MScBA Master Thesis
Family Business and Private Equity
Does the succession problem provide an opportunity for an innovative
cooperation?
By
Joost A. Brouwer
Supervisors: Dr. Hendrik Snijders & Dr. Gerda Gemser
Preface
Each success only buys an admission ticket to a more difficult problem.
Henry Kissinger, Wilson Library Bulletin, March 1979
When I started my internship at the Zernike Group more than seven months ago, I had no idea where the assignment would take me. Being a novice to private equity and family businesses, the first months proved to be an exploration of two dazzling, extensive and very appealing worlds. As the time passed by, the subjects revealed more of its specific problems and challenges such as the succession problem and the quest for new investment targets. In this thesis, I have tried to combine the two, superficially and historically opposing worlds in order to explore a cooperation that could be attractive for both family businesses and private equity.
As a side effect, this process turned out to be a fantastic learning experience. Not only did it gave me a brief glimpse on international projects and helped me to familiarize with potential future career paths such as the family business and private equity. It also further introduced me into academic research in its full glory of chaos, creativity and obstacles. During the last couple of months I was certainly confronted with several problems and diabolic details, which, turned out to be gateways, or admission tickets, to even more difficult problems.
The successful confrontation of these obstacles would not have been possible without the support and feedback of my supervisor Dr. Hendrik Snijders. Although he certainly not always said what I desired to hear, he helped and guided me in the entire process. Lastly, I want to thank Lex de Lange for the opportunity to be an intern at the Zernike Group and my co-intern, Mark Moman, for all the coffee and feedback.
May it be a good and worthwhile read,
best regards,
Joost Brouwer May 2006, Groningen
Management Summary
According to many experts, the majority of the family businesses (FB) are threatened in their existence by their problem to find a successor. The lack of successor candidates within the family forces FB owners to sell their business to an outsider. This will be problematic as the large scale retirement of the babyboom generation will result in a massive flood of FB for sale. The future of thousands of companies and a considerable amount of jobs is at stake and depends on a successful transition of management. At the same time, although there are many management buy-in/buy-out (MBO/MBI) candidates, there are too few buyers who have the capital to finance such deals. Moreover, the unique interrelation of family and business results in high levels of informational opacity and emotional interest which culminates into a highly risky investment. It is for this reason, that banks are often unable to provide capital to backup the MBO/MBI candidates Private equity (PE) firms can be an alternative, as they specifically focus on investment opportunities with high levels of informational opacity. Moreover, the current fierce competition in their traditional investment sectors forces them to look for other investment options. Traditionally, FB and PE firms avoided each other as the long-term conservative strategy of the FB clashed with the short-term growth oriented PE strategy. Under the current circumstances, however, collaboration can be interesting for both parties. After all, the PE firm can offer the capital and support to solve the succession problem, whereas, the FB with its hidden growth potential offers a potentially attractive investment alternative for the PE firm.
To analyze this cooperation, this study attempts to answer the following question: “Can a
cooperation of family businesses and private equity offer a solution for the succession problem of FB and an attractive investment opportunity for PE firms?” In an analysis of the theories on FB
Therefore, cooperation with a PE firm turns out to be a satisfactory solution to the succession problem of the FB. On the other hand, the PE firms can use their informed capital to overcome the informational opacity that characterizes the FB to decrease the associated risk of the investment. Also, the traditional large emotional problem of FB owners to “let go of their baby”, is strongly moderated by the lack of successors, which almost forces them to sell to a PE firm. As a result of the large scale succession problem, PE firms will be able to obtain FB for a relative low price. Moreover, the experience of PE firms to professionalize companies helps to unlock the growth potential of the FB which consists of strong brands, overcapitalized balance sheets and strong commitment to bring the business to a higher level and realize a profitable exit.
To conclude, FB owners who face retirement are strongly recommended to evaluate a sale to a PE firm. A well prepared MBO/MBI that is supported by a PE firm can bring in the capital, improves the business’s future and facilitates a satisfying exit of the family to meet the preconditions of the FB. At the same time, PE firms looking to invest in FB with a succession problem should understand the value of the FB, be selective and adjust their value creation strategy to match the specific situation. Further research is required on value creation strategies involving efficiency, innovation, export and integration in order to provide additional insight in the success of specific PE strategies. Nevertheless, the results of this study indicate that cooperation proves to to be attractive for both partners under the condition that they are aware of each others strengths and weaknesses and deliberately choose for each other, rather than being condemned to a forced marriage.
Table of contents
1. INTRODUCTION ... 6
1.1RESEARCH OBJECTIVES AND MOTIVATION... 7
1.2RESEARCH QUESTION... 8
1.3STRATEGY AND INNOVATION... 8
1.4METHODOLOGY... 9
1.5OUTLINE OF THE STUDY... 9
2. FAMILY BUSINESSES...10
2.1INTRODUCTION...10
2.2THE FAMILY BUSINESS MODEL...11
2.3THE SUCCESSION PROBLEM...15
3. PRIVATE EQUITY ...18
3.1DEFINITION...18
3.2PRIVATE EQUITY CYCLE...19
3.3SELECTION PHASE...19
3.4MANAGEMENT PHASE...20
3.5EXIT PHASE...20
3.6SUCCESS PRIVATE EQUITY...21
3.7COMBINATION FB AND PE ...22 4. CASE STUDIES ...23 4.1INTRODUCTION...23 4.2SAMPLE SELECTION...23 4.3DATA COLLECTION...24 4.4ATIRA CASE...24 4.5ENDURA CASE...27 4.6INVENTA CASE...30 4.7CONCLUSIONS...33 5. DISCUSSION...34
5.1FB:THE PRECONDITIONS OF THE FAMILY...34
5.2FB: THE PRECONDITIONS OF THE BUSINESS...36
5.3FB: THE PRECONDITIONS OF THE OWNERS...37
5.4PE:OBTAIN AT A GOOD PRICE...38
5.5PE:ABILITY TO ADD VALUE...40
5.6PE:POTENTIAL TO REALIZE A PROFITABLE EXIT...42
6 CONCLUSIONS...43
6.1RESULTS...43
6.2PRACTICAL IMPLICATIONS...44
6.3PROPOSITIONS FOR FURTHER STUDIES...44
REFERENCES ...48 APPENDIX I: CASE STUDIES INTERVIEWS
1. Introduction
Experts on small and medium enterprises (SME’s) warn for a succession problem that will threaten the survival of thousands of companies. Although estimates on the exact number vary, prior research indicates that in the Netherlands, about 15.000 to 20.000 companies will be transferred each year in the next 5 years (Flören, 2002; ING, 2004; Rabobank, 2004). And although research on European scale is scarce, an expert panel of the European Committee estimate the number of ownership transfers on a European level around 600.000 companies a year, involving over 2 million jobs each year (Europese Commissie, 2002). As such large-scale business transfers have an enormous impact on the national economies; it is of extreme importance to occur smoothly (Rabobank, 2004).
