The Manufacturing Executive
The Manufacturing Executive

Episode · 8 months ago

Options for Ownership Transitions in Manufacturing w/ Chris Redmond

ABOUT THIS EPISODE

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 economystrong and the level of activity M and a activity for private equity back businessesor businesses seeking private equity backing is very robust. Welcome to the manufacturing executivepodcast, where we explore the strategies and experiences that are driving midsize manufacturers forward. Here you'll discover new insights from passionate manufacturing leaders who have compelling stories toshare about their successes and struggles, and you'll learn from B tob sales andmarketing experts about how to apply actionable business development strategies inside your business. Let'sget into the show. Welcome to another episode of the Manufacturing Executive podcast.I'm Joe Sullivan, your host and a CO founder of the Industrial Marketing Agencyguerrilla seventy six our agency has consulted many midsized manufacturing organizations over the last tenplus years. Quite a few our second or third generation family owned businesses.Others have transitioned to entirely new ownership and a good chunk of them or privateequity owned. Regardless, any manufacturing owner, somewhere along the way will start thinkingabout what the transition and leadership and ownership might look like. And whathis or her options might be. My guests today is someone who happens toknow a little something about this topic, so let me introduce him. ChrisRedmond is senior vice president of capital for business, a middle market private equityfirm singularly focused on successive industrial growth companies. Chris is responsible for sourcing, selecting, structuring and managing CFB's platform and add on acquisitions. He brings morethan twenty years of corporate finance experience to bear in providing guidance to CFB portfoliocompanies, providing insight into issues faced by business owners and management teams. Duringhis fourteen years with AG Edwards and sons and two years with Morgan Stanley,Chris provided mergers and acquisitions and capital raising solutions to private and publicly traded companiesin a broad range of industries. In addition, Chris served as Chief OperatingOfficer for Asset Manager Argent capital management. Chris, welcome to the show,Joe. Thanks for having me. I appreciate the invitation. You bet well. Chris. Before we get into it, can you tell our listeners a littlebit about how you've found your way into this world of private equity specificallyfrom middle market industrial businesses which, frankly, make up a large portion of ouraudience right now. Sure, part of it is with strategic part ofit was opportunity, opportunistic but, as as you mentioned in my bioam orreformed investment banker. But if you think of banking, it's a little bitof marketing, it's a little bit of corporate finance, it's a little bitof accounting and analysis, but it's also a business where you spend time witha lot of different companies and you get insights into working in Avite very dynamicenvironment with different business owners and strategies and the like. And so I wasin banking for a long time and then my firm was sold and I tookthat as an opportunity to switch gears and get into management, which I didwith a small asset manager. But I learned a lot about managing people,thinking about strategy and, I would say, focusing on internal aspects of growing abusiness. That ran its course, however, when I realized that thedynamic nature in the variety of the banking experience was missing at that point andwas part of my fabric, and so I looked for ways to satisfy thatand the opportunity to join capital for business came up. I had provided servicesto industrial business in the past. Businesses in the past also is the servicescompanies, technology companies, and what I felt was that while industrial is theway that we express ourselves, what we're really doing is we're investing in peopleand in businesses and helping them solve problems...

