By Dewey Hammond
May 17, 2012
Businesses are all faced with an uncertain future. Now more than ever, the business world boasts a “survival of the fittest” landscape, and everyone must play to their strengths. Often overlooked, and perhaps underrated, are the strengths of the family business. These companies, frequently small to mid-size, offer a structure that enables them to adapt quickly to changing conditions, focus on customer and supplier relationships, and simply do more with less - all of which represent advantages in today’s marketplace. The only problem? Typically, these guys don’t have access to the capital they need. As the economy continues to flail, family businesses are not only holding their own, they’re experiencing success - and becoming increasingly attractive to their larger competitors.
One of the industries where family businesses seems to be booming is the water treatment industry. Many businesses in this space are family-owned, and are growing at a faster rate than many of their larger peers, leading them to become attractive acquisition targets. John Peters, owner of Southern Water Consultants Inc., experienced this firsthand.
Peters founded SWC in 1989 and worked alongside his two sons, who were minority shareholders and performed key roles in the business as heads of sales and purchasing. The company experienced success over the years because Peters was able to use the family business structure to his advantage. The business cultivated strong relationships with long-term customers and suppliers, helping it to stand out from larger competitors. And, like many other family businesses, Peters and his team possessed “know-how” — an intimate knowledge of their products. This enabled them to develop a process to make aluminum chlorohydrate (ACH) and polyaluminum chloride (PAC) at the same cost as the bigger industry players, but on a smaller scale and with less capital investment.
Like many family businesses, the time came to sell. Peters desired liquidity. One of the most difficult things about owning a family business can be letting it go-¦.-¦to the right people-¦-¦.at the right price.
When the Time Comes-¦
Entrepreneurs are inherently planners. And you can bet they’ve planned on what to do when “that time” comes around. That time came for Peters when SWC caught the eye of “big guy” specialty chemical company General Chemical Performance Products LLC. Based in Parsippany, N.J., GenChem is a portfolio company of New York-based American Securities and serves a range of markets, including water treatment, oil refining, chemical processing and agriculture. With almost 50 North American facilities and a broad variety of chemical products, GenChem was 30 times the size of SWC.
GenChem wanted to capitalize on SWC’s know-how and ability to do more with less - i.e., the company’s ACH/PAC manufacturing process. GenChem also wanted to take advantage of the strong customer relationships SWC’s management had developed in the region. In return, GenChem could provide access to capital and protection from price volatility, furthering consolidation of an overcrowded market.
Ultimately, GenChem offered the best value for the company and the most consistent vision of the evolving water treatment industry. My company, FourBridges Capital Advisors, which had guided Peters through the selling process, negotiated a transaction and completed the sale. -¨
What’s Your Plan?
A transaction such as this is not specific to the water treatment industry. Regardless of markets served or products manufactured, family businesses are experiencing a running theme: they have identified their capabilities and are using them to differentiate themselves from larger competitors. Granted, small to mid-sized family businesses face consistent challenges. As with SWC, these companies might lack access to capital, and they often contend with governance and continuity issues. However, if owners plan appropriately and take advantage of professional financial advisory services, they typically find that they have multiple options to overcome challenges and achieve corporate and personal objectives.
Owners who are early enough in the process should thoughtfully decide if they want the business to continue in the family. For families that decide to do so, it is best to start early as they prepare members of subsequent generations for their future role as owners. If the family decides late in the process that keeping the business in the family is a desirable option, there are other alternatives. Perhaps chief among these is the creation of a board of directors, which research shows to be one of the primary drivers of successful succession.
As is true for all company owners, owners of family businesses must be aware of the economy and capital markets on a macro-level, as well as what is happening in their respective industries. Internally, they must know their company’s position in the market - its strengths and weakness, opportunities and threats. But owners of family businesses must consider an additional factor: their personal goals and the goals of their shareholders. Ultimately, the ability of an owner to balance these dynamics will enable the company to succeed - whether that means the business stays in the family for future generations, is sold to a “big guy” or becomes a “big guy” itself.
Dewey Hammond is a managing director at FourBridges Capital Advisors, a Chattanooga, Tenn.-based investment bank that provides sell-side, buy-side, financing and strategic advisory to clients across the Southeast. He can be reached at fourbridgescapital.com.