Advice from a Smart Cookie
Meet Ian Wilson, who can teach a thing or two to sellers and buyers of family businesses.
The family owners want to stay in the business, but for a number of different reasons it makes sense to sell out. Maybe the founder wants to get his hands on his equity and start enjoying life a little, yet he doesn't want to retire. Or the sons and daughters see a chance for a major expansion of the business, but want a partner to share the risk. Or perhaps selling the business will avoid complications in dividing up the estate later on.
Whatever the reason, owners who want to get their cash out now, and yet continue to manage the business, face a tough task in finding a trustworthy financial partner who will respect the needs of the family, the employees, and the business. They will have to shop carefully to avoid being engulfed and devoured by an impersonal outside investor or a corporate bureaucracy.
If they're in the cookie business, one man they may want to see is Ian Wilson, whose holding company, Wyndham Foods, is situated in San Francisco's Barbary Coast district. In the last four years, Wyndham has acquired eight family-owned regional cookie companies with combined annual sales of $350 million. Wilson's background is not in baking cookies. In a 30-year career, he has been, among other things, vice-chairman of Coca-Cola Company and chief executive of Hawaii's venerable Castle & Cooke. Now, however, he sees himself as more of a "financial godfather" than the CEO of a rapidly growing company. He is especially attuned to the sensitivities of the families whose businesses he buys, and seeks to build on their strengths.
During a recent conversation in his Barbary Coast office, the courtly 59-year-old Wilson sat munching a Country Hearth oatmeal cookie ("no cholesterol, no tropical oils, plenty of oat fiber') made by Wyndham-owned Roush Products Co. While extolling the "proud, fiercely independent second- and third-generation businesspeople" who built the businesses that Wyndham now owns, Wilson offered some observations on what he looks for in buying family companies, as well as what the family can expect to get out of such deals.
Wilson does not have an exact model for the kind of company he seeks out. He says he looks first for personal chemistry, "because that's as fundamental to me as the price. If the chemistry is right, people will stay. We try to create a big extended family whose members lend each other a hand." But Wilson isn't just looking for owners who are congenial; they also have to be savvy and committed. "We walked away from a couple of companies because the family members just didn't have it," he says, adding, "If you go in and replace half the family, you'll have trouble with the ones that remain."
Wyndham Foods doesn't look for bargain-priced turnarounds that it has to immediately jump in and manage. "Price is not important," Wilson says. "You get what you pay for, and we're not after the last crumb on the table. We target companies that have a strong franchise in a local or regional market."
Wilson started pursuing solidly entrenched regional cookie companies in 1985 for three reasons: First, they have fat 15 percent to 18 percent profit margins, double the margins of most grocery items; second, they don't require huge national advertising budgets to generate growth; and third, there are enormous numbers of private, usually family-controlled, businesses throughout the cookie industry.
The holding company usually buys 100 percent of the business, "because it gives us greater flexibility," says Wilson. "But we are also open to other arrangements," he says, although every deal to date has been for the entire company. Since the reputation and experience of the family managers is part of the firm's value, Wilson's offer usually is at a price that recognizes the owners' agreement to stay on to manage the firm for a period of time. In all cases, sellers are asked to sign a five-year non-compete clause that discourages them from setting up another firm making the same product.
"In some cases, we structure an earn-out," Wilson says of acquisitions in which part of the purchase price is deferred and paid over two to three years, based on earnings or other appropriate measures of performance.
"Each deal is tailor-made," says Wilson, noting one acquisition in which the deferred payments were tied to revenue growth rather than profit growth because the company was in that stage of its life cycle when it had to concentrate on increasing its volume before it could concentrate on profitability.
"And we do alterations," he says, citing a case in which a company did not meet its earnings target but was paid part of the agreed deferred payments and given more time to reach its goals.
Acquisition by Wyndham brings many efficiencies to the acquired firms. For example, Wyndham handles tax payments, pension management, group health insurance, and other employee benefits from its central office in San Francisco, which employs five people.
By amassing regional cookie companies, Wyndham itself is reaching a critical mass where it can start to be a serious player in the cookie business, a $6 billion industry that's growing at a 10 percent annual clip. And Wyndham's companies are able to enjoy the benefits of crossmarketing. Jackson Cookie Co., a 57-year-old Wyndham acquisition in Little Rock, Arkansas, is known for its vanilla wafer and "lemon jumble," a cookie with a hole in it. Now they market sugar wafers, snack brownies, and chocolate covered cookies furnished by other Wyndham companies without the cost of new product development and marketing. By providing lemon jumble to other Wyndham outfits, Jackson's own capacity levels are higher and more economical.
Wyndham's deep pockets allow its companies to tackle the majors with new brands when cross-marketing does not fill an existing gap. We can either crossmarket or we will bankroll a new brand," says Wilson. Murray Biscuit, for instance, recently cooked up Goldie's Honey Bears, a knockoff of a national cookie. The move triggered a vigorous new product campaign at Murray, backed by cross-marketing in other Wyndham markets.
Wilson says the company does not "inject management unless we have to. The family is important to us." He stays away from companies that have some of the deeper problems endemic to family management. Their most common failing, he says, is that "they tend to lack tight financial controls, and some are overstaffed." The founder, Wilson adds, often has a patriarchal view that says he has to take care of his relatives, even give them jobs. The possibilities for change in this situation are limited. The father organized the business in a way that seems to work," Wilson observes, "and the son doesn't want to make changes because it reflects badly on the father."
Another red flag, contends Wilson, is that the business has no successor. "Sometimes you have a company that is so well run by a dominant figure that no one grows in his shadow."