...and be successful, and so they'rethrough the course of my banking career and a little bit of management experience,I felt like I was well positioned to to provide that level of advice,if you will, and it's been a great bit now. That's great.I was when you said that, you know, some of it was strategicand some of it sort of just happened. It's it's kind of the same worldfor me. You know, we as a marketing agency early on,so to found some opportunities with manufacturers and we realize you're really like working withthem, and then it became strategic after that and said we really want toown this. But I was just kind of curious how you how you woundup where you are and in this niche and developing a specialty. So itis a journey it is. It is indeed so. On that note,given who sort of our overlapping audiences are here in midsize manufacturers, a lotof the companies that I talked to, clients of ours, prospects I talkedto, many of them are private equity owned, and one thing that I'velearned that is that very, you know, different private equity firms have very differentways of creating value and some of these organizations and private equi are veryhands on inside the business. Others tend to take more of a board oflevel guidance approach. Others yet are purely financial investors, providing funding and stayingin the background. So I'd love to hear from you as an expert inthis field. I love to hear you talk a little bit about the differencein approaches and when each makes sense. Sure. I think one umbrella commentI would say is that hopefully, if a private equity investor successful, theyhave the ability to do any of the three scenarios that you described. Buteach group has a culture and an infrastructure that lends itself to one of thosethree themes, if you will. So a handson investor might have a largerteam and they might have people with specialties in operations and often they call themselvesoperating partners, but they might have specialties in operations or in sales development orbank relationships, or someone is very focused on identifying MNA targets. And that'sall within that shop. And what what you, as a private equity businessowner and manager, would see from that company is a very hands on approach. There your day in and day out partner and they are really an extensionof the management team. That's appropriate, I'd say, for companies that needthat augmentation of management and and that's not a criticism, but there are businessesthat really could broad and broaden their teams. It's appropriate if a business is inneed of some very intense operational support on a day to day basis,either to improve operations or to to change industry focus or product sets, thingsand things of that nature. I'd say the next group, which is theboard level guidance, describes capital for business and the way we view it isthat we put management teams in place. They might already be there, butwe put management teams in place, we provide them with with strategy, wehelp to identify success factors and metrics, we set expectations and we let thosemanagers execute. It's really all about the people in our business, even thoughwe get hung up on strategy and equipment and and markets and those things.It's it's it's about the people. But there are times where the hands onfolks expertise are necessary. So if they are acquisition opportunities, we tend tojump in spend a lot of time with their management teams. If their operationalissues, we tend to look outside and bring in third party resources to helpwith the shop floor efficiency issue. So it's not someone that works for capitalfor business, but we certainly bring to bear whatever guidance and advice a companyneeds. And then their handsoff investors that are financial investors. Typically they're lookingto perhaps pay a slightly higher multiple for a very clean, smooth running business. Perhaps that business was previously private equity owned and it's just time. Youknow, it's five to seven years down the road, is time for theprior investor to exit and someone steps right in and there it would not beuncommon, if that company continues to perform,...

...to hear from their investor quarterly ata board meeting. Whereas you know, we're sort of weekly to monthly,depending on what what the needs are the business at the time are areat the time. So so there are different flavors. But I go backto my initial comment, which is whatever the needs of the business are,it's important to determine, based on the experience of the Private Equity Group,that they can provide guidance, advice input into those needs, whether it's inhouse or whether it's through a third party. And you know, all three ofthose groups should be able to dive into a business and do that.It's a really good summary, Chris. I'm curious what things a private equityfirm like capital for business is looking for in a midsize manufacturing organization when you'reconsidering an investment. Can you talk about that a little bit? Sure,I'd be happy to. You know, we typically look for niche manufacturers andthat can mean a lot of things, but but to me it means somethingthat differentiates a business so that they're competitive in a particular niche or so thattheir margins look a little bit different and perhaps higher than others who play morebroadly. Now, that doesn't mean that they have to be focused on avery, very specific sector of the market. It could be multiple sectors, buta value added provider with some nitch expertise. We always look for agrowth potential and growth is in the eye of the behold room. Some peoplelike fifteen percent sales growth, some people are comfortable with four percent. Wejust want to understand the industry and that there's an ability to grow. Thatcan be internal through diversifying customer bases, improving customer acquisition and essentially sales.Can also be internal growth through improving efficiency and improving margins and cash flows.But external growth through acquisition is, as obviously a very common way of addingto the growth trajectory of the business, particularly if a company is entering tryingto enter into new markets. But if in our case, we often acquireto to kind of extend the value chain, to add more capabilities and perhaps addsome a little bit vertical integration down the chain, like adding assembly,for example, to someone who's making fabricated parts, and I'll talk a littlebit about that in the future. But that can be done through acquisition.So so we look for niches, we look for growth. We always lookfor management, or at least look to understand management, and clearly there arebusiness owners who intend to transition out of a business and we're not intimidated bythe need to find new management, but we do look for teams that cancontinue to execute and can grow with us and improve their businesses. Then I'dsay we always focus on blocking and tackling. What at the end markets? What'sthe equipment? What do systems look like? If their holes in management, can we fill them? So those are things that were intently, intenselyfocused on. But we can accomplish solving those issues, if necessary, postclosed, through investment or through augmenting the management team. So that those arethe things we look look for. And, as we mentioned the outset, weremore of a board level guidance type shop to begin with, and it'sall about the people. It's all about management. So if we get theright management in place, help them to devise a good, solid plan andmonitor and measure that plan well, and it's rest peeple success, and that'sthat's really good. You know, one of the first things you said,they're kind of jumped out to me because it's something I talked about in myown world often, and you mentioned companies that have a niche or they havesome kind of defined differentiator that makes them different. And there are so manycompanies I talk to, and of course I'm coming at this from the standpointof like positioning of your business to to the market and and everything, buta lot of companies kind of think they're different because they say, Oh,we've got great customer service or or, you know, our people are justreally good and our competitors aren't like that. And I always challenge people on thatbecause I think that from the outside a lot of companies just kind oflook the same and you need to you...