This might be problematic, however, as the majority of these businesses can be characterized as family businesses (FB) which usually have great trouble making the transition from one generation to the next (Barnes and Hershon, 1976; Lansberg, 1988). This problem is often underestimated as there is little information available about the specific problems of the FB, which can be explained by the high level of informational opacity involved in FB (Flören, 2002). Nevertheless, Ward (1987) found that an alarming number of 66% of all FB do not survive the transition to the second generation. Research by the European Committee provides strong evidence that almost half of this group will disappear (Flören, 2003). On a national level, these high failure rates will lead to high losses in employment and gross national product.
This problem recently increased by the decreasing interest of offspring to join the FB (Stavrou, 1999) and forces FB owners to look for non-family successions. The large-scale succession, however, makes it impossible for all FB owners to find buyers with the capital to finance these acquisitions (Upton and Petty, 2000). Moreover, banks are reluctant to finance such deals as the informational opacity makes it difficult to analyze the situation and successions are considered to be very risky (Flören, 2002). This forces FB owners to look for innovative sources of capital to finance the deals.
Traditionally, PE firms and FB were reluctant to cooperate as the long-term strategy of the FB collided with the short-term growth strategy of the PE firms (Sharma, 2004; Upton and Petty, 2000). These days, the succession problem forces FB owners to consider such an alternative. Although reluctant to exit the company, they might have no other choice than to sell it to a PE firm, which is at least a much better option than liquidation. At the same time, the succession problem offers an alternative investment opportunity for PE firms that currently face oversupply of capital and hyper competition in traditional PE sectors (Ernst & Young, 2005). A collaboration of FB and PE would be innovative for both parties but could be a solution to the succession problem of the FB and offer attractive returns for the PE firm. Recently, this line of thought is followed by various experts.
Stoy Hayward (2003) for example urge FB owners to consider PE to finance transitions and PE trade journals advice that the nearby large scale retirement of FB owners offers opportunities that PE companies can not afford to ignore (Hickey, 2005; PE Week Wire, Oct 13th 2005). Academically, however, this issue has not been investigated and a further exploration of this subject is the goal of this study. This study specifically focuses on the FB with 10-99 employees, as this category is often used and specifically threatened in its survival by the succession problem (van der Eijk, Flören and Jansen, 2004). Moreover, these companies are attractive but currently overlooked potential portfolio firms for PE firms (Stein, 2005).
1.1 Research objectives and motivation
1.2 Research Question
To explore the combination of FB and PE, this study uses the following research question: “Is a collaboration of family businesses and private equity a preferable solution for the
succession problem of FB and an attractive investment opportunity for PE firms.” In this study,
the succession problem is defined as the problem of FB to make a successful transition in both management and ownership subsystems. Figure 1.1 provides a schematic overview of the combination of FB and PE. This combination with FB looking for a solution for the succession problem on the one side and PE firms looking for an alternative investment opportunity on the other side is the core of this study.
1.3 Strategy and Innovation
This study is a thesis for the master Strategy and Innovation at the business school of the University of Groningen. Although the subject of this study is not an obvious choice for this master, it certainly has various interesting links. First, the cooperation between FB and PE is a novel strategy for both parties and as such falls under Schumpeter’s (1934) “the carrying out of
new combinations of the means of production” definition of innovation. Schumpeter (1934) also
was the first to divide innovation between product and process innovation, a division that was later expanded to include organizational, marketing, business model and, more recently, management innovation (Hamel, 2006). Although the cooperation between FB and PE can result in various types of innovation it has specific and important organizational and management innovation aspects. PE firms try to rigorously change organizational aspects such as strategy, HRM, finance and knowledge management and install new growth-oriented non-family managers. The goal of these large changes, which are discussed in greater detail in the following chapters, is to innovate the organizational and managerial aspects to overcome the traditional and often rigid principles of the FB and grow the business.
Second, a study carried out by the EIM (2006) among Dutch SME’s showed that FB are less innovative than non-FB. The same study, however, found that strategy’s that are more formalized, risk-oriented and focused on growth have a positive effect on the innovativeness of a business. As PE is known to focus on growth, take more risk and formalize the company’s strategy, the PE financed non-family succession might very well have a positive effect on the innovativeness of the former FB. Although fascinating, this remains a subject for later studies as it is crucial to first generally explore the PE financed non-family exits.
Family Business Private Equity
Investment opportunity Succession problem
1.4 Methodology
This study uses the hourglass model (Figure 1.2) to structure a study on PE financed non-family succession as a solution to the succession problem of the FB.
Following this model, the report starts with the construction of a theoretic framework from existing literature on FB and PE. The theoretical framework acts as the guideline for the rest of this study and helps to construct theories (Pandit, 1996). This framework consists of a number of preconditions for a successful cooperation between FB and PE, which are used and further analyzed in the rest of this study. The second step is the waist of the hour glass and focuses on the three case studies of former FB which experienced a PE financed non-family succession. These case studies further focus on the cooperation between FB and PE and “increase the likelihood of
creative reframing into a new theoretical vision” (Eisenhardt, 1989:p546). Next, the study
broadens again as the case study results are discussed and compared to the theoretic framework and supporting expert interviews. Moreover, this study attempts to use the existing FB and PE theories, the case studies and the expert interviews to achieve a triangulation effect (Jick, 1979). This triangulation is “the combination of methodologies in the study of the same phenomenon” (Denzin, 1978:p291) and a metaphor for the military strategy to use multiple reference points to pinpoint the exact position of an object (Jick, 1979). As the study is explorative in nature, one should not expect this study to deliver a blueprint for the combination of PE and FB. Rather, this study provides a rough sketch, including theoretic propositions for future research.
