As we have reflected in the past, it is interesting to see the investment patterns of private equity firms that specialize in acquiring privately held, lower middle-market businesses. These firms do their research and focus on business opportunities that make sense and offer growth possibilities over the longer term.
Boston middle-market private equity firm BV Investment Partners made a majority investment in C.F. Stinson, partnering with the family owners of the textiles company. Keith Stinson and Glenn Stinson, the third generation of the family-owned company, will continue to manage the target and maintain an ownership interest.
C.F. Stinson, based in Rochester Hills, Michigan, designs and markets textiles for commercial interiors, including customers in the hospitality and health care sectors.
A couple of items are important in this segment. First, most amazingly, the owners represent the third generation for this family-owned business. That is remarkable since research tells us that “less than one-third of family businesses survive the transition from first to second generation ownership. Another 50% don’t survive the transition from second to third generation.” This generational succession into the third generation is rare, indeed.
And a related item, most business owners, especially those that have inherited the business from prior generations, are usually quite concerned about the legacy of the business, the family name, and how it will be affected by an ownership change. This legacy can take many forms and can be reflected in longevity, company name, employee base, and even standing in the community. I am not sure if the two Stinson owners were concerned about the legacy, but taking a surviving business into the third generation is a tremendous responsibility.
Finally, it is critical to note that the current owners are being retained in the structure of the new company. This not only will allow them to maintain the operations of the firm and most likely participate in key management decisions but it will also enable them to be engaged as partial owners. This is significant from a financial standpoint, as it will allow them to participate in a second liquidity event later when a much larger entity is either taken public or sold by BV. And they do have plans to grow this business, according to Mergers and Acquisitions:
Sean Wilder, BV principal, says the PE firm plans to grow Stinson through both acquisitions and through organic expansion, similar to the way it managed the firm’s investments in ECRM and Plasco ID—business-to-business, software-driven companies. BV has invested more than $2.7 billion in 84 companies since its beginning in 1983, targeting investments in the information and business services and communications industries.
According to their website, BV has nine holdings in its current portfolio and nearly 30 that it has held historically. So that adds up to 39 “platform” companies, but the article above indicates that it has made 84 investments, which tells us that a substantial portion of its acquisition activity is focused on add-on companies.
This is a method of growth that is becoming more and more popular with funds like BV that specialize in lower middle-market companies. An initial investment is typically made in a portfolio, or platform, company and then over time, usually 5-7 years, strategic add-ons are targeted to round out the holding to create a much larger, usually more profitable entity.
This is what the article indicates BV will do with C.F. Stinson. You can bet that the professionals with BV, along with the Stinson’s, already have some ideas for future acquisition activities in the Stinson space. And they are not the only ones interested in this niche, according to Mergers and Acquisitions:
Recently, in April, the Riverside Co. announced it was purchasing another textile distributor to the health care and hospitality sectors, Momentum Group, from Norwest Equity Partners. The evolving health care industry in the U.S. in the wake of the Affordable Health Care Act, or Obamacare, has been frequently cited as a source of middle-market M&A.
This is great news if you own a business in this industry (or related industries) right now. However, keep in mind that this is simply one example of an active private equity group moving forward with this type of acquisition plan. There are literally dozens of others using the same strategy in other industries.
To find out if there are active PE firms in your industry, give us a call and attend a Generational Equity M&A seminar. Although we won’t identify buyers for your business at this meeting, we will allow you to see lots of active examples similar to the BV sample, which are pursuing the same strategy.
Carl Doerksen is the Director of Corporate Development at Generational Equity, part of the Generational Group.
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