Who will inherit the family business? Often, it’s private equity.


When Neil Rosenthal set out to develop a succession plan for his wine importing business a few years ago, he found a different kind of heir.

Mr. Rosenthal He wasn’t ready to give up the company he started in 1977, a liquor store connected to his parents’ pharmacy on Manhattan’s Upper East Side, and their daughter wasn’t interested in taking over. So Mr. Rosenthal sold his share of the business to a buyout firm and stayed on as CEO.

“If I died today, I’m sure my business would go on without me,” said Mr. Rosenthal, 76.

Private equity firms are joining America’s family businesses. An industry that made its name taking on large private corporations has shifted its focus to smaller targets, bringing together car washes, pet food makers and specialty manufacturers, some of which have been family-owned for generations.

Family businesses are particularly attractive to buyout firms, and they are throwing out the traditional private-equity playbook to attract them. Management is often left intact. Owners hold a large stake. Buying companies have promised to retain employees and plow more money into the businesses.

Still, some buyout targets carry heavy debt loads that turn a once-profitable company into a money loser. Families can relinquish control so that their private equity owners realize benefits when the business is eventually sold. Communities and employees may, by extension, lose their personal connection to company ownership.

At the same time, the deal helps older business owners ensure their companies’ future after they’re gone. Many are finding that their own children have no desire to take over. Those who want their children to stay involved will find that their children need more technology and financial literacy.

Even owners who want to continue operating often want to divest their assets from their businesses. They’re ready to share the risk they’ve carried for years alone, but they’re not ready to hand over their legacy to a bigger competitor.

The biggest concern for Mr. Rosenthal was maintaining his decades-long relationships with winemakers in Italy, France, Switzerland and Spain.

After evaluating nine bids, including one from a large wine company, he and his wife and wife, Kerry Madigan, opted to sell a majority stake to Pittsburgh private equity firm Incline Equity Partners last year.

After Incline invested, the holding company that owns Rosenthal Wine Merchant bought one of its distributors and another boutique wine business. Mr. Rosenthal identified both targets but would not have approached them without Eklin’s support.

“For 45 years, our capital has been in danger.

Companies with similar or adjacent businesses looking to add bulk have long been seen as preferred buyers. They can pay more—as mergers of businesses often result in significant cost savings—and grow sales faster. Lately, however, deal-hungry private equity firms have been exiting these strategic buyers, bankers say.

Private equity firms can pay more when they make acquisitions of previously owned companies, essentially acting as strategic buyers. Sometimes they buy several companies in the same industry and merge them together.

Untouched by private equity or public shareholders, a family business can pave the way for the biggest profits because most of the financial or operational controls can be returned to juice – by making production more efficient, increasing contracts, merging with competitors or financing. Expanding to new markets – has yet to be pulled. Many such businesses carry little debt.

Between $50 million and $99 million in equity—the portion of the purchase price not covered by debt—has averaged returns of 25.4% since 2010, 19% for deals of $1 billion or more and 23.4% for all. Deals, according to DealEdge.

In the year In 2014, some members of the Lang family were nearing retirement and wanted to cash in on their 80-year pet-food business. A Greenwich, Conn.-based firm that invests in consumer brands.

Americans’ obsession with their pets recently prompted Ensworth Pet Nutrition LLC to partner with celebrity chef Rachael Ray to expand its premium offerings under the Nutrish brand. L Catterton wanted to bring the brand to the wider market.

But first the organization had to defeat the Langs. L Catterton Co-CEO Scott Dahnke traveled to the company’s headquarters in Meadville, Pa., two hours from the major airport, and was waited on for three hours by four family members and the company’s CFO.

“For them, it was a political town hall where half the people were progressive and half the people were conservative,” Mr. Dahnke said. “I somehow survived the first meeting.”

The family chose to sell their 42 percent stake for $200 million, but gave El Catton free rein to run the company.

Ainsworth paid off debt, expanded his marketing budget and cleared his contract. It expanded its product offerings and moved into new distribution channels. The company acquired Triple T Foods Inc., which manufactured some of its products. In the year In 2018, annual sales of the Nutrish brand grew sixfold to $700 million.