1.5 Outline of the study
The plan of this paper is as follows. First, section 2 and 3 provide an overview of the current literature on FB and PE respectively and construct a theoretic framework as a guideline
Figure 1.1: Research model Source: Mol (2004)
Hourglass model
1 Theoretic framework 2 Case studies
2. Family businesses
2.1 Introduction
Family businesses (FB) are often underestimated and little is known about their specific problems. Flören (1998) found that FB are overlooked because they do not have to publish annual reports, seldom publish the family’s involvement and have a complex ownership for fiscal reasons. In other words, the FB are known for their informational opacity (Berger and Udell, 1998) which makes it difficult for outsiders to analyze them. These reasons make it very difficult to set the FB apart from other companies, what explains why no clear data is available on the amount and importance of FB. Experts differ in their estimates on the amount of FB, but most of the research done on this subject found that between 50% and 75% of the companies in the world is family owned (Astrachan and Shanker, 2003; Flören, 2002). More specifically, Flören’s (2002) research indicates that FB in the Netherlands account for 40% of the employment and almost 50% of the gross national product (GDP). It surprised Flören to find out the contribution of FB to the GDP is higher than to the national employment, he expects the GDP ratio to be overestimated as a result of several required assumptions. In the end, he assumes the contribution of FB to the employment level and GDP to be around 40%. To be able to set the FB apart from other companies it is important to use a clear definition. Some authors (Barnes and Hershon, 1976; Lansberg, 1988) use the level of equity held by a single family as the guideline to define the family business. Others prefer the degree of implementation of the family in the management structure (Keppner, 1983) or the intention to keep the business within the family (Astrachan and Shanker, 2003). In recent years, authors (Bowman-Upton, 1991; Brooks, 2002) use a combined evaluation of equity ownership and managerial influence to define a FB. This study uses the strict definition of Flören (2002) who defines a business as a FB if it meets at least two of the following criteria: 1. More than 50% of the shares or certificates are owned by a single family.
2. A single family exercises considerable influence.
3. A majority or at least two members of the board of directors are from one family. As the FB includes a large variety of company sizes and this study’s main interest is in small and medium FB this study is restricted to FB with 10-99 employees. This is a category that is often used (Flören, 2002) and allows to analyze small and medium sized FB without the deviating results from very small companies (0-10). Therefore a fourth criteria is added to the definition of FB for this study
2.2 The family business model
To analyze the unique organization of the FB this study uses the three circle model, (Tagiuri and Davis, 1982). This model, which is shown in figure 2.1, is an adaptation of the older two circle model (Donnelly, 1964) and includes ownership as a separate system.
In the FB, like in the three circle model, family, business and ownership combine “to
produce a joint system operating according to rules derived from the needs of the separate parts but adapted to the needs of the whole” (Davis, 1983:p48). As all three subsystems have their own
rules, requirements and goals and individuals can be a member of any or all systems the FB is a complex organization. Brooks (2002) really hits the nail right on the head with the comparison of the FB to a three legged chair. Like a three legged chair, a FB with one instable subsystem can not function and will fall apart. The interrelation between family, business and ownership separate FB from non-FB.
Numerous researchers have tried to analyze FB and came up with several advantages and disadvantages. This research follows Tagiuri and Davis (1982), who developed the concept of bivalent attributes to analyze the strengths and weaknesses of the FB. According to Tagiuri and Davis, bivalent attributes are unique, inherent features of the FB which are the source of both advantages and disadvantages of the type of firm. The success of a FB is determined by its ability to manage the bivalent attributes in such a way that advantages are used and disadvantages avoided. In their study, Tagiuri and Davis defined seven major bivalent attributes: simultaneous roles, shared identity, lifelong common history, emotional involvement and ambivalence, private language, mutual awareness and privacy and the meaning of the FB. In the years since the introduction of the bivalent attributes concept various authors such as Flören (2002) have defined a different set of attributes. They argued that Tagiuri and Davis focused too much on
A= Family subsystem: Consists of members of the immediate family (father, mother and siblings). This system is based upon emotions and is designed to support the needs for security, growth and love. The focus is internal.
B= Business subsystem: Composed of employees, customers and creditors who demand productivity and work towards operational effectiveness. The focus is external.
C= Ownership subsystem: Consists of family and non family members who oversee management, create policy and influence strategy through a board of directors. This system is focused on return on investment and the viability of the firm.
The director
The directors in the FB generally hold their positions far longer than directors in non-FB (Flören, 2002). This creates an organization with stable and effective management and a personally involved and experienced leader (Tashakori, 1980). At the same time, however, the informal and centralistic style of the FB directors (Smith, 2003) makes the organization very dependant on them and limits the development of a good managerial and support staff (Donckels and Fröhlich, 1991). This style may suit in early startup stages of the business but hamper the development of the business at a later stage (Barnes and Hershon, 1976). Moreover, the education (Pérez-González, 2003) and management skills (Flören, 2002) of the FB directors are often lacking in areas such as financing and strategy. As a last point, Flören (2002) argues that FB directors may lack the motivation to completely focus on growth and performance in the business once they have reached a level of income they are comfortable with.
The business: strategy and culture
The close involvement of the family in the business creates a conservative and inward focused organization with a long-term commitment (Flören, 2002). FB take advantage of the conservative and inward focused culture as it shapes the organization into a secret and cohesive business with strong loyalty ties (Davis, 1983). In addition, the long-term perspective helps the FB to resist the pressure for short-term returns and to create a reputation of trust and strong brand names (Davis, 1983; Donnelly, 1964). The other side of the coin is that FB often find it difficult to keep in touch with changes in the environment (Donckels and Fröhlich, 1991) and to innovate and grow (Holland and Boulton, 2001). Also, FB often fail to utilize their competitive advantages that arise from the secrecy and long-term perspective (Flören, 2002).
Human resource management
FB are known for their HRM stability as they do not quickly expand their work force nor lay off their employees easily (Flören, 2002).
