The Manufacturing Executive
The Manufacturing Executive

Episode · 5 months ago

Options for Ownership Transitions in Manufacturing w/ Chris Redmond


Are you prepared to exit your company?

Many business owners haven't thought about transitioning from their position of leadership. But it's inevitable that you'll hand over the keys to your business one day.

When that day comes, will you know what your options are?

In today's episode, I talk with Chris Redmond, Senior Vice President at Capital For Business, about transitioning ownership or leadership of an industrial enterprise.

Here's what Chris and I discussed:

  1. Three different approaches to private equity investment
  2. How to differentiate your company for prospective buyers
  3. Where owners seeking outside investment should start

To ensure that you never miss an episode of The Manufacturing Executive, subscribe on Apple Podcasts, or Spotify, or here.

Listening on a desktop & can’t see the links? Just search for The Manufacturing Executive in your favorite podcast player.

It's a seller's market, the economy isstrong and the level of activity M N, a activity for private equity, backbusinesses or businesses seeking private equity backing is very robust. Welcome to the manufacturing executivepodcast, where we explore the strategies and experiences that aredriving mid size manufacturers forward here, you'll discover new insights frompassionate manufacturing leaders who have compelling stories to share abouttheir successes and struggles, and you will learn from Bob Sales and marketingexperts about how to apply actionable business development strategies insideyour business. Let's get into the show, welcome to another episode of theManufacturing Executive Podcast, I'm Joe Sullivan your host and a Co founderof the Industrial Marketing Agency guerilla. Seventy six. Our Agency hasconsulted many mid sized manufacturing organizations over the last ten plusyears, quite a few, our second or third generation family owned businesses,others have transitioned to entirely new ownership and a good chunk of themor private equity ound, regardless any manufacturing owner somewhere along theway. We'll start thinking about what the transition and leadership andownership might look like, and what his are her options might be. I guess todayis someone who happens to know a little something about this topic, so let meintroduce him. Chris Rodman is senior vice president of capital for business,a middle market, private equity firm, singularly focused on success ofindustrial growth companies. Chris is responsible for sourcing, selecting,structuring and managing a CF platform and add on acquisitions. He brings morethan twenty years of corporate finance experience to bear in providingguidance to cf portfolio companies, providing insight into issues faced bybusiness owners and management teams during his fourteen years with AgEdwards and sons, and two years with Morgan Stanley, Chris provided mergersand acquisitions and capital raising solutions to private and publiclytraded companies in a broad range of industries. In addition, Chris servedas chief operating officer for asset manager, Argent capital management.Chris Welcome to the show Joe thanks for having me. I appreciate theinvitation you bet well Chris, before we get into it. Can you tell ourlisteners a little bit about how you found your way into this world ofprivate equity, specifically for Middle Market industrial businesses, whichfrankly make up a large portion of our audience right now? Sure part of it iswas strategic. Part of it was opportunity opportunistic. But, as youmentioned in my bio, I am a reformed investment banker. But if you think ofbanking, it's a little bit of marketing. It's a little bit of corporate finance,it's a little bit of of accounting and analysis, but it's also a businesswhere you spend time with a lot of different companies and you get insightinto working in a Ideey, dynamic environment with different businessowners and strategies and the like. And so I was in banking for a long time andthen my firm was sold and I took that as an opportunity to switch gears andget into management which I did with a small asseta. But I learned a lot aboutmanaging people, thinking about strategy and I would say, focusing oninternal aspects of growing a business that ran its course. However, when Irealized that the dynamic nature in the variety of the banking experience thatwas missing at that point- and it was part of my Farik- and so I looked forways to satisfy that and the opportunity to join capital forbusiness came up, I had provided services to industrial business in thepast. Businesses in the past also is the services, companies, technologycompanies, and what I felt was that, while industrial is the way that weexpress ourselves, what we're really doing is we're investing in people andin businesses and helping them selve...

