How an RP-Managed Acquisition Preserved the Legacy of a Third Generation Family Business

 

 

 

THE PROBLEM
Identifying business value is one thing. Unlocking it – particularly when under duress – requires different skill sets.

The process is both art and a science, which is appropriate in this particular case, since Revitalization Partners’ client was a 100-plus-year-old family business whose groundbreaking innovations had transformed it into a long-time recognized material supplier to the medical diagnostics and vaccine industries leader within the medical sciences field.

However, even the most innovative companies can run into problems, as this one when did when a firestorm of external factors converged to create a crisis that threatened its continued viability.

In fact, the company had received prior advice centered on that outcome.

The owner, whose complex business model included both bioscience and food processing components, contacted Revitalization Partners to determine if there were other alternatives available.

After reviewing both financial and operational conditions, we believed the company needed to adopt a different strategy. RP recommended an operational restructuring that included developing a plan for increasing working capital by better managing inventory and identifying a lender that was better suited for the business.

The owner took our advice.

We worked with the company over the next several years to improve operations and profitability while identifying a new lender and providing more liquidity for the business.

As part of the operational restructuring, we negotiated a partnership with the company’s largest competitor that allowed our client to focus on production – its competitive advantage – while the partner managed the sales process for both organizations.

During this process an RP principal supported the owner by serving as the company’s CFO, facilitating the successful execution of these initiatives.

Eventually, the owner received an offer to buy/sell his revitalized company. Because we had worked with him over an extensive period of time and gained his trust, we were asked to manage the sale and acquisition.

Our role was to be the interface between the company and the buyer to make sure the process was managed objectively and to manage the negotiations on behalf of the company.

Sounds relatively simple, but as is often the case with middle-market business acquisitions, there were a number of hurdles to overcome.

 

UNIQUE CHALLENGES

The buyer was backed by highly sophisticated and experienced investors, and as a result, we had to prepare for negotiations with reasoned objectives and a persuasive approach to the changes we proposed.

Our client’s biologics division had experienced significant growth and was extremely profitable. The food group, however, was struggling to break even – a formidable challenge considering that it provided the by-products used by its profitable counterpart.

The company also had a defined benefit pension plan that was significantly underfunded. To further complicate matters, the CEO/Owner also owned the real estate and buildings which housed the business as well as possessing a lease agreement with the company to pay rent and other charges.

The latter served as a prime example of one of our overarching challenges: How to successfully balance the CEO/Owner’s expectations for the price he wanted to receive for the company, while managing the buyer’s expectations for the lower value they were willing to pay.

These factors, along with the desire to successfully complete the transaction within the time frame the buyer had established, presented significant challenges to achieving a successful exit.

 

PROCESS

After completing initial due diligence and financial review, the buyer presented us with an initial letter of intent to purchase the assets of the company. Working with the CEO/Owner, we evaluated the term sheet and identified areas where we wanted changes and more favorable terms.

One of the initial roadblocks we encountered was that the buyer only wanted to purchase the biologics division. That prospect was not appealing to the seller as it would leave him with an underperforming food processing business. Allowing the buyer to achieve a carve-out could result in post-closing complications.

The initial offer involved three components, including a cash payment up front; a promissory note with no principal payments until maturity; and a substantial earn-out provision. One additional deal point that required negotiation was the required targeted working capital contribution.

Our goal was to negotiate terms that would minimize any reduction in the purchase price, and which could be beneficial to the owner.

 

OUTCOME

Ultimately, the final letter of intent was accepted and signed, and the buyer and the company began their due diligence. We managed the process to ensure there were no material issues that could negatively impact the negotiated purchase price. After an extended period of negotiations, the asset purchase agreement and related agreements were finalized.

Notably, one of the final complications encountered was the beginning of the pandemic, which injected a high degree of uncertainty and volatility concerning its overall impact on the economy and, potentially, the company’s future prospects. Despite these challenges, we successfully closed the deal — with no decrease in purchase price.

The company was sold at a for a strategic valuation at
seven times multiple of trailing 12 months EBITDA.

In addition, we were successful in increasing the cash offer and the amount of the promissory note, while decreasing the amount of earn-outs with more favorable terms.

We also negotiated a series of annual promissory note payments that increased over the term of the note.

And, in one of the more pivotal aspects of the deal, we successfully convinced the buyer to purchase the food division along with the biologics group and increased the offer with an additional earn-out provision.

Other big wins included negotiating a lengthy new term lease with the buyer, resulting in a substantial increase in rent and related charges. Subsequent to closing, the owner received a favorable working capital adjustment, as well as the maximum earn-out possible under the asset purchase agreement.

 

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering, a State Receivership or Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.