...know. I mean, I'll justuse ourselves as an example, like we have specialized a gorilla in working withmidsize industrial sector companies, like we're focused on digital marketing and demand generation.But whoever it is, you know, as a manufacturer, I think it'sreally important that you take a look at Your Business and say, like,what are we really truly good at doing? Listen to the words that are comingfrom your customers mouths about like what do they value about you, andtry to build around that, because I think it's just people, don't theyget caught up in their own worlds and realize they don't realize they look thesame to everybody on the outside. So it's just kind of curious. Scarceryour perspective on that as a private ector guy as opposed to a marketing guylike me. Yeah, well, I oftentimes businesses are manufact that we lookat our manufactures of something having to do would metal or plass. So theystart with the same machines, the same capabilities. Perhaps the first different creatoris and markets, and some in markets have higher margins and others. Andwe have the benefit of looking in a lot of companies and if if acompany is in an end market that's growing and should a higher margins, wellthen that business that we're looking at should have a growth profile and margin profilethat suggests that they're doing a great job of serving that niche. And occasionallythat's not the case. That doesn't necessarily mean that we don't have an interestin business because it may be that they do other things incredibly well and ifthey maybe understood their cost better and price more strategically, they might be ableto enhance their margins. But there are clearly of giving an extreme, thereare some businesses that are distributors and maybe they're just packaging something for someone andand the end customer says, yeah, we value these guys because they're theonly ones that will turn the machine on for low volume high mix opportunities andthat's a nice niche if you get paid for the changeover times in the downtimeand the variability of providing low on in high mix business. And so veryoften there is a margin improvement that you can see and you could say thatcustomer service in that particular cases a differentiator that the end customer values. Sosometimes I look at a business and say I don't know what they do,but they're doing something specially. Look at those numbers and then you try toget underneath to find out what what is different. And occasionally we don't reallyhave a chance to learn that because it's it could be a secret sauce insome ways. But we don't have a chance to learn that until we actuallymeet management teams and spend a day with them and and drill into what thedifferentiators are. So you are correct there. There's a great deal in industrial Americathat looks similar, but there are enough customers out there that you canbranching yourself and in terms of improvement and profitability, that that's endless in someways. And and there's a broad range about booms in every word. Yeah, I really agree with kind of the last thing you said there, thatmost companies do actually have differentiators, but they either just haven't uncovered them orthey're hanging their head on the wrong thing. That is just sort of commoditizing theirbusiness from the perspective of people are trying to reach. So, Chris, is there an example or case study that you could use from your experienceand private actory that sort of describes the transformation a company in your portfolio hasgone through from the day you entered to the day you exited? I loveto kind of hear what that journey looks like, or maybe has looked likean example, and what happened along the way. Sure, I'll provide acouple of examples and the first I touched on a bit. It was acompany that broadened its capabilities to kind of extend down the value chain and addmore value to to its end customers. So this is a business that isis essentially a sheet metal fabricator. So goes back to they in the samecutting machines, the same forming machines, that the same probably skilled labor asmany people do, but they have precision products that have attracted a really neatcustomer base. So think of a medical...

