The Manufacturing Executive
The Manufacturing Executive

Episode · 1 year 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 economy strong and the level of activity M and a activity for private equity back businesses or businesses seeking private equity backing is very robust. Welcome to the manufacturing executive podcast, 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 to share about their successes and struggles, and you'll learn from B tob sales and marketing experts about how to apply actionable business development strategies inside your business. Let's get 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 Agency guerrilla seventy six our agency has consulted many midsized manufacturing organizations over the last ten plus 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 private equity owned. Regardless, any manufacturing owner, somewhere along the way will start thinking about what the transition and leadership and ownership might look like. And what his or her options might be. My guests today is someone who happens to know a little something about this topic, so let me introduce him. Chris Redmond is senior vice president of capital for business, a middle market private equity firm 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 more than twenty years of corporate finance experience to bear in providing guidance to CFB portfolio companies, providing insight into issues faced by business owners and management teams. During his 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 companies in a broad range of industries. In addition, Chris served as Chief Operating Officer 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 little bit about how you've found your way into this world of private equity specifically from middle market industrial businesses which, frankly, make up a large portion of our audience right now. Sure, part of it is with strategic part of it was opportunity, opportunistic but, as as you mentioned in my bioam or reformed investment banker. But if you think of banking, it's a little bit of marketing, it's a little bit of corporate finance, it's a little bit of accounting and analysis, but it's also a business where you spend time with a lot of different companies and you get insights into working in Avite very dynamic environment with different business owners and strategies and the like. And so I was in banking for a long time and then my firm was sold and I took that as an opportunity to switch gears and get into management, which I did with 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 a business. That ran its course, however, when I realized that the dynamic nature in the variety of the banking experience was missing at that point and was part of my fabric, and so I looked for ways to satisfy that and the opportunity to join capital for business came up. I had provided services to industrial business in the past. Businesses in the past also is the services companies, technology companies, and what I felt was that while industrial is the way that we express ourselves, what we're really doing is we're investing in people and in businesses and helping them solve problems...

...and be successful, and so they're through 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 strategic and some of it sort of just happened. It's it's kind of the same world for 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 with them, and then it became strategic after that and said we really want to own this. But I was just kind of curious how you how you wound up where you are and in this niche and developing a specialty. So it is a journey it is. It is indeed so. On that note, given who sort of our overlapping audiences are here in midsize manufacturers, a lot of the companies that I talked to, clients of ours, prospects I talked to, many of them are private equity owned, and one thing that I've learned that is that very, you know, different private equity firms have very different ways of creating value and some of these organizations and private equi are very hands on inside the business. Others tend to take more of a board of level guidance approach. Others yet are purely financial investors, providing funding and staying in the background. So I'd love to hear from you as an expert in this field. I love to hear you talk a little bit about the difference in approaches and when each makes sense. Sure. I think one umbrella comment I would say is that hopefully, if a private equity investor successful, they have the ability to do any of the three scenarios that you described. But each group has a culture and an infrastructure that lends itself to one of those three themes, if you will. So a handson investor might have a larger team and they might have people with specialties in operations and often they call themselves operating partners, but they might have specialties in operations or in sales development or bank relationships, or someone is very focused on identifying MNA targets. And that's all within that shop. And what what you, as a private equity business owner 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 extension of the management team. That's appropriate, I'd say, for companies that need that augmentation of management and and that's not a criticism, but there are businesses that really could broad and broaden their teams. It's appropriate if a business is in need 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, things and things of that nature. I'd say the next group, which is the board level guidance, describes capital for business and the way we view it is that we put management teams in place. They might already be there, but we put management teams in place, we provide them with with strategy, we help to identify success factors and metrics, we set expectations and we let those managers execute. It's really all about the people in our business, even though we 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 on folks expertise are necessary. So if they are acquisition opportunities, we tend to jump in spend a lot of time with their management teams. If their operational issues, we tend to look outside and bring in third party resources to help with the 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 a company needs. And then their handsoff investors that are financial investors. Typically they're looking to 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. You know, it's five to seven years down the road, is time for the prior investor to exit and someone steps right in and there it would not be uncommon, if that company continues to perform,...