Figure 2.2: FB model and bivalent attributes 1 Director
2 The business: strategy and culture 3 Human resource management 4 Communication
5 Balancing business and family 6 Ownership issues
Furthermore, FB are reported to treat their employees better (Lansberg, Perrow, Rogolsky, 1988), which is one of the reasons why employees in FB are more loyal and committed compared to employees in non-FB (Davis, 1983; Donnelly, 1964). At the same time, FB often lack a professional HRM policy (Lee and Rogoff, 1996, Tashakori, 1980) and are characterized by different compensation levels and less training than non-FB (Flören, 2002). Altogether, this makes it more difficult for FB to attract talented outside managers (Upton and Petty, 2000).
Communication
The long history between family and non-family members in the FB certainly has its impact on the communication in the business. The common history and high levels of trust improve communication in the FB (Tagiuri and Davis, 1982) which strengthens the business and decreases the possibility of conflicts (Flören, 2002). Nevertheless, family members find it difficult to discuss the purpose of the business and often avoid formal goal-oriented discussions (Lansberg, 1988). Also, communication in FB often lacks objectivity and crucial information and feedback is often not provided in time (Tagiuri and Davis, 1982).
Balancing business and family interests
The interrelation between family and business brings more emotion and family feelings into the business. This emotional bond brings the pride, motivation and strong commitment of the family in the business, which can be a true competitive advantage (Flören, 2002). However, the FB can only seize this advantage if it can balance the needs of both systems, or else the bond might very well damage both systems. In such a scenario, the FB is in danger of being ruled by nepotism (Donnelly, 1964; Tashakori, 1980) and conflicts from one system easily spread over to other systems (Holland and Boulton, 2001). A well known example of such a conflict is between the director and his successor, which at the same time are father and son (Flören, 1999).
Ownership issues
At the same time, the ownership of the family can dramatically influence the FB. This shows in the reluctance of FB owners to use external finance (Sharma, 2004) or to cooperate with other companies in joint ventures (Flören, 2001). This certainly limits the growth potential of the FB (Flören, 2002). Moreover, the ownership of the firm is often not professionalized which lead to badly planned ownership transfers (Flören, 1999).
Financial issues
Families often consider the resources from both the family and the business as one pool, adding and subtracting money from the business whenever it suits them (Brooks, 2002). This may provide the company with extra resources in dire times, but it often restricts the resources available for investment as well. Combined with the reluctance to use external capital and use low debt/equity ratio’s (Flören, 2002) this often seriously harms the growth opportunities (Harvey and Evans, 1995). These issues can be explained by the competition for control, liquidity and capital by the family, shareholder and business subsystems respectively. As capital is scarce, the competition within the business triangle (Dreux, 1990) is bound to restrict the demands of at least one of the subsystems, which often makes the business less effective as a whole.
2.3 The succession problem
The greatest problem for FB is the transition from one generation to the next (Lansberg, 1988). And although the transition of management is a threat for every organization (Chrisman et al, 2003) the problem is significantly greater for FB (Sharma, 2004). The widely respected and often quoted study of Ward (1987), found that only 33% of the FB survive to the second generation, a survival rate that is repeated in the transition between the second and third generation. To explain this enormous survival rate, this study turns to the three circle FB model and the seven bivalent attributes. In a FB, the three subsystems of family, business and ownership move in a sequence of relatively stable stages which end in a transition, a period of change between the stages (Gersick et al, 1999).
In such periods of change, a transition in the management subsystem is often accompanied with a transition in the ownership system (Barnes and Hershon, 1976; Chrisman et al, 2003). This is typical for the FB and complicates the management transition compared to non-FB. After all, the organization now not only has to cope with a change of management, but also with a change of ownership. This study follows Flören (2002) in that a combined ownership and management transition is defined as a succession in the FB. Therefore, a succession problem is the problem of a FB to successfully pass the transition of ownership and management.
Aside from the parallel transitions, there are several factors that derive from the bivalent attributes and can threaten the success of a succession. These factors are a result from the role of the director, the position of his successor and the characteristics of the organization itself. First of all, there is the special status of the director in FB. This status derives from the dependency of the FB on their director, “not only for their leadership and drive but also for the connections and
technical know-how” (Lansberg, 1988:p120). The dependency on centralized and loosely
organized management often leaves the FB unprepared to function without its leader.
Secondly, there is the position of the successor. As the FB owners generally like to continue the control of the family over the business (Sharma, Chrisman, Pablo and Chua, 2001) the new manager must originate from the same family as the former owner. This narrows the choice for a successor and the chance of selecting a capable and willing successor (Stavrou, 1999). Thirdly, characteristics of the organization itself complicate the succession. The bivalent attributes showed that planning and the discussion of difficult subjects is often avoided, which is a major reason for succession failure (Lansberg, 1988). These characteristics increase the failure rate of the non-voluntary (House and Singh) and unpredictable (Gersick et al, 1999) successions (Lansberg, 1988). Another problem that derives from the characteristics of a FB is a lack of viability of the organization (Bowman-Upton, 1991). Aside from general economic causes, the major reason for this situation is the tendency of FB to forestall investments and changes which can leave the organization unfit for continued operation in a changing environment (Flören, 2002).
Regardless of the above, a transition is not only the source of failure and uncertainty. On the contrary, a transition phase can be very beneficial to a company, as it is a good moment to reassess the business and offers great opportunities for focus and growth (Gersick et al, 1999). In order to take advantage of this opportunity a business owner has to make difficult choices. Arguably the most important choice to make in a transition phase is the selection of the successor of the FB. And although most of the FB owners desire to keep the business within the family (Sharma et al, 2001), a majority of the FB owners are forced to sell the business to an outsider. This is a result of the difficulty of a family succession and the decreasing interest of offspring to join the FB (Stavrou, 1999).
If the company, however, lacks good candidates or if they are not interested in an MBO, an MBI might be more preferable (Wright and Robbie, 1996). Flören (1998b) found that there are plenty of MBO/MBI candidates, but that they often lack the capital to finance the acquisition. Banks often can not finance the ownership transitions as they provide capital based on risk and securities (Van der Eijk et al, 2004). FB owners should therefore adapt their strategy and tap into a new source of capital to finance the successions. PE firms could be an attractive option as PE has the informed capital to overcome the informational opacity of the FB (Keuschnigg, 2003) and the ability to professionalize companies (Sahlman, 1990).