...lab bench that's that's in a diagnosticsetting or in, you know, a pharmacyable development setting. Think of anaggin turf part that ends up on a fairly significant you know, it's asmall market, so you might imagine who the large commercial players are in that. But they very high quality standards. You might see a branded motorcycle orsnowmobile that has their parts on it and you know they're they're important in termsof their durability and their safety and things of that nature. So a companythat was a neat solid company in its own right and very, very successful. We transformed that business through two acquisitions and the first was much more ofan acquisition in their own lines of business that added capacity. Equipment was similarand customers were fairly similar. But there were two differentiators. One is thatthey had a small but profitable assembly operation and so they were primarily doing subassemblies, but they did some end product assembly, not necessarily sophisticated complex assemblies, butthey added value and were able to capture more wallet Chare for that endcustomer. The second was that it essentially had a paint shop, but powdercoating paint shop, which we typically don't have that much of an interest inbecause there's a lot of capacity available and it's not a high marching business.In their business, though, for precision and closures, paint is really important. HAS TO BE Super High Quality, and actually found that there was ashortage of high quality third parties that they could work with, and so controllingtheir own paint shop became sort of a strategic advantage. And so those weretwo things that added to the business and it was a nice first step inan acquisition. The second acquisition took it even a step further in terms ofassemblies, and so they they acquired a business that was a very it hadmachining in addition to fabrication, but it also had a couple of very largecustomers that trusted them to do full turnkey outsourced manufacturing. So they made acertain portion of the parts, they spect and procured the other portion of thepot parts, did a full assembly of a large commercial aggon turf product line, put it in a box and sent it out to the end user,and so the customer could could focus on their manufacturing capacity on some other things, even though their design work and their intellectual property still ended up inside thatbox. But it was really a full turnkey assembly capability and it's a littlebit 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 in the stool machining, fabrication and really full turnkey contract manufacturing. So we have high expectations for thatand the early returns are good. I'll offer one other example that's alittle bit shorter, but it relates to niche and it's a focus on aniche. When we acquire a business it may have a niche or two andit may not have found its way and this was a particular company in thein the molding industry that was diversified and it provided parts to consumer products andindustrial products and medical products and a few other end markets. And the youknow, wasn't just our idea, but the management team felt like if theyreally invested in their business and refocused on medical or focused on medical, theycould change the margin and growth profile of the business and that's what occurred.Now it's easier said than done if you think of the medical industry and thesethese are plastic injection molded parts for medical devices. You have stringing, customerquality issues, you have FDA audits and quality issues and repeatability and and thelike. It requires investments and material handling and automated drying, for example,so that a human doesn't touch the material from from when it comes out ofthe raw materials all the way into the end procket product and is packaged.It requires investment physical plant, in clean room plant. So we put alot of time and effort and money expansion of sales resources and other things.But it's a business that went from about fifty percent medical when we bought itto almost a hundred percent today. In the margin and growth profile reflects thatdifference. And you know, by the...

...way, it's also a much highermultiple end of the market for these kinds of companies, and so we shouldbe well rewarded when we exit. So those are a couple of examples.But you know, a niche business that hadn't really found its niche but itwas right there hundred's nose, and then and then perhaps another business that addedboth capacity and capabilities but also really extended down the value chain to provide amuch higher value product to some key customers. Those are great examples. I waslike to try to illustrate some of these concepts of something a little moretangible to help listeners. So too, really good and different exams apples.So, Chris, for any manufacturing a business owners listening right now who arethinking about maybe seeking an outside investment via private equity or even just kind ofthinking about, you know, take my business to the next level, I'mjust kind of curious. For Look, where would you advise that they start? Yeah, I been and some of this is common sense, but you'dbe surprised how difficult it is for a business owner to come to the realizationthat they either would like to exit or would really like to bring on someoneelse who might have some element of control over their business. So, sovery often we see people who are less prepared. So I think the messageis around preparedness and and it starts with assessing the business owner, assessing hisor her interests. How long do they want to remain with the business?What are the challenges of the business? If it one extreme the challenges atthe business is solid but it's it just lacks the scale to compete, thenperhaps even a strategic buyer not. A private equity buyer is the right buyerand you know they can take care of the operating level employees. Perhaps notthe executive level employees, because they might assume that. But it may beand there are many cases where the strategic buyers a great partner, particularly ifmaximizing value is the sole objective of the owner. But it's often not.In private equity valuations can be very, very competitive, and so in inthat case, at the other extreme, a private equity solution is appropriate.Foreign owner WHO's not yet ready to retire but can see that over the nextfive to seven years they'd like the transition and they would like to take,you know, achieve some financial diversification now and sell a good portion of theirbusiness, but but stick around and and grow with the business for a bitlonger. But it has to do with preparation and has to do with reallyassessing your needs and determining what you like to do. Now. Your questionwas where do you start? I think you start in there's an abundance ofresources out there. Private Equity Twenty years ago is mysterious and today it's avery established business. And not suggesting that everyone knows exactly how it works.But there are private equity firms who are very approachable, that would be happyto like us, that would be happy to tell you how we do businessand they can get a field for the culture and the mechanics of what itactually looks like to be private equity owned their bankers. There are attorneys,their acquaintances who have sold their business as to private equity. There's Joe Sullivanand his clients who who have had exposure in the past. So so Ithink they're there are a lot of resources, but ultimately, until you talk todifferent kinds of parties in the context of a sale process that's very serious, that's when you really get down to you know, assessing what you need, what what the differences are. There are a lot of people that saythey do for prietary deals, which means they go out and they they buya business, they approach it one off and they buy it without the competitionthat's created by an investment banker. And that does happen. But these daysintermediaries play a pretty important role and and there's usually someone who's supporting a businessowner who is seeking to sell, whether it's a full fledged investment bank orwhether it's someone who's maybe a little bit more handsoff, but it's a brokerwho's helping them to find an array of buyers to talk to. We typicallysee someone and there is value in helping to support and organize the effort ofsomeone who's selling their business. So there...