When JM Smucker Co.

In the year In 2018, they bought Ainsworth for $1.9 billion, based on the value of their stakes in which L Catterton and the Lang family invested about eight times their money in private equity.

“This is truly the American dream,” said Sean Lang, CEO of Ensworth, when El Caterton invested.

L Catterton Managing Partner Andrew Tabb, far left, and colleague Scott Dahnke, right, with members of the Lang family during dinner in 2018.


Photo:

Unsworth’s Pet Nutrition

An acquisition can come at different points in a company’s life cycle. Some include taking a public company private; Others are to set up a private company that will one day go public. Private equity firms often buy companies, each tweaking and tweaking the business model to make more profit along the way. Sellers who own their shares can earn huge rewards when the business is resold.

Bill Clendenon sold his Eugene, Ore., workplace safety company to private equity firm Riverside in 2006. In 2012, he sold Riverside Health & Safety Institute Inc. to another firm, DW Healthcare Partners of Toronto, who then sold it back. Riverside in 2015.

In the year In 2019, Riverside sold HSI to Chicago-based Waud Capital LLC. With each subsequent sale, Mr. Clendenen maintained his stake in the company and each time more than tripled his money.

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The company has grown so much that the check Mr. Clendenen recently received for Wade’s sale of less than 5% was larger than what he and his original partner received when they first sold in 2006.

Although he no longer works for HSI, Mr. Clendenen still owns a small part of the company and expects to collect another check when Wood is sold.

“It changed my life and my family’s life,” he said. Many people think private equity is all about slash and burn, but it’s all about growth.

Buyouts often involve risk because a significant portion of the purchase price is covered by debt. Many private equity-backed companies have gone bankrupt due to insolvent debt burdens, resulting in the loss of thousands of jobs.

As private equity firms buy more companies, those risks extend to more workers and communities, a concern that has prompted lawmakers including Sen. Elizabeth Warren (D., Mass.) to try to further regulate the industry.

Private equity firms and private equity-backed companies will employ 11.7 million workers with nearly $900 billion in annual salaries and benefits by 2020, according to a report by private equity industry lobbyist U.S. consulting firm EY. Investment Council.

Gary DeAngelo had a stake in the sunscreen company when he sold it to private equity in 2012, but the buyers brought in new management.

The new CEO from a large consumer packaged goods company has ramped up production with the goal of boosting sales of No-Ad, Ocean Potion and Bullfrog sunscreens.

The strategy was a flop. Retailers stock up on sunscreen during the busy summer months and return what they don’t sell at the end of winter. The company ended up with a stockpile of waste. Warren Feder, a banker at Carl Marks Advisors, advises family businesses that profits have evaporated and losses have increased.

The company got a new CEO who fixed some of the damage, but in 2015, the debt of about 30 million dollars became too heavy. He was forced to pursue asset sales to avoid bankruptcy and avoid missing the all-important summer season. Mr. DeAngelo made an unsuccessful bid to buy it back. He did not respond to requests for comment.

The new owner, private equity-backed Kik Custom Products Inc., closed Sun & Skin Care Research’s Florida factory, putting 130 people out of a job.

When John McGuffey decided it was time to sell his company, which makes pedestrian signs that help blind people cross sidewalks safely, he had one question: No layoffs.

Mr. McGaffey’s father founded the business in 1969. With 80 employees, it is one of the largest employers in its hometown of Greenville, Texas.

After a process involving 10 bidders, including six private equity firms, Mr. McGaffey sold a majority stake in Polara Enterprises LLC to Los Angeles-based Vance Street Capital. Instead of suits and loafers, Vans’ partners wore jeans and polo shirts. They took a commercial flight. And they agreed not to stop any work.

Mr. McGaffey, 64, is retired but sits on Polara’s board. His son and son-in-law, who are in their mid-30s, remain as executives.

“I would have liked to have left it with my sons, but we felt that if we could get an outside investor, we would have a lot to gain with our technology,” said Mr. McGaffey, whose voice could be heard over the intersection. Locally, teaching pedestrians when to cross. “I didn’t want to risk all my capital.”

Write to Miriam Gottfried at Miriam.Gottfried@wsj.com

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