...problems and be successful, and so,though, through the course of my banking career and a little bit ofmanagement experience, I felt like. I was well positioned to to provide thatlevel of advice. If you will- and it's been a great pit now that's great, Iwas when you said that you know some of it was strategic and some of it sort ofjust happened. It's it's kind of the same world. For me, you know we s as amarketing agency early on, so I found some opportunities with manufacturersand we realized we really like working with them, and then it became strategicafter that and said. We really want to own this, but I was just kind ofcurious how you how you wound up, where you are, and in this niche anddeveloping a specialty, so it is a journey it is. It is indeed so on thatnote, given who sort of our overlapping audiences are here in mid sizemanufacturers, a lot of the companies that I talked to clients of arsprospects, I talked to. Many of them are private equity, owned and one thingthat I've learned. That is that, very you know, differentprivate equity firmshave very different ways of creating value and some of these organizationsin private act. We are very hands on inside the business. Others tend totake more of a board level of guidance approach, others yet are purelyfinancial investors providing funding and staying in the background. So I'dlove to hear from you as an expert in this field. I love her. You talk alittle bit about the difference, it approaches and when each makes sensesure I think one umbrella comment, I would say, is that, hopefully, if theprivate equity investor successful, they have the ability to do any of thethree scenarios that you described. But each group has a culture and aninfrastructure that blends itself to one of those three themes: If you willso hands on investor, might have a larger team and they might have peoplewith specialties and operations and often they call themselves operatingpartners, but they might have specialties and operations or in sales,development or bank relationships, or someone was very focused on identifyingNA targets and that's all within that shop. And what what you is a privateequity business owner and manager would see from that. Company is a very hand.Son Approach there your day in and day out partner, and they are really anextension of the management tea. That's appropriate I'd say for companies thatneed that augmentation of management and and that's not a criticism, butthere are businesses that really could broaden broaden their teams. It'sappropriate if a business is in need of some very intense operational supporton a day to day basis, either to improve operations or to to changeindustry focus or products. SES things things of that nature. I'd say the nextgroup, which is the board level guidance, describes capital forbusiness and the way we view it is that we put management teams in place. Theymight already be there, but we put management teams in place. We providethem with with strategy. We help to identify success factors in metrics. Weset expectations and we let those managers execute it's really all aboutthe people in our business, even though we get hung up on strategy andequipment and markets and those things it's it's about the people, but thereare times where the hands on folks expertise are necessary. So if thereare acquisition opportunities, we tend to jump in, spend a lot of time withtheir management teams. With their operational issues, we tend to lookoutside and bring in third party resources to help with a shop floor,efficiency issue. So it's not someone that works for capital for business,but we certainly bring to bear whatever guidance and advice at company needs,and then there are hands off investors that are financial investors, typicallythey're, looking to perhaps pay a slightly higher multiple for a veryclean, smooth, running business. Perhaps that business was previouslyprivate equity owned, and it's just time you know it's five to seven yearsdown. The road is time for the prior investor to exit and someone stepsright in and there it would not be...