...to hear from their investor quarterly at a 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 are at the time. So so there are different flavors. But I go back to 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 in house or whether it's through a third party. And you know, all three of those 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 equity firm like capital for business is looking for in a midsize manufacturing organization when you're considering an investment. Can you talk about that a little bit? Sure, I'd be happy to. You know, we typically look for niche manufacturers and that can mean a lot of things, but but to me it means something that differentiates a business so that they're competitive in a particular niche or so that their margins look a little bit different and perhaps higher than others who play more broadly. Now, that doesn't mean that they have to be focused on a very, very specific sector of the market. It could be multiple sectors, but a value added provider with some nitch expertise. We always look for a growth potential and growth is in the eye of the behold room. Some people like fifteen percent sales growth, some people are comfortable with four percent. We just want to understand the industry and that there's an ability to grow. That can 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 adding to the growth trajectory of the business, particularly if a company is entering trying to enter into new markets. But if in our case, we often acquire to to kind of extend the value chain, to add more capabilities and perhaps add some 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 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 to understand management, and clearly there are business owners who intend to transition out of a business and we're not intimidated by the need to find new management, but we do look for teams that can continue to execute and can grow with us and improve their businesses. Then I'd say we always focus on blocking and tackling. What at the end markets? What's the equipment? What do systems look like? If their holes in management, can we fill them? So those are things that were intently, intensely focused on. But we can accomplish solving those issues, if necessary, post closed, through investment or through augmenting the management team. So that those are the things we look look for. And, as we mentioned the outset, were more of a board level guidance type shop to begin with, and it's all about the people. It's all about management. So if we get the right management in place, help them to devise a good, solid plan and monitor and measure that plan well, and it's rest peeple success, and that's that'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 my own world often, and you mentioned companies that have a niche or they have some kind of defined differentiator that makes them different. And there are so many companies I talk to, and of course I'm coming at this from the standpoint of like positioning of your business to to the market and and everything, but a 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 just really good and our competitors 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 the same and you need to you...

...know. I mean, I'll just use ourselves as an example, like we have specialized a gorilla in working with midsize 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's really 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 coming from your customers mouths about like what do they value about you, and try to build around that, because I think it's just people, don't they get caught up in their own worlds and realize they don't realize they look the same to everybody on the outside. So it's just kind of curious. Scarcer your perspective on that as a private ector guy as opposed to a marketing guy like me. Yeah, well, I oftentimes businesses are manufact that we look at our manufactures of something having to do would metal or plass. So they start with the same machines, the same capabilities. Perhaps the first different creator is and markets, and some in markets have higher margins and others. And we have the benefit of looking in a lot of companies and if if a company is in an end market that's growing and should a higher margins, well then that business that we're looking at should have a growth profile and margin profile that suggests that they're doing a great job of serving that niche. And occasionally that's not the case. That doesn't necessarily mean that we don't have an interest in business because it may be that they do other things incredibly well and if they maybe understood their cost better and price more strategically, they might be able to enhance their margins. But there are clearly of giving an extreme, there are some businesses that are distributors and maybe they're just packaging something for someone and and the end customer says, yeah, we value these guys because they're the only ones that will turn the machine on for low volume high mix opportunities and that's a nice niche if you get paid for the changeover times in the downtime and the variability of providing low on in high mix business. And so very often there is a margin improvement that you can see and you could say that customer service in that particular cases a differentiator that the end customer values. So sometimes 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 to get underneath to find out what what is different. 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 a chance to learn that until we actually meet management teams and spend a day with them and and drill into what the differentiators are. So you are correct there. There's a great deal in industrial America that looks similar, but there are enough customers out there that you can branching yourself and in terms of improvement and profitability, that that's endless in some ways. 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, that most companies do actually have differentiators, but they either just haven't uncovered them or they're hanging their head on the wrong thing. That is just sort of commoditizing their business from the perspective of people are trying to reach. So, Chris, is there an example or case study that you could use from your experience and private actory that sort of describes the transformation a company in your portfolio has gone through from the day you entered to the day you exited? I love to kind of hear what that journey looks like, or maybe has looked like an example, and what happened along the way. Sure, I'll provide a couple of examples and the first I touched on a bit. It was a company that broadened its capabilities to kind of extend down the value chain and add more value to to its end customers. So this is a business that is is essentially a sheet metal fabricator. So goes back to they in the same cutting machines, the same forming machines, that the same probably skilled labor as many people do, but they have precision products that have attracted a really neat customer base. So think of a medical...

...lab bench that's that's in a diagnostic setting or in, you know, a pharmacyable development setting. Think of an aggin turf part that ends up on a fairly significant you know, it's a small 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 or snowmobile that has their parts on it and you know they're they're important in terms of their durability and their safety and things of that nature. So a company that 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 of an acquisition in their own lines of business that added capacity. Equipment was similar and customers were fairly similar. But there were two differentiators. One is that they 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, but they added value and were able to capture more wallet Chare for that end customer. The second was that it essentially had a paint shop, but powder coating paint shop, which we typically don't have that much of an interest in because 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 a shortage of high quality third parties that they could work with, and so controlling their own paint shop became sort of a strategic advantage. And so those were two things that added to the business and it was a nice first step in an acquisition. The second acquisition took it even a step further in terms of assemblies, and so they they acquired a business that was a very it had machining in addition to fabrication, but it also had a couple of very large customers that trusted them to do full turnkey outsourced manufacturing. So they made a certain portion of the parts, they spect and procured the other portion of the pot 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 that box. But it was really a full turnkey assembly capability 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 in the stool machining, fabrication and really full turnkey contract manufacturing. So we have high expectations for that and the early returns 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 niche. When we acquire a business it may have a niche or two and it may not have found its way and this was a particular company in the in the molding industry that was diversified and it provided parts to consumer products and industrial products 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 they really invested in their business and refocused on medical or focused on medical, they could 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 these these are plastic injection molded parts for medical devices. You have stringing, customer quality issues, you have FDA audits and quality issues and repeatability and and the like. 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 of the 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 a lot 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 it to almost a hundred percent today. In the margin and growth profile reflects that difference. And you know, by the...