Such deals only take place sporadically (Van der Eijk et al, 2004) which can be explained by the reluctance of FB owners to use equity capital. Regardless, authors such as Harvey and Evans (1995) and Stoy Hayward (2003) endorse the PE option and urge the FB owners to consider equity capital for successions. As this is an unexplored area, this study continues the work of Upton and Petty (2000) and further examines the combination of FB and PE. More specifically, this study uses the three circle model of the FB to determine the success of a PE financed family succession. Figure 2.4 presents the model to evaluate the success of a non-family succession which is based on the preconditions of the three FB circles.
This model is in line with Sharma, Chrisman, Pablo and Chu (2003) who argued that the success of a succession does not only depend on its effectiveness, but also on the satisfaction of the family. As one can see, the three subsystems of the FB all have a specific demand to be fulfilled in order to consider the succession a success.
In the next chapter, the theories on PE are analyzed to explore the potential partner of the FB.
Figure 2.4: FB preconditions for non-family succession
3. Private Equity
3.1 Definition
Before considering the combination of private equity and family businesses it is good to first formulate a definition for private equity, as this is often the cause for confusion. Most authors agree that PE is a pool of capital that is used to make risky yet high potential investments (Gompers and Lerner, 2002; Robbie and Wright, 1998). The confusion starts, however, when venture capital (VC) comes into play. Some authors, like Wright and Robbie (1998), use VC as a term that includes all PE investments. Others prefer to define VC as early stage investment and separate it from later stage investments (Sahlman, 1990; Barry 1990). This study follows Sahlman and Barry to separate VC from the later stage investments. As FB with a succession problem are existing organizations and often have a long operating history they are typical later stage investments. Therefore, the scope of this study is restricted to later stage PE, although some studies on VC are used to overcome the lack of theory on later stage investments.
To identify and define PE it is important to know what type of investments it makes. Gompers and Lerner (2002) argue that PE firms provide capital in situations which traditional sources, such as banks and wealthy individuals, determine too risky to finance. In their study, Gompers and Lerner found that there are four factors that characterize such situations; uncertainty, asymmetric information, the nature of the assets and the market conditions. The asymmetric information is crucial here and describes a situation where information about and action from the investment target are hidden (Amit, Brander and Zott, 1998). This makes it difficult for the investor to gather the information required for a good analysis of the investment target. To conclude, investment opportunities which posses high levels of the limiting factors are highly risky which makes traditional investors avoid them (Sahlman, 1990). In contrast, PE firms specifically focus on such investment opportunities; it is their niche (Amit et al, 1998). With the use of informed capital, consisting of both money and managerial advice (Keuschnigg, 2003), PE firms can overcome the four limiting factors, whereas traditional sources often can not (Amit et al, 1998). In the end, the goal of PE firms is to maximize the value of their investment target and sell it at a profit (Gompers and Lerner, 2002).
To conclude, this article uses the following definition for PE: Private equity is a pool of
informed capital that is invested in later stage situations that are characterized by limiting capital access factors, with the goal to increase the value of the investment and sell it at a profit.
3.2 Private Equity Cycle
To describe the PE process, this study uses Gompers and Lerner’s (2001) model, which describes PE as a cycle that starts with a PE firm raising a fund and “proceeds trough the
investment in, monitoring of and adding value to companies and continues as the firm exits successful deals and returns capital to its investors (Gompers and Lerner, 2001:p152). Although
this model was created for VC, it is applicable to later stage investments as well, as these investments are organized in the same cyclical process. Using this model, which is shown in figure 3.1, it can be concluded that the success of a PE firm is dependant on its ability to select and invest in, manage and add value to and find a good exit for the portfolio companies. The following sections analyze these three phases of the PE cycle in more detail.
3.3 Selection phase
The PE definition showed that PE firms can use their informed capital to develop a competitive advantage in situations that are characterized by limiting capital factors. To develop the informed capital, PE firms specialize in specific industries or development stages (Barry et al, 1990) to gain experience and industry contacts which are required for good selection and advice (Megginson, 2001). This helps them to select only the potentially most successful companies (Amit et al, 1998) which is required as many firms lack the quality and would provide impossible challenges to the PE firms (Keuschnigg, 2003). Tyebjee and Bruno (1984) analyzed this selection process and found that PE firms identify the attractiveness of a potential investment by the expected return, the perceived risk and the cash-out potential of the investment. In order to determine these factors, PE firms rigorously investigate and evaluate the investment opportunity, a process defined as due diligence (Schwienbacher, 2002). In this process, the PE firm uses its prior developed experience and capabilities to get the insight in the investment opportunity that is Figure 3.1: PE Cycle
Source: Gompers and Lerner, 2002
1 Begin PE cycle: raise fund, selection and acquisition of portfolio companies 2 Management and adding value to portfolio companies
The actual price that is paid and the stock percentage that is received by the PE firm are the result of a negotiation process. In this process, the price of the firm is determined by the perceived value of the company (Seppa and Laamanen, 2000), the determination of buyer and seller (Porter, 1980), the negotiating skills of both parties and the overall state of the PE market (Megginson, 2001). After the deal is closed, it is up to the PE firm to manage the investment in such a way, that it grows and becomes more valuable.
3.4 Management phase
The next phase of the PE cycle is the management of portfolio companies. In this phase the PE firm has the task to support and control the portfolio firm in such a way that its value is increased (Hellman and Puri, 2002). In order to realize this, PE firms focus on growth, do not measure too many details, work the balance sheet, avoid sentimentality and hire hungry, result-driven managers (Rogers, Holland and Haas 2002). To exert these five disciplines, later stage PE firms turn to the same managerial devices as VC’s. Hellman and Puri (2002) found that PE firms control their portfolio companies with a combination of support and control. On the one hand, PE firms support their portfolio companies by managerial advice (Chrisman and McMullan, 2004), assistance to enter new markets (Maula and Murray, 2001), a network of business contacts and reputation capital (Bottazzi and Da Rin, 2002). On the other hand, PE firms exercise strict control over their portfolio companies by frequent monitoring (Jeng and Wells, 2000), board representation (Barry et al, 1990), the right to remove management (Hellman and Puri, 2002) and the right to withdraw any additional financial support (Sahlman, 1990). In the end, it is exactly the combination of carrots and sticks that provides the PE-backed firms with an advantage over other firms (Bottazzi and Da Rin, 2002) and leads to growth and added value. After this, the next step is liquefying the investment to make a profit.
