Case Study | Industry: Industrial Distributorship sold to a Private Equity Group
Fact Pattern: This company is a 40-year-old, third generation company that specializes in the distribution of components used in the manufacture of specialty equipment. Because it was certified as a small business it had access to competitive set-aside contracts. The company also possessed high customer concentration with two contractors. Our buyer, a private equity group, was interested in adding the company to an existing platform. They saw the concentration as a terrific opportunity for its other products. And due to the size of the platform company it believed the small business classification would continue. We agreed on an all-cash deal price. The source of the funds was cash on the balance sheet of the PEG.
Two problematic issues arose. In legal due diligence the buyer discovered the small business certification would be lost as the aggregate number of employees amongst all its portfolio companies would not meet the threshold. Secondly, the spring 2023 banking crisis intervened. As a result, the buyer’s lenders wanted a pause on acquisitions to review all deals. After a month they approved the deal but required them to get more liquidity before they closed on our deal.
How Was It Resolved?
The small business set aside issue was resolved by deal structure. A percentage of the deal price was moved to a revenue earn-out for the concentration of the two contractors. This included potential upside to my client and no upper limit. This has proven to be positive for my client as this industry is growing.
The financing issue was also resolved. The private equity group was able to execute a purchase option on real estate from another acquisition done previously. They hired a sale/lease back broker, obtained twenty bids, and accepted the highest offer. Three months after our target closing date, the private equity group exercised their option, purchased the real estate, sold it to a REIT, and closed our deal – all on the same day.
What Was the Takeaway?
If you have a reasonable buyer, and a reasonable seller, both committed to making a deal, there is always hope of getting to close. My role was to keep all lines of communication open. This included staying on top of the buyer to keep us informed day-to-day on all activities with the financing. My seller clients played a significant role by being patient and not overreacting. They accepted the earn-out as they understood the small business certification was a real risk to the buyer but also knew the future of their industry was promising and had faith that revenues would be maintained. Education and communication and are the most important part of any deal and the greatest role of an advisor in any deal.
Kathlene Thiel, MBA, M&AMI, CBI, CVA
Kathy is an M&A Master Intermediary, Certified Business Intermediary, and Certified Valuation Analyst with forty plus years’ experience in business. She obtained a BA in Economics from Union College in Schenectady, and her early career was in sales and marketing for Procter & Gamble, Johnson & Johnson, and AT&T. Desiring to become an entrepreneur, she bought a business, The Knowledge Network, Inc., which she owned for over 14 years. After the successful sale of that company, she earned an MBA from Union Graduate College (now a part of Clarkson University) and started ThielGroup – a business sales, consulting, and valuation company. Since that time Kathy has assisted in the sale of and performed valuation services for numerous companies in various industries throughout Upstate New York. Kathy is currently the conference chair for the M&A Source and Chair-elect for 2025.