...is value to having an intermediary involvedin addition to creating a competitive environment, but even on our side, thethe buyer, there's value to have an an intermediary involved. Sure now thatmakes sense. Is there anything you'd like to add to the conversation, Chris, that we didn't touch on? Well, it's maybe not a surprise to folks, but it pains me to say that it's a seller's market. Theeconomy is strong. I think if people were to have looked back a yearago at the beginning of the pandemic and wondered how the next twelve months wouldshake out. And there are clearly businesses that are in end markets that areheavily affected, but but for the most part our portfolio is whether the stormquite well and the level of activity M and A, activity for private equityback businesses or businesses seeking private equity backing, is very robust. It's I judgethe market by how frequently opportunities cross our desks and what the quality isof those opportunities. And they are either crossing our desks or we're seeing themor, you know, one way or another we're in front of them.And today frequencies high and quality is very high. There's a lot of capital. No surprise eyes that lenders and investors are trying to put capital to workand that means that valuations are strong. So you know, as as abuyer, that's kind of double edged sort. You know, we're buyers, butwe're also sellers, so we're selling businesses as well, and it justhappens that that's the equilibrium today. It has been a seller's market for sometime. The world will cycle downward at some point, but it is definitelya cellars market. So I think for those sellers or buyers, but forthose sellers that are assessing their future needs, you know, they've probably heard itfor a few years now, but now is as good a time asany to approach the market. Good Way to wrap it up? Yeah,I imagine that. You know, if we're sitting here a year ago havingthis conversation, of probably would have been a wild guess at what what thingslooked like a head but it's kind of amazing looking, you know, afterwhat the world's gone through over the last year or so, that we arewhere we are with the economy. So very good. Well, Chris,this was really great discussion. I appreciate you doing this today. Joe.Thanks very much. Happy to be a resource to you or any your clientsor really anyone that would like to bounce ideas off of capital for business.There are six of us here, various levels of experience, but we've prettyexperienced team. So we enjoy being a part of the community, we enjoybeing a resource to the community and we spend a whole lot of time talkingto people who don't do transactions with us. So I encourage folks to reach outto the example. Now that's that's really right. Low, low pressurethere. So I appreciate you offer in that Chris. Where is the bestbut what's the best way to get in touch with you and also to learnmore about capital for business? Sure I'd say our website is a good place. Is as good a place as any. It's www dot cfbcom and then allof our individual contact information is there, as well as more color on ourportfolio. So we have a business then looks like some of our businessesand would like some insects into the market. Feel free to track me down.Awesome. Well, I've met a handful of you guys and can vouchfor you. Know. This is an awesome group, early, approachable crewand I'd encourage you to reach out to him if this is something that's onyour mind. So, Chris, yeah, thanks once again for doing this today. Really appreciate it. Sounds great anytime. Awesome, and as forthe rest of you, I hope to catch you on the next episode ofthe Manufacturing Executive. You've been listening to the manufacturing executive podcast to ensure thatyou never missed an episode. Subscribe to the show in your favorite podcast player. If you'd like to learn more about industrial marketing and sales strategy, you'llfind an ever expanding collection of articles, videos, guides and tools specifically forbedb manufacturers at Gorilla Seventy sixcom learn thank you so much for listening. Untilnext time,.

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