3.5 Exit phase
In less promising ventures the PE firm therefore has to turn to other exit strategies such as the trade sale, where another company buys the portfolio company for strategic or financial purposes and the management buyout, where the company is bought by the existing management (Bottazzi and Da Rin, 2002). After the portfolio companies are liquefied the PE firm will distribute the capital to the investors minus the planned operating costs and, if the target returns were met, a bonus percentage for itself (Gompers and Lerner, 2001). This is the end of the PE cycle and allows all parties to evaluate the partnership and, possibly, enter a new cycle.
To conclude figure 3.2 provides the criteria this study uses to determine the success of a PE investment. These three criteria are derived from the selection, management and exit phases of the PE cycle and will be used to analyze the attractiveness of the FB for PE firms.
3.6 Success private equity
The PE cycle gives the idea that PE is a highly successful niche player in markets with investment limiting factors. Moreover, research has indicated that PE firms provide
“mouth-watering returns for their investors” (Kaplan and Schoar, 2003; Rogers et al, 2002) and
significantly increase the growth and innovation level of their portfolio firms (Amit et al, 1998; Sahlman, 1990). On the other hand, the performance of PE firms is extremely fickle, and the mouth-watering returns are often followed by enormous losses (Kaplan and Schoar, 2003). This is an inevitable result of the risk associated with most of the PE investments, which results from the four investment limiting factors (Gompers and Lerner, 2002). Moreover, the capital provided by PE firms also caused overinvestment in certain industries and inexperienced PE firms ruined the chances of a several high potential firms (Gompers, 1994). Nevertheless, the success of PE and the current low interest rates have attracted a large number of investors which threatens the success of the industry as it is now in danger of overcapitalization and “too much money chasing
too few good deals” (Gompers and Lerner, 2001:p157). As a result, it is lucrative for PE firms to Figure 3.2: PE preconditions for family business investment
1 Opportunity to acquire FB at a good price
- Old owners keener to withdraw than continue ownership - Market for FB has capital limiting factors
2 Ability to add value
3.7 Combination FB and PE
The analysis of the FB showed that the transition from one generation to the next is a major problem for all FB alike. As a result of the succession problem, many FB owners will be forced to sell their business, although there are too little buyers with the capital to finance these acquisitions. PE was suggested as a new, innovative way to finance the management transitions. And although PE and FB traditionally avoided each other, the PE firms might be very suitable capital providers for the FB with a succession problem. On the one hand, PE firms can use their experience and network to provide and support a new manager. Moreover, they might be the only option for FB owners to receive any money. On the other hand, FB can also provide an attractive opportunity for PE firms as they are currently looking for alternative investment sectors. After all, the large scale succession provides the PE firms with the opportunity to acquire companies at a relatively low price. Moreover, the bivalent attributes indicate that FB possess growth potential based on strong brands, a good financial basis and employee loyalty. And although FB often can not take advantage of this potential as they are conservative, lack strategic planning and are reluctant to use external capital (Flören, 1999), PE firms can use their experience and informed capital to unlock this growth potential to add value and realize an attractive return.
The other side of the coin, however, is that there are several potential disadvantages as well. From the FB perspective, the PE firms may work to rational, not keeping in mind the culture and value of the FB. From the PE perspective, the FB may offer too many complex emotional issues to get involved in. Nevertheless, it is worthwhile to further explore the combination of FB and PE. Figure 3.3 presents the model that results from the theoretic framework. On the one hand, there is the FB that has preconditions from all three circles for non-family succession. On the other hand, PE firms are searching for companies where they can successfully carry out the three phases of the PE cycle. This FB-PE model is used to discuss and generalize the results of the case studies, which are tackled in detail in the next section of this report.
Private Equity Cycle
1 Selection and acquisition 2 Management and adding value 3 Liquefying investment
Family Business Model
Family: Emotional, internal focus Business: Operational effectiveness Ownership: Return on investment
Succession problem
- Manager - Capital - Satisfaction
Investment Opportunity
- Acquire company at a good price
- Ability to add value - Potential for profitable exit
4. Case studies
4.1 Introduction
This study explores the innovative cooperation of FB and PE as it is believed to be a solution for the FB succession problem and provide an attractive investment opportunity for PE firms. After the construction of the theoretical framework, the next step is to focus on empirical examples. In order to do so, this study uses case studies, which are “empirical enquiries that
investigate a contemporary phenomenon within its real-life context when the boundaries between phenomenon and context are not clearly evident and in which multiple sources of evidence are used” (Yin, 1984:p23). The advantage of case studies is that they are an excellent way to explore
new areas of research and provide novel and testable insights with empirical validity (Eisenhardt, 1989). To avoid a lack of structure, which is proven to be a major trap for case studies (Yin, 1984), this study uses the theoretic framework to structure the discussion of the results.
4.2 Sample selection
For the case studies, three arbitrarily chosen FB which match the definition of this study are selected to give empirical insight. This selection is based on a search in newsarticles on potential case studies in the database of “het Financieel Dagblad”, “De Volkskrant”, and “het NRC Handelsblad) in the period 1995-2005 combined with several references by interviewed experts. Around 15 potential case studies were found, which were contacted by phone and email to check whether they match this study’s definition of a FB. Half of the companies on the shortlist did and after further contact three of these FB were willing to cooperate.
4.3 Data Collection
The case studies are based on interviews with individuals who were directly involved in the FB succession process. These interviews are semi-structured which allows for focused but flexible interviews (Bryman, 2004) and in-depth examination of the research subject (Snow and Thomas, 1994). The qualitative data from the interviews is combined with quantitative financial data from annual reports as well as secondary sources such as newspapers and trade journals.
By combining the qualitative with the quantitative data, this study follows the advice of Eisenhardt (1989) and Kelle (2001) who argue that such a combination can be highly synergistic. Especially the financial data can provide a more realistic mirror for the subjective information that is gathered in the interviews. By reviewing the development of important financial factors such as gross margin, net result, solvability and liquidity, one can analyze the performance of the company and the impact of PE support. Moreover, the calculation of the EBITDA (Earnings Before Interest, Taxes, Depreciations and Amortizations) allows for insight in the value of the FB, as multiples of EBITDA are often used to determine the value of businesses (Lie and Lie, 2002).
