When Jim Stanger and the other owners of Edge One were considering selling their business, their lawyer helped connect them with an advisor to manage the process.
Based in Stoughton, Edge One sells ARMs and other financial equipment to financial institutions and retail markets. The current ownership group had bought the company in 2013 and blew past its growth goals ahead of schedule. In the process, the group learned they had limitations when it came to integrating acquired companies.
The idea was to find a buyer that could help make Edge One more competitive, both in executing better on acquisitions and providing the resources to expand to other geographic markets beyond the six states it focuses on currently.
[caption id="attachment_545041" align="alignright" width="300"] Jim Stanger[/caption]
Stanger and the Edge One team started by quietly reaching out to industry contacts to express their interest in a potential deal. As they did, their lawyer connected them with an advisor, Rob Jansen, managing director of Milwaukee-based Bridgewood Advisors.
In one of their first meetings, Jansen asked if the group had a buyer in mind. Stanger responded that they did; there was a strategic buyer in the industry they felt would be a good fit. Jansen cautioned them that, in most cases, a deal doesn’t work out that easily. He encouraged the group to keep an open mind.
Then Jansen asked if there were any buyers the group would object to. Stanger spoke up again, saying he didn’t want to sell to private equity ¿. He’d seen at least four or five deals in the industry where being acquired by a private equity firm led to the demise of once strong companies.
Jansen again encouraged the group to keep an open mind and said not all private equity firms are the same, Stanger recalled.
As the process went on, Jansen reached out to hundreds of private equity firms and around a hundred strategic firms. The list was eventually trimmed to around a dozen companies Edge One had phone calls with and then around six for face-to-face meetings, held on the terrace of the Milwaukee Art Museum due to the COVID-19 pandemic.
Ultimately, the owners sold a controlling interest in the company to Detroit-based private equity investment firm Peninsula Capital Partners and private investment firm Connecticut-based Pillsman Partners.
“He forced us to look at options that we wouldn’t have considered on our own,” Stanger said of Jansen.
It is not uncommon for business owners to shy away from selling to private equity firms. Maybe they’ve heard stories from others in their network of deals gone wrong. Maybe they have an image of PE firms as corporate raiders who will decimate their business or as turnaround specialists making tough decisions and slashing costs.
The reality is that with thousands of private equity groups in the market, each one has its own approach. The end goal, however, is largely the same: generating returns for investors.
“At the end of the day, no buyer wants the business to be more successful than a private equity buyer. That is 100% their motivation,” said Sequoya Borgman, founder and managing director of Milwaukee-based private equity firm Borgman Capital.
Borgman acknowledged that, for some, private equity is associated with destroying the value built by a founder or family owners.
“For every one of those you hear about, there’s 10 success stories, though,” he said.
While everyone involved may want the sale of a business to work out for all involved, making that happen requires many conversations prior to closing to make sure everyone is on the same page.
Consider the different styles of private equity firms. A traditional firm may raise a fund and then seek to invest money over a five-year period, planning to hold its investments for anywhere from three to seven years before selling. During the hold period, the PE firm will be looking to grow the business to generate returns for investors at the eventual sale. A more family-office-oriented firm might make investments and plan to hold for an extended period of time.
While any buyer will want to grow the business, growing with an eye toward a sale in three years creates drastically different imperatives compared to an owner with no defined endpoint in mind.
For an owner considering selling, those different approaches can help inform which firm makes more sense as a buyer. Consider a 55-year-old business owner who knows his business could grow faster with the right assets and investments.
[caption id="attachment_545040" align="alignright" width="300"] John Emory Jr.[/caption]
“The owners, they’ve already sort of won the game. They don’t want to risk the capital. They want to take some chips off the table, not put more chips on the table,” said John Emory Jr., president of Milwaukee-based Emory & Co.
Emory said the right partner might be willing to buy 70% of the company from the 55-year-old and hold it for five years. With the right investments and a good working relationship, the remaining 30% stake could be worth more when it does sell than the 70% was worth at the initial sale.
Getting two chances at realizing significant value from the business requires that the owner and private equity buyer see eye-to-eye on a number of fronts. Beyond how long the PE firm will hold onto the business, there are questions about how involved the buyer will be in day-to-day operations, what kind of expertise the PE firm will bring to the table, whether both sides have the same vision for how to grow the business, and even how the individuals involved work together.
“There’s not a right and a wrong, but there can be misalignment if there’s different expectations,” Jansen said.
Borgman said PE firms are generally looking for a business with strong growth prospects and it is often clear if a relationship will work.
“It’s just like any other meeting. If you’re a sales person, you go into a meeting and either you hit it off with the person making the decision or you don’t,” he said.
Even with a good relationship, it can be difficult for some owners to adjust to working with private equity firms.
“You truly are partners and you no longer are the only person making the decision,” Borgman said, noting the new partnership may often come with an external board and additional reporting requirements. “That’s something new to a lot of these entrepreneurs.”
[caption id="attachment_545039" align="alignright" width="300"] Rob Jansen[/caption]
For Stanger and Edge One, it took a lot of conversations to get comfortable with the private equity firms they eventually partnered with. They told him their approach was to not get involved unless it was needed. They liked platform companies with a chance to grow, and the cultures were similar: hardworking and friendly; technical, but without losing sight of the people.
Stanger acknowledged it seemed like a bunch of talk, but after spending enough time with the buyers he started thinking, “Maybe these guys are for real.”
The deal closed in December 2020 and Stanger said the Edge One team has been pleased with the hands-off approach but added that even with all the conversations and research, there was still some uncertainty.
“You really just don’t know until you’re in there though,” he said.
“Take your time and get to know the people that you’re going to be partnering with,” Stanger added. “If it’s not a fit, don’t do it. You have to fit as people as well as businesses. I’m convinced that it won’t work on either front unless you do.”