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Case Study: How Private Equity Firms Operate

By Generational Equity

case study PE Firms

We have discussed how private equity (PE) firms operate throughout the years, pointing out that the reputation created by the business media is more heavily weighted by the operations of firms that specialize in billion-dollar, mega deals rather than those that focus on companies in the lower middle-market size range. Firms that work in the latter arena have a “buy and build” strategy rather than the “buy and break up” philosophy that gets all the bad press.

I always keep my eyes open for real world examples of lower middle-market equity firms in operation, so the title of this press release caught my attention:

Pfingsten Further Expands Wood Products Platform

And here is the information about the transaction:

Pfingsten Partners, L.L.C. (Pfingsten) announces its portfolio companyBurton Saw and Supply Holdings, L.L.C. (Burton Saw), a manufacturer and distributor of consumable products and equipment to saw mills and wood product manufacturers, has acquired Global Tooling and Supply, L.L.C. (Global Tooling). Global Tooling, based in Eugene, Oregon, is a distributor of cutting tools, knives and associated products primarily for secondary wood product manufacturers in North America. The company sells a broad product portfolio of approximately 2,000 SKUs to an active customer base of over 800 customers.

"Global Tooling has supplied Burton Saw for the past 20 years and we are aligned with Burton Saw's culture, vision and values," said Global Tooling's owner Eric Allen. "This combination is a logical fit and we are very excited about the future." As part of the transaction, Eric and Patty Allen will become shareholders in Burton Saw.

"Global Tooling's diverse business model, impressive growth track record, outstanding customer service and strong cross-selling potential made the companyan ideal addition to the Burton Saw platform," said Craig Tompkins, CEO of Burton Saw. "The partnership also facilitates a strong entrée into the secondary wood products market for our organization."

This is Burton Saw's second strategic acquisition since Pfingsten became the majority shareholder in December 2014. The transaction is part of Pfingsten’ s strategy to CREATE the leading supplier of consumable products and equipment to North American wood product manufacturers.

I have taken the liberty of bolding several key segments of this release to emphasize salient points for business owners reading this article.

First is this: PE firms like Pfingsten make initial investments in an industry they believe they can consolidate and by doing so, create a solid return on investment for their investors. These initial investments are called “platform” or “portfolio” companies. After the initial investment is made, they then research the industry, get to know the portfolio company, invest in its growth, and look for logical “add on” investment opportunities.

This is exactly the scenario outlined above. Burton Saw was Pfingsten’s initial foray into the “consumable products and equipment for the wood products industry” in 2014. In two years they have made two add-on acquisitions to the platform company, Global Tooling being the second.

What is interesting to note is that Global Tooling is actually a supplier to Burton Saw and has been for several years. So this is a “down-stream” logical fit (read synergistic fit) that nicely meets Pfingsten’s goal of CREATING a leading supplier in this industry.

Building and Investing

I have capitalized and bolded the words CREATE and CREATING twice because it really is important for business owners to realize that this is what private equity firms like Pfingsten focus on: building businesses.

Far too many business owners that we meet at our exit planning conferences have a dim view of equity firms. Based on what they read and hear, many fear that the legacy they have built in their businesses will be negatively impacted. They also often worry that the long-term employees, the loyal folks that have been with them for years, will most likely be affected by back office and operational consolidation.

Although these things do happen, more often than not, if you create a partnership with a middle-market equity firm like Pfingsten, you will actually see your legacy grow and your employees be given tremendous opportunities to do so as well. This is how Pfingsten describes their focus:

Pfingsten is an operationally focused private equity firm formed in 1989. From its headquarters in Chicago, IL, and representative offices in ChangAn, China, Chennai, India and New Delhi, India, the firm builds better businesses throughoperational improvements, professional management practices, global capabilities and profitable business growth rather than financial engineering. Since completing its first investment in 1991, Pfingsten has raised four investment funds with total commitments of approximately $1.0 billion and has acquired 110manufacturing, distribution and business services companies.

Again, key points of emphasis: First they are “operationally focused” and are dedicated to “building better businesses.” They do this not by tearing their investments apart and consolidating back office operations; rather, they invest, invest and invest in their holdings and look for very synergistic fits to add on to them. Again, Global Tooling is a perfect example of this in action.

Of course this is just one PE firm focusing on a specific industry. However, trust me, of the thousands of PE firms out there looking for synergistic fits right now, chances are good there is one operating in your industry as well. You may not even be aware of it because, as in this case, Pfingsten made the acquisition via its portfolio company so other folks in that industry may be under the assumption that Burton Saw is operating independently. As we have seen, nothing could be further from the truth. Having deep pockets and resources behind you can be very beneficial. Don’t just take my word for it, listen to a few Generational Equity clients who we have helped create similar partnerships for:

A common theme you hear throughout these video clips is this: My company is now poised for tremendous growth BECAUSE of our new partner, AND my employees now have even more opportunities available to them.

Whether your company is a good fit for an equity firm is an important issue to address. Time and space do not allow me to do so in detail; you need to hire a professional M&A advisor to help you make that decision. The firm you hire, if they have closed deals with a variety of buyers, will talk to you about your business goals, personal needs, and financial objectives in order to determine who the optimal buyer would be AND, just as importantly, what the appropriate deal structure will be to meet your personal and financial goals. These are conversations that are vital for you to have.

Generational Equity is here to help. We have closed dozens and dozens of transactions for our clients with a full range of buyer types. If you are interested in learning more about buyers for your business, reach out to us and one of our senior business advisors will walk you through your options and help you begin the process.

Keep in mind that odds are good that there are one (or many) firms like Pfingsten active in your industry.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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