You might say Dave Kliber’s search to buy a company was destined to end the way it did. His detailed, analytical approach to a business acquisition has netted him S-F Analytical, a West Allis-based scientific laboratory.
Like a laboratory experiment that must be repeated to critically assess various factors, Kliber’s year-long venture had him facing many unknowns as he reviewed more than 40 acquisition prospects.
Kliber, a founding officer and former president of Polacheck Property Management Corp., detailed his search for a business to purchase in the Aug. 2 issue of SBT.
"When I started this process, I decided I needed to sit down and do a business acquisition criteria package so I could identify the scope of my search," Kliber said. "I wanted something with sales between a half million and $5 million in southeastern Wisconsin, preferably with customers served within this geographic area. I wanted a service business; possibly they could have some product. Service – that is where the bulk of my experience was."
Kliber looked at more than 40 businesses in his search, including some franchises.
"As I looked at each of them, I ran the numbers, looked at the quality of the people and the organization and how it would fit in with my lifestyle and my family," Kliber said. "We have young children and aging parents. I had started a corporation before, when I started Polacheck in 1987. And at that time I was working between 75 to 90 hours a week. This time, I wanted something established."
The search came to an end Sept. 12 with the closing of Kliber’s purchase of S-F Analytical Laboratories, Inc., West Allis, from Ed and Barbara Treick, who had owned the firm for the past 16 years. Kliber’s search was a long one – he formed his company Kliber & Associates in December of 2001 to act as his acquisition corporation. And the fact that his search terminated in a deal with a longtime friend and associate – the buyer and seller had known each other for eight years through the Metropolitan Milwaukee Association of Commerce and other organizations – did not necessarily mean the deal came off without complications.
The first complication was that Kliber had retained Nick Wahl of Godfrey & Kahn’s Milwaukee office to help him in his search. Godfrey & Kahn also had been retained by the S-F Analytical owners.
"We had a conflict of interest with Godfrey and Kahn, which represented both my firm and S-F Analytical," Kliber said. "So I hired Tom Myers at Reinhart Boerner Van Deuren to represent me on the buyer’s side."
The Treicks continued to work with Godfrey & Kahn, because that firm had drawn up S-F Analytical’s employee stock ownership plan (ESOP), and were familiar with the legal provisions involved in selling a firm with such a plan in place.
ESOPs a challenge
S-F Analytical Laboratories, a 102-year-old multidisciplinary lab, had put in ESOP in place only a few years ago, and Kilber found that state and federal laws regarding the purchase of ESOP firms are more complicated than those governing other companies.
"We started narrowing it down and put together a letter of intent (LOI) in May," Kliber said. "We had started discussions in March."
But it would be several more months before the deal closed.
"We went back and forth on that – and on June 19 we came up with the fourth and final LOI," Kliber said. "It made sense for the buyer, the seller and the ESOP. We wanted to make sure they were getting a good value for their dollar. … We went to four banks for financing in July and August, and by early August had received a commitment letter from Johnson Bank in downtown Milwaukee. We worked with Dick Hensley there."
Regulations in place to protect the ESOP participants were a stumbling block in part because, if a bank loan is involved in the purchase, the added debt load placed on the company reduces the value of the ESOP shares. But Ed Treick admitted he did not fully understand the effect his ESOP, which he put in place in 1997, would have on the sale of the business.
"The real reason for the hassle was originally, I thought it would be a good idea because I only had to find someone who had to come up with 70% of the value – and they could take over with the ESOP in place," Treick said. "What I had not considered is that with financing, the value of the business would dramatically change, which would make the ESOP shares suddenly drop in value. This is attributable to buyer financing, and that adds additional debt, lowering the business’ net worth. Dave and I didn’t want to put that burden on the employees."
According to Mark Ehrmann, who represented the Treicks on behalf of Godfrey & Kahn, under the ESOP, the Treicks are actually required by law to protect the interest of ESOP shareholders.
"Ed and his wife are two of the three trustees – and they have a fiduciary duty to maximize the value of the stock," Ehrmann said. "If they sell, there has to be some relation to fair market value. That means you have to get an appraisal to determine that a third party agrees that it is a fair price."
The fact that an ESOP was in place also meant the deal was structured as a stock purchase rather than a sale of an asset.
"They still could have done an asset deal, technically," Ehrmann said. "But it doesn’t make a lot of sense. If they had sold assets, the corporation would have had a tax on the asset sale and when the money was distributed to the Treicks, it would have been taxed again."
The appraisal and additional legal fees add up to a more expensive transaction, according to Ehrmann, as the cost of the appraisal alone can run between $5,000 and $20,000.
"Even though this was a fairly small deal, the fees were disproportionately large as there was an ESOP involved," Ehrman said. "The other area of added expense may be that when you have a bank involved, typically the borrower will pay some of the bank’s counsel; they have to look at things in detail, as well."
Other factors apart from the ESOP also affected the deal, including the fact that Kliber actually bought three companies in his transaction, making his purchase of S-F Analytical more interesting than he may have planned.
"There were actually three companies involved," Ehrmann said. "A holding company, Sommer-Frey Laboratories, Inc., owned stock in Assets Analytical Labs, which owned S-F Analytical Laboratories. What the Treicks sold was their stock in the holding company."
But Treick said the fact that three entities were involved in the sale did not seem to complicate matters much.
"That didn’t seem to confuse anyone too much," Treick said. "It added a little to the complexity, is all."
Lessons learned
all around
Kliber and Treick both came away from the deal feeling the right way, and wiser, as well. They say there are specific lessons that can be learned from their experiences.
"When you have the holding company and the subsidiary company in place, you should be concerned as to whether it makes sense to collapse that company, because it does make it simpler," Ehrmann said. "And I think I would say that whenever you decide to put an ESOP in place, you have to be concerned about how it is going to affect a sales transaction."
Treick acknowledged that if he had it to do over again, he would avoid putting an ESOP in place so soon before engaging in the sale of the business. In fact, he had considered allowing the ESOP to purchase the entirety of the company over time, but said he felt better bringing in strong outside leadership that could help grow the business in the future.
The Treicks will stay in with Kliber for six months as his advisors, making sure he and his administrator are well oriented.
Kliber said he got a lot of excellent advice from dedicated professionals in his search and in managing his transaction, but many of the service providers are used to handling larger deals.
"While the process for buying a business needs improvement – more organization – I found the players are very receptive, very open, like to network, like to help," Kliber said. "There are a lot of good people here in Milwaukee who are involved in the venture marketplace. Most of them, however, like to play with the bigger numbers."
Both Kliber and Treick advise those on both sides of potential business sale transactions to anticipate a long process.
"I think the sellers need to understand that the process is probably more difficult than they thought it would be, and will probably take longer than they thought it would take," Kliber said. "The buyers are going to find the same way. It is not something that you should run away from and be afraid of, but the marketplace needs to grow a little."
"I think most small business owners would have no concept prior to selling of what is all involved in due diligence and how time-consuming it can be," Treick said. "I thought five our six weeks would take care of it, but instead it was more like three months."
The Treicks had purchased the company, then known as Sommer-Frey Laboratories, from Robert Frey in 1986, and expanded its operations. Kliber said he intends to continue to grow the company, which has customers nationwide.
Ed Treick said he plans to become increasingly involved in church, community and political activities.
Nov. 8, 2002 Small Business Times, Milwaukee