...uncommon if that company continues toperform to hear from their investor quarterly at a board meeting, whereasyou know we're sort of weekly to monthly depending on what what theneeds are. The business at the time are at the time. So so there are differentflavors. But I go back to my initial comment, which is whatever the needs ofthe business. Are It's important to determine, based on the experience ofthe Private Equity Group that they can provide guidance advice in put intothose needs, whether it's in house or whether it's through the third party-and you know all three of those groups- should be able to dive into a businessand do that? That's a really good summary. Chris, I'm curious what thingsa private equity firm like capital for business is looking for in a mid size,manufacturing organization, when you're considering an investment, can you talkabout that? A little bit sure I'd be happy to you know we typically look forniche manufacturers, and that can mean a lot of things, but but to me it meanssomething that differentes of business so that they're competitive in aparticular niche, or so that their margins look a little bit different andperhaps higher than others who play more roly. Now that doesn't mean thatthey have to be focused on a very, very specific sector of the market. It couldbe multiple sectors, but a value added provider with some ditch expertise. Wealways look for a growth potential and growth is in the eye the beholder somepeople, like fifteen percent sales growth. Some people are comfortablewith four percent. We just want to understand the industry and thatthere's an ability to grow that can be internal through diversifying customerbases. Improving customer acquisition and essentially, sales can also beinternal growth through improving efficiency and improving marges andcash blows. But external growth through acquisition is O K, as obviously a verycommon way of adding to the growth trajectory of the business,particularly if a company is entering trying to enter into new markets, butin our case we often acquire to kind of extend the value chain to add morecapabilities. I and perhaps add some a little bit vertical integration downthe chain like adding assembly, for example, to someone who's. You knowmaking fabricated parts and I'll talk a little bit about that in the future,but that can be done through acquisition. So so we look for niches.We look for growth, we always look for management or at least look tounderstand management and clearly there are business owners who intend totransition out of a business and we're not intimidated by the need to find newmanagement. But we do look for teams that can continue to execute and cangrow with us and improve their businesses. Then I'd say we alwaysfocus on blocking and tackling what are the end markets? What's the equipment,what do systems look like if their holes and management can we fill them?So those are things that were intently intensely focused on, but we canaccomplish solving those issues of necessary post clothes throughinvestment or through augmenting the management team, so that those are thethings we look look for and, as we mentioned, the outset were more of aboard level of guidance type shop to begin with, and it's all about thepeople, it's all about management. So if we get the right management in place,help them to devise a good, solid plan and and monitor and measure that planwell and its rest people success and that's that's really good. You O one ofthe first things. You said there kind of jumped out to me because it'ssomething I talked about in my own world, often- and you mentionedcompanies that have a niche or they have some kind of defineddifferentiator. That makes them different and there are so manycompanies I talked to and of course, I'm coming at this from the standpointof like positioning of your business to the market and and everything, but alot of companies, kind of think they're different because they say oh we've gotgreat customer service or you know our people are just really good and ourcompetitors aren't like that, and I always challenge people on that,because I think that from the outside a lot of companies just kind of look thesame and you need to... know I mean I'll just use ourselvesas an example like we've specialized at Corilla, in working with mid size,industrial sector companies like were focused on digital marketing and demandgeneration. But whoever it is you know, as is a manufacturer. I think it'sreally important that you, you take a look at Your Business and say like whatare we really truly good at doing? Listen to the words that are comingfrom your customers, mouths about like what do they value about you and try tobuild around that? Because I think it's just people, don't they get caught up intheir own worlds and realize that they don't realize they look the same toeverybody on the outside. So it's just kind of curious curse. Your perspectiveon that as a private decry guy as opposed to a marketing guy. Like me,yeah. Well, I oftentimes businesses are main fact that we look at ourmanufacturers of something having to do with metal or plast, so they spoke withthe same machines, the same capabilities, perhaps the first thatbranch creator is and markets and some men markets have higher margins andothers, and we have the benefit of looking at a lot of companies and if,if a company is in an end market, that's growing and should on highermargins well than that business that we're looking at should have a growth,povile margin profile. That suggest that they're doing a great job ofserving that Mace and occasionally that's not the case that doesn'tnecessarily mean that we don't have an interest in business because it maybethat they do other things credibly well and if they may be understood, the costbetter and price more strategically. They might be able to announce theirmarches. But there are clearly on giving an extreme there's somebusinesses that are distributors and maybe they're just packaging, somethingfor someone and and the UN customer says yeah. We value these guys becausethey're, the only ones that will turn the machine on for low volume, high mixopportunities and that's a nice nice if you get paid for the change over timesin the down time and the variability of providing road on an high mix business.And so very often there is a margin improvement that you can see, and youcould say that customer service in that particular cases in differenter thatthe UN customer values. So sometimes I look at a business and say I don't knowwhat they do but they're doing something specially look at thosenumbers. And then you try to get underneath to find out what what isdifferent and occasionally we don't really have a chance to learn that,because it's it could be a secret sauce in some ways, but we don't have achance to learn that until we actually need management teams spend a day withthem and and drill into what the differentiators are. So you are correct,there's a great deal in industrial America that look similar, but thereare enough customers out there that you can differentiate yourself and in termsof improvement and propably that that's endless in some ways and and there's abroad range of outtime in Thet we o yeah. I really agree with kind of thelast thing you said there that most companies do actully have differenttators, but they either just haven't uncovered them or they're hanging theirhead on the wrong thing. That is just sort of commoditie their business fromthe perspective of people to trying to reach so Chris, is there an example orcase study that you could use from your experience and private equity that sortof describes a transformation? A company in your portfolio has gonethrough from the day you entered to the day, you ecided I'd love to kind ofhear what that journey looks like, or maybe it has looked like an example andwhat happens along the way sure I'll provide a a couple of examples and thefirst I touched on a bit. It was a company that broadened its capabilitiesto kind of, extend it down the value chain and add more value to his owncustomers. So this is a business that is, is essentially a sheet metalfabricator so goes back to the they've, the same cutting machines, the sameforming machines, the the same, probably skill labor, as many people do,but they have precision products that have attracted a really neat customerbase. So I think of a medical lab bench...

