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Owners wanted out of long-standing family business

by 25/06/2010 02:59:00 0 comments 4129 Views

THE CHALLENGE

Paul and Bob Riedlinger knew they wanted to sell their company, The Ornamental Group.

Founded in Waterloo, Ont., as Berlin Amplifier by their grandfather, William Riedlinger, the company initially made gramophone horns. When gramophone horns were replaced by amplifiers, the company started making components for wooden furniture. When the bottom dropped out of the furniture market in 1982, the brothers looked for new opportunities and settled on high-end decorative architectural mouldings and millwork.

By 2001, the company, now known as The Ornamental Group, had 275 employees, three factories in North Carolina, a factory in Waterloo, and contract plants in China. It was the largest supplier of decorative mouldings and architectural millwork to Home Depot and Lowe’s Home Improvement, and 80 per cent of the company’s revenue was generated in the United States.

However, the company was now so big it wasn’t fun any more. The Riedlingers, who had grown up in the company, loved doing custom work, but they didn’t have time for it. They also felt vulnerable: Although they provided the most profitable products in the millwork aisle, their products were a small percentage of the overall sales of that aisle.

It felt like a good time to try something new. But first the brothers needed to find a buyer and sell the company on favourable terms.

THE BACKGROUND

The key to a successful sale was to recognize that it couldn’t be done overnight. The company had been in the family for three generations and the brothers wanted to take the time to do it right. “My brother and I gave ourselves two years to prepare the company and find a buyer, and it really does take that long for a sale of any size,” Paul Riedlinger says. “To increase the likelihood of success, we had two priorities. The first was to make sure a strong management team was in place, and the second was to be pro-active about finding a buyer that was a good match with our product.”

A strong, intact management team was important because a buyer would want to ensure that the business would not be disrupted by critical managers leaving the company to take work elsewhere. As an incentive for managers to stay and support the sale, the brothers valued the company, and they offered to split with the top four managers any increase between this first valuation and the valuation when it was sold. As a result, all of the managers stayed committed to quality and growth and received a substantial financial bonus from the sale.

To find a buyer that was a good fit, the brothers leveraged their knowledge of the industry, the other players in it, and the ways in which their own firm was distinctive. They knew that an important strength of their company was their relationship with both Home Depot and Lowe’s. A dual relationship is quite rare because both of these big-box retailers prefer exclusive vendor relationships. The Ornamental Group had been able to supply both retailers because they had no competition: no other supplier was large enough to satisfy the demand.

This increased the value of the firm for the sale, but it also meant that the most important criterion in finding a buyer was to find one that could continue the dual relationship and supply to both Home Depot and Lowe’s. This cut the pool of potential buyers down.

THE RESULT

The Riedlingers’ in-depth understanding of other players in their market and sensitivity to the motivations and concerns of their employees resulted in a successful sale to Baltimore-based American Wood Moulding. It was a great fit because AWM sold to Home Depot and it had a parent company, Tenon Ltd. of New Zealand, which sold to Lowe’s.

Once the sales agreement was in place, though, the process was far from over. “It took two or three years to disengage,” Paul Riedlinger says. “We got part of the purchase price right away, the rest of it two years later, and in between, my brother and I retained shares and a seat on the board.”

The lesson is that sellers need to be cautious about looking for a quick sale. It is takes time to get your company ready internally and to find the right buyer. And the best buyers are those that recognize the value of your company and want to make sure that value is realized.

This means they will probably want your involvement during a transition period, so you shouldn’t expect to be able to disengage immediately.

Special to The Globe and Mail

Becky Reuber is a professor of strategic management in the Rotman School of Management of the University of Toronto.

This is the latest in a regular series of case studies by a rotating group of business professors from across the country. They appear every Friday on the Your Business website.

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