worth is tied up in the business. Such private equity deals offer owners another exit option when they wish to diversify their wealth.
Gottfried tells the story of the Lang family, owners of an 80-year-old pet food business, Ainsworth Pet Nutrition. Partnering with celebrity chef Rachael Ray, the firm was poised to take their brand to the mass market. The private equity firm L Catterton, recognizing the country’s growing obsession with pets, spotted an opportunity.
Rather than selling 100%, the Langs sold 42% but parted with control over operations. Under L Catterton’s management, the business expanded its product line and acquired one of the manufacturers of their merchandise. Fast-forward four years and J.M. Smucker Co. bought Ainsworth for $1.9 billion, earning the Lang family eight times what their stake was worth four years earlier.
Another example hits closer to home for me in nearby Greenville, Texas. Polara Enterprises, a 50-year-old family business, makes pedestrian signals to tell the blind when to cross at intersections. Owner John McGaffey held a “beauty contest” attracting 10 bidders (among them six private-equity firms) and sold a majority interest to Vance Street Capital. In acquiring a stake in Polara, Vance agreed to McGaffey’s conditions: no layoffs of its 80 employees, McGaffey holds a seat on the Board, and his son and son-in-law remain executives. “‘I would have loved to have just left it with my boys, but we felt we could get a lot further in terms of our technology if we could get an outside investor, said Mr. McGaffey. ‘I didn’t want to risk all of my own capital.’” McGaffey continues to own a minority stake that will further benefit him if Polara hits it big.
Gottfried offers other examples to illustrate private equity’s entry into the domain of American family businesses. Neal Rosenthal, owner of Manhattan’s Rosenthal Wine Merchant received nine bids, ultimately selling a majority interest to Incline Equity Partners but remaining as CEO. Realizing that his daughter had no interest in taking over, the 76-year-old Rosenthal achieved peace of mind: “I am confident that if I dropped dead today, my business would continue on without me.” Rosenthal Wine Merchant has since acquired one of its distributors and another wine business, but Rosenthal has the peace of mind that it’s not his capital at risk.
Private equity buyouts don’t always have a happy ending. Examples abound where they load up a company with debt, bring in new management, lose ties with the local community, or expand irrationally and break the back of a once profitable business. All can acknowledge the risks. But with a carefully structured deal, private equity offers a business-selling family another solution to consider.
If selling a business is a part of your family’s succession plan, it’s wise to hire a professional firm to help you consider all your options.
Marvin E. Blum
Marvin Blum addresses the trend of private equity firms buying family-owned businesses.