...that that's in a diagnostic setting orin you know, a pharmaceutical development setting think of an aganturf part ends up on a fairly significant. You know I's a smallmarket, so you might imagine who the large commercial players are in that,but they are very high quality standards. You might see a brandedmotorcycle or snowmobile that has their parts on it, and you know the they'reimportant in terms of their durability and their safety and things of thatnature. So a company that was a neat solid company in its own right and very,very successful. We transform that business through two acquisitions andthe first was much more of an acquisition in their own lines ofbusiness. That added capacity equipment was similar and customers were fairlysimilar, but there were two differentiators one is that they had asmall it profitable assembly operation, and so they were primarily doingSelasse lies, but they did some end product assembly, not necessarilysophisticated, complex assemblies, but they added value and worry aboutcapture more wallet chair for that that end customer. The second was that itessentially had a paint shop but powder coding, pain shop, which we typicallydon't have that much of an interest in because there's a lot of capacityavailable, and it's not a high margin business in their business, though forprecision, enclosures paint, is really important, has to be super high qualityand actually found that there was a shortage of high quality third partiesthat they could work with and so controlling their own paint shop becamesort of a strategic advantage, and so those were two things that added to thebusiness and- and it was a nice first step in an acquisition. The secondacquisition took it even a step further in terms of assemblies, and so theythey acquired a business. That was a very head machining in addition tofabrication, but it also had a couple of very large customers that trustedthem to do full turn key outsource manufacturing. So they made a certainportion of the parts they spect and procure the other portion of the potparts to a full assembly of a large commercial agan turf product line, putit in a box and sent it out to the end user, and so you know the customercould could focus on their manufacturing pasty on some otherthings, even though their design work and their intellectual property stillended up inside that box. But it was really a full turn key assemblycapability and it's a little bit early. We haven't quite exited that business,but it's a little early, but it's expected to be kind of a third leg inthe stool, machining fabrication and really full turn key contractmanufacturing. So we have high expectations for that and the earlyreturns are good I'll offer. One other example that's a little bit shorter,but it relates to niche and it's a focus on a nitch. When we acquire abusiness, it may have a niche or two, and it may not have found its way, andthis was a particular company in the in the moulding industry that wasdiversified and it provided parts to consumer products and industrialproducts and medical products and a few other end markets and the you know,wasn't just our idea, but the management team felt like if theyreally invested in their business and refocused on medical or focused onmedical. They could change the margin and growth profile of the business andthat's what occurred now. It's easier said than done. If you think of themedical industry and these, these are plastic injection, molded parts formedical devices. You have stringing customer quality issues, you have F daAudits and quality issues and repeatability and and the like. Itrequires investments and material handling and automated drying, forexample, so that a human doesn't touch the material from from when it comesout of the raw materials all the way into the end pocket product and ispackage. There requires investment in physical plant in clean room plan. Sowe put a lot of time and effort and money, expansion of sales resources andother things, but it's a business that went from about fifty percent medicalwhen we bought it to to almost a hundred percent today and the marginand growh profile reflects that...

...difference. And you know by the wayit's also a much higher multiple end of the market, pretties kinds of companies,and so we should be well rewarded when we exit. So those are a couple ofexamples, but you know an inch business that hadn't really found its niche, butit was right there and under its nose and then and then perhaps anotherbusiness, that added both capacity and capabilities, but also really extendeddown the value chain to to provide a much higher value product to some keycustomers. Those are great examples. I was like to try to illustrate some ofthese concepts with something a little more tangible to help listeners so toreally good and different examples. So, Chris for any manufacturing a businessowners listening right now who are thinking about maybe seeking an outsideinvestment VI, a private equity or even just kind of thinking about you know. Ido take my business to the next level, I'm just kind of curious for like here.Where would you advise that they start yeah? I then, in some of this is commonsense, but you'd be surprised how difficult it is for a business owner tocome to the realization that they either would like to exit or wouldreally like to bring on someone else who might have some element of controlover their business. So so very often we see people who are less prepared. SoI think the message is around preparedness and- and it starts withassessing the business owner assessing his or her interests. How long do theywant to remain with the business? What are the challenges of the business ifit one extreme the challenges that the business is solid, but it's it justlacks the scale to compete. Then perhaps even a strategic buyer, not aprivate equity buyer is the right buyer and you know they can take care of theoperating level. Employees, perhaps not the executive level employees becausethey might assume that, but it may be- and there are many cases where thestrategic fighters a great partner, particularly if maximizing value is thesole objective of the owner. But it's off an not bein private equityvaluations can be very, very competitive, and so I, in that case, atthe other extreme of private equity solution, is appropriate forener, whois not yet ready to retire, but concede that over the next five to seven years,they like the transition- and they would like to take. You know, achievesome financial versification now and sell a good portion of their business,but let's stick around and grow with the business for for a bit longer, butit has to do with preparation and it has to do with really assessing yourneeds and determining what you'd like to do now. Your question was: Where doyou start? I think you start and there's an abundance of resources outthere, probably of equity. Twenty years ago is mysterious, and today it's avery established business and not suggesting that everyone knows exactlyhow it works, but there are private equity firms who are very approachablethat would be happy to like us. So would be happy to tell you how how wedo business and they can get a feel for the culture and the mechanics of whatit actually looks like to be private equity. One. There are bankers, thereare attorneys or acquaintances who have sold their businesses to private equity,there's Joe Sullivan and his clients who who have had exposure in the past.So so I think there there are a lot of resources, but ultimately, until youtalk to different kinds of parties in the context of a sale process, that'svery serious. That's when you really get down to you know assessing what youneed and at what the differences are. There are a lot of people that say theydo proprietary deals, which means they go out and they buy a business. Theyapproach it one off and and they buy it without the competition, that's createdby an investment banker, and that does happen. But these days intermediariesplay a pretty important role and and there's usually someone who'ssupporting a business owner who is seeking to sell whether it's a fullfleshed investment bank or whether it's someone who's, maybe a little bit morehands off. But it's a broker who's, helping them to find an array of buyersto talk to. We typically see someone and there is value in helping tosupport and organize the effort of someone who's selling their business.So there is value to to having an...

