Dealmaking can often be the next step in the pathway to becoming a great business. Or, in the case of Bluffton Motor Works, it can provide an opportunity to recapture past glory, says Richard R. Hollington III, managing director and CEO at CapitalWorks LLC. The story of Bluffton began as a 2006 carve-out from a large public company, Franklin Electric.
“It was a domestic fractional horsepower motor business,” Hollington says. “We happened to have a number of executives from the Reliance Electric network in our group, so they helped us assess the opportunity and we brought experts to the table who understand the electric motor business. The first chapter of our ownership was to create the infrastructure and the management team for a business that was a forgotten division in a big company.”
Once that foundation was built, the team at CapitalWorks took steps to grow the business, both organically and through acquisition.
“We successfully completed four acquisitions, most of which were adding new capabilities to expand the breadth of their offering, which was very successful,” Hollington says. “We were very effective in our commercial sales strategy to build the business. We owned the business for eight or nine years and ultimately sold it (in 2016) to a Brazilian manufacturer named WEG. Bluffton has become the domestic hub for WEG, producing electric motors here. Management was very successful in executing their strategy and has the opportunity to continue to grow the business with new ownership.”
Hollington has been helping companies use dealmaking to maximize their growth potential throughout his career, which began at McDonald & Co., then continued at McKinsey and Sky Financial Group before Hollington came to CapitalWorks.
“I have to use everything I’ve learned throughout my career just about every week in my role at CapitalWorks,” Hollington says.
In this week’s Master Dealmakers, Hollington talks about the role preparation plays in developing an effective acquisition strategy and what private equity firms do to make sure they stay on top of their game.
Acquisition strategy
Making a good acquisition first starts with a good fit and an understanding of the business. We spend a lot of time trying to get to know and understand the management team and the fundamentals of the business. In becoming the acquirer of the business, we need to believe we can add value. Our investors are largely entrepreneurs and executives that have had great success in their career. We’re often bringing those individuals along with us, and they are helping to assess the fit and the ability for CapitalWorks to add that value. So we start there. Is this a business that if we own it, we can make it a better business because of the people we know and the things we can bring to the table to improve it?
In the next step, you go to the elements of the deal. We need to buy businesses at a fair and relative value. And we have to be able to capitalize businesses to give them the kind of capital availability to support their growth, as well as deal with unforeseen bumps in the road that come about with relatively small businesses in the lower middle market. That becomes a tricky match.
Often the value we think is fair and relative in today’s market may look low to a seller. The way we try to position CapitalWorks is that we’re going to be amongst your best partners that will help you create the most value in the next chapter of the ownership of the company. So our value should make sense from that perspective. If you can get that combination of things to work well together, you can do a mutually successful deal for all parties.
Is it the right time?
Making deals can be a balancing act. If you’re going to make an acquisition, make sure there isn’t so much on the plate of the business itself in terms of fixing things or transforming things that you don’t have any capacity to deal with the issues of integrating a new business. That’s the most important thing to assess. Some of that can be dealt with by using outside resources and consultants. But at the end of the day, if you’re trying to integrate one business into another one, you want that management team to own it and drive it. They have to have capacity to do that. Make sure they’re not dealing with so many of their own issues, problems and opportunities to improve that they can’t dedicate the time and energy to successfully integrate the target acquisition.
Think through the possibilities of aligning two businesses together. As I observe the market today, there are many businesses adding other businesses just to get bigger. They haven’t really thought through the strategic fit between these businesses and where, from a market standpoint, a capability standpoint, a cost standpoint or a manufacturing standpoint, where there are real opportunities to improve the businesses by bringing them together. There are some situations where people are doing deals to get bigger in revenue and earnings, but they haven’t thought through how to really create a strategic fit between businesses. That often can detract from value as opposed to creating value.
Maintain discipline
There are thousands of private equity firms, many of which talk like they do the same thing. As a PE firm, you have to be very clear about what makes you successful and stay disciplined in that strategy. For us, that’s working with relatively small businesses in a lower middle market that are in industrial industries and have a reason for being, but also have an opportunity to become larger and more effective businesses through executing simple strategies.
It’s easy to buy a business if you just pay the most money. That’s the easiest way to get into trouble as a private equity firm. It’s having the discipline to buy businesses at a value that enables you to create a capital structure where you’re not so stretched that you’re on the verge of tripping bad things with the bank. That’s an important part of the equation. That’s not always easy as there are deals being done around you. You just have to keep at it and keep looking for those opportunities.
The Last Word
The economy feels pretty good. If anything, what worries me most in our space is that the amount of money available to pursue transactions does make it harder for us to put our money to work within the discipline of our strategies. We are doubling our efforts to find more opportunities. It’s been a tough time to buy businesses for the last 10 years, and yet, we buy one or two a year at what we think are reasonable values. They are out there. You just have to work hard to find them. The other thing, and I think this is true across the private equity spectrum, is that PE firms are getting smarter and better about how to improve businesses. That’s also good for the economy. Stronger more robust businesses will grow and prosper and add jobs. That’s good for all of us.
Related post: CapitalWorks moves on from Capewell Aerial Systems investment