4.4 Atira case
The first case is Atira, a company that is started by Beringa, “a true Calvinist and formerly active
in the WO II resistance” (Interview Beringa). Beringa founded Atira in 1950 and started trading
coffee machines in Apeldoorn. At first, this company was only an intermediary in coffee machines, but in an attempt to improve the quality of his products, Beringa decided to manufacture the machines himself. Due to a boom in sales, this production soon expanded from his back-yard to larger production facilities. In a few years, a second factory was built in 1962 in Emmen, an attractive location for its cheap ground and labor. “The main drivers behind the
success of Atira were father’s network from his resistance days and his ability to work very hard”
(Interview Beringa). Around this time, two of Beringa’s sons joined the company and the eldest was groomed to succeed his father. Business was well around those days and as early as 1965, Atira started to export coffee machines to nearby countries. This growth, however, increased the management tasks and proved to be too stressful for the eldest son, leading to his early exit from Atira in 1972. As a result, the other son, Henk Beringa got a more leading role in the company and tried to professionalize the organization. “This was certainly needed, as the company used
As Beringa senior grew older he divided a portion of the shares of the company among his seven children. This situation, however, was not favored by Beringa junior as he refused to work hard and let his brothers and sisters reap the benefits. To solve this problem, he and his father bought the shares from the other family members in 1983. As a result, Beringa senior remained the majority shareholder with 51%, but shared the management of Atira with his son. In reality, however, Beringa junior did most of the work as illness and his increasing age prevented his father to play a major role. The company, however, did not suffer from the management transition and expanded its sales activities in the Netherlands as well as nearby countries.
To support the export activities, sales offices were opened in Belgium, France and Germany in the early 90’ies. At the same time, Beringa junior wanted to integrate the activities in the Netherlands, as the simultaneous production in Apeldoorn and Emmen was not very efficient. Beringa senior on the other hand had a strong emotional tie to the location in Apeldoorn and refused to think about these ideas. “Due to the bad financial results in 1992, it was possible to
convince father and at least relocate all production activities to Emmen, although the headquarters remained in Apeldoorn.” These changes and his declining health lead to Beringa
senior’s retirement. At this point, Beringa senior was convinced his son could not lead the company alone and desired someone else to take over. “In reality, however, I already led the
company for 10 years, but this was difficult for father to accept.” (Interview Beringa)
After the exit of Beringa senior, the headquarters were also relocated to Emmen, although a distribution centre and the old office of senior remained in Apeldoorn. “During my father’s
life”, Beringa junior said, “I would never close down these activities as it would hurt him too much.” As a result of the integration of the production facilities, Atira worked more efficient and
realized better results. After a period of indecisiveness, Beringa senior decided to sell the company in 1999 and although junior could afford to buy the shares, it would leave him without a good reserve (Interview Beringa). To remedy this problem, Beringa contacted the Investerings en Ontwikkelingsmaatschappij voor Noord-Nederland (NOM) to provide the capital to finance the deal. By including the NOM, Beringa could also realize one of his ideas, a supervisory board which could guide the management of Atira, especially on the long-term. According to Beringa, the NOM was specifically interesting as “they are not just profit-driven but also advocate the
regional and employee interests.” And because there was no suitable successor available within
After negotiation, the NOM bought 22% of the shares and provided a financial person, Hans Lever, for the board. The NOM, however, wanted Beringa to find a second person for the supervisory board, who would bring in the market knowledge and experience. This request led Beringa to consider a different solution. Rather than attracting an outside board member, he would retire and join the supervisory board himself. This way, he could take it easier and leave the management of the company to his warrant-manager, Jaap Wiers, a capable man, who was certainly interested in more responsibility. In the end, they decided that Beringa would gradually decrease his activities in three years and that the warrant-manager would take over.
“Many of the people around me did not believe I could take the required distance from
the firm, but I managed to do so, especially because I experienced the less successful exit of my father myself” (Interview Beringa). After the deal in 1999, Atira started to quickly professionalize
and automate their production facilities. “The old-fashioned image of Atira was turned around by
large investments in facilities, equipment and training” (Interview Beringa). This turn-around
was possible by the exit of the founder, the support of Beringa junior and the capital and aid from the NOM. After the death of Beringa senior in 2002 for example, it was possible to finally shut down the activities in Apeldoorn (Annual report 2004). These changes were required as “the
competition from low-wage countries in Asia forced us to further decrease the manual labour in favor of automated facilities” (Interview Beringa). Although these changes had a negative impact
on the results on the short-term, they were a necessity for the long-term survival of Atira (Annual reports, 2001/2002). Table 4.1 presents the financial results, which indicate that the gross margin did only slightly improve in the years after the MBO. Moreover, the ROE dropped, although the rates are still very attractive for any investor.
Regardless of these results, however, both the NOM and Beringa believe in the success of the investment (Interview Klaasen).
Financial year 2004 2003 2002 2001 2000 1999 1998 Em ployees 94 92 98 104 103 99 96 Results G ross m argin € 7.380.983 € 7.341.680 € 7.198.014 € 7.555.311 € 7.854.772 € 6.913.053 € 6.577.098 EBIT DA € 1.499.231 € 1.508.347 € 1.445.817 € 1.751.785 € 1.916.573 € 1.718.169 € 1.339.583 Net Result € 660.499 € 680.776 € 619.111 € 779.672 € 862.100 € 839.921 € 851.195 Return on equity 11,26% 11,12% 10,16% 12,69% 13,59% 14,34% 16,40% Balance Sheet O w ners equity € 3.414.258 € 3.434.535 € 2.753.759 € 2.753.759 € 2.753.759 € 2.799.221 € 3.638.289 T otal Equity € 5.864.360 € 6.122.433 € 6.092.274 € 6.143.306 € 6.343.189 € 5.856.738 € 5.189.652 Solvability 58,22% 56,10% 45,20% 44,83% 43,41% 47,79% 70,11% Liquidity Q uick ratio 120% 136% 82% 66% 96% 213% 286% W orking capital € 3.420.416 € 3.564.054 € 2.837.373 € 2.749.125 € 2.936.325 € 3.313.559 € 3.380.282
Table 4.1: Financial results Atira
It will take a few more years to reap the profits, as the accomplished investments will pay off in the future. Moreover, “the competition in Asia forces Atira to grow larger, operate flexible
and focus on niche markets.” (Interview Beringa) To achieve this, Atira is looking for
cooperation or even integration with other companies. It will therefore be quite likely that the exit of NK and Beringa from Atira will be achieved by a sale to a strategic party. These potential integrations, however, should only be allowed if it is possible “to continue the operations in
Emmen and safeguard the trade mark but above all the jobs of the employees” (Interview
Beringa).