Buying a family firm calls for all the tact and skills of a trained psychologist. "You have to remember that these are proud individuals with strong egos," Wilson emphasizes. "And they don't respond well to outsiders coming in and taking over." When paying his first visit to a prospective seller, Wilson may show up in slacks and sportshirt rather than the corporate pinstripes he is used to; the more relaxed look is less likely to suggest that employees are about to be swallowed up by a big company.
Wilson has used psychology in other ways. He describes one case of a baking-supply company, owned by a father and son, that he eventually acquired. "The father was getting along in years and was conservative," he recalls. "So I motioned the son aside and said, 'I'll bet you have a lot of ideas you'd like to try at this company. Is your father letting you do them?' Suddenly, I had become his biggest ally. I went from being a predatory buyer to a supportive partner."
The various transitions in family businesses create opportunities for buyers like Wilson. "There are changing phases in a family business you don't get in a public corporation," he observes. "One generation moving on and the next generation not wanting to move into the business, for example." Or when what Wilson calls the "third-generation syndrome" strikes — when younger owners don't have the founder's vision or passion for the enterprise.
For the health of the business, Wilson believes, families ideally should sell for strategic reasons: for example, when the company has reached a certain size and has to expand. The owner who has built up a $10 million equity doesn't want to risk it all on one role of the dice," he says. "These are just some of the constantly changing dynamics of a family business that make a company that would not otherwise be up for sale a potential candidate for us."
There are, of course, numerous other choices available to family business owners who want to raise capital or sell a sizeable stake without giving up either management or equity control completely. They can go public; they can sell off some assets or turn to bank financing; they can take in either individual or institutional investors as new, minority partners; they can sell part of the business to employees through an employee stock-ownership plan. Depending on the needs of the family business owners, each alternative has its own unique set of advantages and disadvantages when compared to selling out to a larger group, like Wyndham, and then continuing to work with them.
Most companies Wyndham ends up buying are not initially for sale. A good example was Wyndham's first acquisition, in January 1986, of Roush Products, a $50 million baking company in Cedar Rapids, Iowa. Roush's owner, Vinnie Noce, was highly successful and didn't want to sell, but he needed a partner to share the risk of modernizing and expanding his plant. Wilson recalls: "We helped him accelerate his capital investment so he could buy state-of-the-art bakery equipment, and in the last three years his production capacity — and his revenues — have tripled."
Noce seems to be happy with the deal. There were only two ways he could have grown, he says now: "By personally signing for borrowed money, or by playing on a bigger field and networking with other companies." He chose the bigger playing field. Since then Noce has joined with Wilson and several others in a new corporation called Windmill, which will fund acquisitions of family-owned baking-supply companies.
While Wilson believes that the best reasons to sell a business are strategic, most of his families have sold for "estate reasons." For Wilson, that phrase may cover anything from an owner's need to satisfy creditors before passing on the business, to a desire to get cash for various family members' needs and projects. Indeed, an early cashout of the business can, according to Wilson, be a form of estate planning. Family members do not have to worry about structuring buy-and-sell agreements among themselves and then worry about funding them if one partner dies or wants out. By selling beforehand, they've already gotten their equity out and divided it up.
Mal and Leon Kaufman were not seeking buyers for their Plantation Baking Co. of Lake Bluff, Illinois, when Wilson came along. The brothers had already gotten other offers for the company, which is known for its fudge brownies, baked from an old Kaufman family recipe. They were beginning to feel, as Mal puts it, that "after 42 years there comes a time when you want to get your estate in order and reap some of the rewards." Yet both brothers loved working in the business and wouldn't dream of retiring. The buyers "had to be people we could communicate and work with."
After selling to Wilson in 1986, the Kaufmans had to overcome some "very traumatic feelings," says Mal. "It's like a son or daughter getting married. They move out on you, but you don't stop loving them." Wilson wanted the brothers to stay on and continue managing the business. So far, the Kaufmans think the merger has proved to be a good fit. "Wyndham's lean and mean," Mal says, "and we have this tight, tighter, even tighter philosophy. Yet Ian Wilson never says, 'Cut corners.'"
In fact, Wilson reports there has been no trouble getting along with the families in his eight companies. Only one patriarch has defected, Albert (Bud) Cason, former owner of Greg's Cookies of Birmingham, Alabama, and even he left on friendly terms. Cason says he thought it unfair to work for Wyndham knowing that he planned to go back into the cookie business when his five-year, no-compete clause expired. So in 1988, two years after selling to Wyndham, he quit. Wilson says there is no way to protect himself against exits of this sort. Shackling the previous owner to his old company just does not work.
Wilson's philosophy seems to pay off. All eight cookie companies are profitable, he reports, and some have experienced extraordinary growth since their acquisition. Noce's revenues have tripled; profits at Bishop Baking of Cleveland, Tennessee, are up "more than 300 percent"; profits have doubled at Greg's Cookies — despite the exit of the former owner. The dough is there for more acquisitions. Initially capitalized by private investors at $35.25 million, the company made its first seven acquisitions before recapitalizing itself in the course of its eighth, the Murray Baking Co. As a result of the refinancing of its senior debt and raising $100 million in high-yield bonds, Wyndham currently has some $170 million with which to expand its cookie empire.
Wilson thinks that owners of healthy family businesses who want to stay involved with their companies should evaluate buyers as they would potential partners in a joint venture. Make sure the buyer doesn't want to rebuild your business from the foundation up, he cautions. He also suggests that business owners look for suitors who can relieve them of costly overhead and administrative burdens such as benefit plans. To those wishing to join "extended families" such as Wyndham Foods, he further advises: Resolve any internal bickering, keep your management team intact after the sale, and be willing to cooperate with your new corporate owners and "siblings."