...intermediary involved, in addition tocreating a competitive environment, but even on our side, the the buyer there'svalue to have an intermediary involved sure, and that makes sense. Is thereanything you'd like to add to the conversation Chris? So we didn't touchon well, it's maybe not a surprise to folks, but it pains me to say that it'sa seller's market, the economy is strong. I think if people were to havelooked back a year ago at the beginning of the pandemic and wondered how thenext twelve months would would shake out. There are clearly businesses areand and markets that are heavily affected, but but for the most part ourportfolio is weathered the storm quite well, and the level of activity M N, aactivity for private equity, back businesses or businesses seekingprivate equity backing is very world bust. It's I judge the market by howfrequently opportunities cross our desks and what the quality is of thoseopportunities and they are either crossing our desks or we're seeing themor you know one way or another, we're in front of them t and today,frequencies, high and quality is very high. There's a lot of capital, nosurprise that lenders and investors are trying to put capital to work, and thatmeans that evaluations are strong. So you know, as a buyer, that's kind of adouble edge sort. You know we're buyers, but we're also sellers, so we'reselling businesses as well- and it just happens that that's the equilibriumtoday it has been a selish market. For some time, the world will cycledownward at some point, but it is definitely a sellar market, so I thinkfor those sellers or buyers, but for those sellers that are assessing theirfuture needs. You know they probably heard it for a few years now, but nowis as as good a time as any to approach the market good way to wrap it up. Yeah.I imagine that you know if we were sitting here a year ago. Having thisconversation, it probably would have been a wild guess at what what things looklike ahead, but it's kind of amazing looking you know after what the world'sgone through over the last year or so that we are where we are with theeconomy, so very good. Well, Chris, this was really great discussion. Iappreciate you doing this today, Joe thanks very much happy to be a resourceto you or any of the clients or really anyone that I would like to bounceideas off of capital for business. There are six of us here, variouslevels of experience, but we have a pretty experienced team, so we enjoybeing a part of the community. We enjoy being a resource through the communityand we spent a whole lot of time talking to people who don't dotransactions with us. So I encourage folks to reach out to the extent we canhelp. Now. That's that's really great love low pressure there. So Iappreciate you offering that Chris ware is the best was the best way to get intouch with you and also to learn more about capital for business. Sure I'dsay: Our website is a good place as good a place as any it's WC, F D Comand then all of our individual contact information is there as well as morecolor on our portfolio. So you have a business that looks like some of ourbusinesses and would like some insights into the market. You pree to track medown awsome. Well, I've met a handful of you guys and can vouch for you knowthat this is an awesome group, early, approachable crew and I'd encourage youto to reach out to him. If this is something that's on your mind, so ChrisYeah thanks once again for for doing this today, really appreciate it soundsgreat anytime, awesome and, and as for the rest of you, I hope to catch you onthe next episode of the Manufacturing Executive. You've been listening to themanufacturing executive podcast to ensure that you never missed an episodesubscribe to the show in your favorite podcast player. If you'd like to learnmore about industrial marketing and sale strategy, you'll find an everexpanding collection of articles, videos guides and tools, specificallyfor B to B manufacturers at gorilla, seventy sicot, flash and learning.Thank you so much for listening until next time. I.

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