...way, it's also a much higher multiple end of the market for these kinds of companies, and so we should be 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 it was right there hundred's nose, and then and then perhaps another business that added both capacity and capabilities but also really extended down the value chain to provide a much higher value product to some key customers. Those are great examples. I was like to try to illustrate some of these concepts of something a little more tangible to help listeners. So too, really good and different exams apples. So, Chris, for any manufacturing a business owners listening right now who are thinking about maybe seeking an outside investment via private equity or even just kind of thinking about, you know, take my business to the next level, I'm just kind of curious. For Look, where would you advise that they start? Yeah, I been and some of this is common sense, but you'd be surprised how difficult it is for a business owner to come to the realization that they either would like to exit or would really like to bring on someone else who might have some element of control over their business. So, so very often we see people who are less prepared. So I think the message is around preparedness and and it starts with assessing the business owner, assessing his or 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 at the business is solid but it's it just lacks the scale to compete, then perhaps even a strategic buyer not. A private equity buyer is the right buyer and you know they can take care of the operating level employees. Perhaps not the executive level employees, because they might assume that. But it may be and there are many cases where the strategic buyers a great partner, particularly if maximizing 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 in that 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 next five 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 their business, but but stick around and and grow with the business for a bit longer. But it has to do with preparation and has to do with really assessing your needs and determining what you like to do. Now. Your question was where do you start? I think you start in there's an abundance of resources out there. Private Equity Twenty years ago is mysterious and today it's a very 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 happy to like us, that would be happy to tell you how we do business and they can get a field for the culture and the mechanics of what it actually 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 Sullivan and his clients who who have had exposure in the past. So so I think they're there are a lot of resources, but ultimately, until you talk to different 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 say they do for prietary deals, which means they go out and they they buy a business, they approach it one off and they buy it without the competition that's created by an investment banker. And that does happen. But these days intermediaries play a pretty important role and and there's usually someone who's supporting a business owner who is seeking to sell, whether it's a full fledged investment bank or whether it's someone who's maybe a little bit more handsoff, but it's a broker who's helping them to find an array of buyers to talk to. We typically see someone and there is value in helping to support and organize the effort of someone who's selling their business. So there...

...is value to having an intermediary involved in addition to creating a competitive environment, but even on our side, the the buyer, there's value to have an an intermediary involved. Sure now that makes 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. The economy is strong. I think if people were to have looked back a year ago at the beginning of the pandemic and wondered how the next twelve months would shake out. And there are clearly businesses that are in end markets that are heavily affected, but but for the most part our portfolio is whether the storm quite well and the level of activity M and A, activity for private equity back businesses or businesses seeking private equity backing, is very robust. It's I judge the market by how frequently opportunities cross our desks and what the quality is of those opportunities. And they are either crossing our desks or we're seeing them or, 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 work and that means that valuations are strong. So you know, as as a buyer, that's kind of double edged sort. You know, we're buyers, but we're also sellers, so we're selling businesses as well, and it just happens that that's the equilibrium today. It has been a seller's market for some time. The world will cycle downward at some point, but it is definitely a cellars market. So I think for those sellers or buyers, but for those sellers that are assessing their future needs, you know, they've probably heard it for a few years now, but now is as good a time as any to approach the market. Good Way to wrap it up? Yeah, I imagine that. You know, if we're sitting here a year ago having this conversation, of probably would have been a wild guess at what what things looked like a head but it's kind of amazing looking, you know, after what the world's gone through over the last year or so, that we are where 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 clients or 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 pretty experienced team. So we enjoy being a part of the community, we enjoy being a resource to the community and we spend a whole lot of time talking to people who don't do transactions with us. So I encourage folks to reach out to the example. Now that's that's really right. Low, low pressure there. So I appreciate you offer in that Chris. Where is the best but what's the best way to get in touch with you and also to learn more 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 all of our individual contact information is there, as well as more color on our portfolio. So we have a business then looks like some of our businesses and 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 vouch for you. Know. This is an awesome group, early, approachable crew and I'd encourage you to reach out to him if this is something that's on your mind. So, Chris, yeah, thanks once again for doing this today. Really appreciate it. Sounds great anytime. Awesome, and as for the rest of you, I hope to catch you on the next episode of the Manufacturing Executive. You've been listening to the manufacturing executive podcast to ensure that you 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'll find an ever expanding collection of articles, videos, guides and tools specifically for bedb manufacturers at Gorilla Seventy sixcom learn thank you so much for listening. Until next time,.

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