Selling to private equity
Some families sell their business outright to a private equity firm rather than selling a stake as a first step in a process. In both cases, it’s wise to do your homework.
When Charles Scheidt learned in early 2012 that his sons were not interested in taking over the family’s specialty foods company, he knew he had to make some hard decisions for the good of his business, employees and family.
“I decided the worst all around would be to go out, so to speak, feet first,” Scheidt says.
For more than 40 years, Scheidt had dedicated his life to American Roland Food Corp., a specialty food company started by his parents in Paris in 1934. With the start of World War II, Bruno and Suzanne Scheidt were forced to flee France in 1939. The couple relocated to New York and began operating Roland Foods out of a one-room office in downtown Manhattan. It grew to become one of the largest specialty food importing businesses in the United States.
“It was important for me to keep what my family had built. I wanted to keep it going and see it grow,” says Scheidt, who is an only child and a Columbia-trained lawyer.
Eventually, Scheidt decided to sell the entire business, which today generates annual revenues of approximately $250 million.
“I was not interested in a partnership of any kind,” Scheidt says. “Having gone to law school and seen enough conflict, I always wanted to stay away from that.”
By the time of the sale in 2013 to Vestar Capital Partners, a private equity firm that focuses on leveraged buyouts of middle-market companies, Scheidt says, he felt as if he had run 10 marathons.
Despite his exhaustion, he says, “I felt I’d done my best.”
Not all families who sell their businesses to private equity experience happy endings. In 2003, the Oreck family sold their vacuum cleaner business to a private equity group, American Securities Capital Partners. After American Securities borrowed heavily to invest in Oreck, a firm called GSC Group acquired the vacuum cleaner business by buying up its debt. When GSC went bankrupt in 2010, Black Diamond Capital Management acquired GSC Group’s assets, including Oreck, in 2011. In 2013, Black Diamond put Oreck into bankruptcy.
Company founder David Oreck, 94, says he found the bankruptcy “astounding.” At the time of the sale to American Securities, the company had no debt and was generating more than $400 million in revenues, he says.
The family — led by David Oreck’s son, Tom, who had stayed with the company until 2010 — tried unsuccessfully to reacquire the vacuum cleaner manufacturer in bankruptcy in 2013. They were outbid by Royal Appliance Manufacturing Co., a subsidiary of Hong Kong-based Techtronic Industries Co. Ltd., which also owns the Hoover brand.
“I felt bad about it. The product had my name on it … that means something,” David Oreck says. “If I’d known I was going to live this long, I would have hung on.”
To Oreck, what happened to his company was the result of “arrogance.” Oreck says he offered to provide advice, but the new owners never reached out to him.
“To this day they never once called. They didn’t even say ‘Let’s go to lunch,’” Oreck says. “All I was trying to do is be helpful.”
Brian O’Connor, Vestar’s managing director and co-head of the consumer group, says that while there have been bad marriages between private equity and family businesses, the success stories outnumber the negative ones.
“There’s no doubt, we meet people who have a negative view of private equity because they’ve read something in the paper,” O’Connor says.
Scheidt approached the sale of his business with the diligence and thoroughness of a top M&A lawyer. He had numerous conversations with lawyers and accountants before he hired investment banker Evercore Partners. He also did a lot of reading.
Evercore came up with a list of potential parties that might be interested and could constitute a good fit. Gradually, competitors were eliminated in cases where Scheidt felt the business and his team might not survive. Vestar impressed Scheidt because the firm was serious and thorough. Scheidt had a “good chemistry with them individually,” he reports.
“They understood and had a good feel for the business,” Scheidt says.
In the end, Vestar didn’t offer the top price. But it had owned several food companies and brought knowledge and understanding to the table, Scheidt says. He found it impressive that during Vestar’s due diligence process its team included someone who knew the specialty food business.
“Money isn’t everything. You have to have good feelings about who you’re working with,” explains Scheidt, who serves on Roland’s board.
When the deal closes, family business owners should feel they’ve done the right thing, says Christian Schiller, managing director of Cascadia Capital LLC investment bank.
“After they sell, they need to feel that when they run into any employees at the grocery store, they will be proud of what they did,” Schiller says.
Maureen Milford is a business writer based in Wilmington, Del.
Advice on selling your family business to a private equity firm
Charles Scheidt, who sold his family business, American Roland Food Corp., to Vestar Capital Partners in 2013, offers some advice for family business owners considering selling their companies to a private equity firm:
• Start the process early. Allow enough time to explore all the options, including a sale to a family office or a strategic buyer as well as a sale to a private equity firm. “The process was twice as demanding as I thought it would be,” Scheidt says.
• Hire the right advisers. You should feel comfortable that you’re engaging an investment banking firm or other adviser who is committed to your interests. Scheidt used an intermediary to approach investment bankers so that they didn’t know who the prospective client was. He says he found significant differences in approaches and styles among advisers.
“I knew it was going to be a long slog. I wanted to make sure I chose [an investment banker] who I could live with, since that banker would be part of my life for a year,” Scheidt says.
Scheidt advises family businesses to insist on confidentiality agreements during the process of hiring an investment banker.
• Analyze your numbers. Scheidt found that although he had a very good accounting system, third parties would slice and dice the numbers “in ways I never heard of [and had] never been interested in.” During the selling period, Scheidt would get requests for various reports, and it became an enormous strain on the business.
“Before you hire an investment banker, get someone to analyze the numbers and find the gaps between existing internal protocols and the requirements for sales documents,” he advises.
• Wait for the right buyer. Tell your adviser to investigate prospective buyers and bring in only those who have a good reputation. Be confident the business and its team will survive under the new owner.
• Expect change. After the business is sold, the new owners will do some things differently. “Buyers will change things, and you better realize that going in and not take it personally,” counsels Scheidt, who says he also prepared his employees for change.
— Maureen Milford
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