To conclude, this case does not show large improvements of the financial results of Atira. However, both the family involved and the PE investor consider the collaboration as a success. On the one hand, the family is satisfied with the slow exit of the family and do not worry about the capital they receive for their shares. Also, the involvement of the NOM made it possible for Atira to finance the required changes and develop strategic plans to ensure the future of the company. Moreover, Beringa complimented the NOM for its true interest in the position of Atira and its employees. On the other hand, the NOM had the opportunity to invest in a company with a yearly ROE above 10% and believe that a future exit will give them a good ROI.
4.5 Endura case
Endura is a company that was founded in Heiloo in 1975, by Dirk Van Schee. Van Schee used a principle of electrostatic filtration that was developed in the gramophone industry to clean air and developed commercial air cleaners for bars, restaurants and offices. This innovative idea was a result of van Schee’s “love for innovation” (Interview Groevers) and clearly successful, as Endura moved to larger locations several times, before relocating in Alkmaar in 1992. The success of Endura was ascribed to “the strong faith in our specialization that has been
represented by a number of key words. The most important are vision, innovation and quality”
To finance the ownership transition, De Vries and Van Schee sought a PE investor as Van Schee wanted to cash-out and did not find a bank that could finance the transaction (Interview Groevers). Taros Capital decided to finance the MBO in 1998, as they saw great potential in Endura and believed De Vries would be the right man to take over (Interview Groevers). As a result of the MBO, Taros Capital gained 60% of the shares whereas De Vries and Van Schee both became minority shareholders (Financieel Dagblad, 23 Oct, 1998). Moreover, Taros Capital used a strategy that they often use in MBO/MBI; they gave a group of 15 employees the opportunity to participate as well. “This way,” Groevers (Interview) says, “the key
employees are motivated to push the limits as they co-own the company” After a relative short
period of introducing De Vries into the company, Van Schee left Endura and retired.
According to Groevers: “he was very satisfied with the succession, as not only he gained
more money for his shares than he hoped for, but also had faith in his successor.” At that point, it
was time for Endura and Taros Capital to make “real choices without concessions” (Presentation De Vries, 2005). It was crucial to determine the position and future perspectives of Endura what should be changed in order to realize this (Presentation De Vries, 2005). The first step was to standardize the reporting within the organization to provide De Vries and Gold Partners with the information that was required for the important decisions. Logically, the most important decisions would be commercial, as this was an area that was lacking earlier on.
In the first year after the MBO, Endura acquired its Dutch distributor, Vicom, which was a very good way to get in touch with the market (Interview Groevers). Vicom had around 40 employees and already cooperated with Endura for a long time (Algemeen Dagblad, 12 May, 1992). Aside from this acquisition, Endura closed all international sales offices and replaced the entire sales team (Presentation De Vries, 2005). Rather, Endura would use local distributors, who were better equipped to deal with the local markets. These steps were a big success and the export rose enormously, now forming over 75% of the total sales. (Metalektro profile, Dec 2002)
“Endura certainly benefited from the ever increasing attention and regulations for clean air”
Table 4.2 presents the financial results of the Endura Holding which show an incredible growth in turnover of almost 300% (€ 7.136.932-€ 21.699.000) in the period after the MBO.
At first sight, the profits are disappointing as there are losses in the period 1999-2001 and the return on equity never exceeds the 10%. However, looking more closely at the numbers, it becomes clear that the EBITDA grows with almost 750%. The enormous difference between profits and EBITDA can be explained by the heavy depreciations. In the annual report of 1999, De Vries explains that the MBO included the payment of over 11 million euros for goodwill, which is linear depreciated, diminishing the results with 1 million each year. This means that the results are in reality much better, as the value reduction only takes place in the books, not in reality. In 2004 the management team of Endura came up with a strategic plan for the next three years. According to Groevers (Interview) this was an ideal time to exit, and certainly attractive because several potential buyers already informed. Gold Partners and Endura decided to sell the company trough an auction, with a preference for a secondary buy-out. This would give the current management team the opportunity to continue their management and carry out their plans. In the end, Rabo Participaties had the best offer and bought a minority of the company from Gold Partners and Van Schee. The rest of the shares were bought by the management team, hereby increasing their own ownership. From this moment, the PE firm would only be a minority partner in Endura (Financieel Dagblad, 20 Sep, 2005). The exact return on investments of Gold Partners remains a secret, although Groevers (Interview) does reveal that “Gold Partners realized three
times the money multiple of the investment” In other words, Gold Partners tripled the money
invested over the life-time (1998-2005) of the Endura investment.
To conclude, the Endura case is an excellent example of a successful MBO in the FB.
Financial year 2004 2003 2002 2001 2000 1999 1998 1997 Employees 127 123 103 105 99 89 42 37 Results Turnover € 21.699.000 € 17.754.000 € 16.615.500 € 15.786.000 € 14.577.000 € 12.878.599 € 8.098.825 € 7.136.932 EBITDA € 4.090.000 € 3.253.000 € 3.560.000 € 2.270.000 € 2.864.710 € 2.245.760 € 1.353.319 € 580.766 Net Result € 559.000 € 183.000 € 181.000 -€ 669.000 -€ 267.000 -€ 2.060.284 € 363.154 € 2.923 Return on equity 4,04% 1,22% 1,20% -3,85% -1,52% -11,16% 8,04% 0,06% Balance Sheet Owners equity € 5.914.000 € 5.355.000 € 5.172.000 € 5.104.000 € 5.660.000 € 5.905.998 € 348.163 € 1.603.819 Total Equity € 13.822.000 € 15.026.000 € 15.026.000 € 17.385.000 € 17.609.000 € 18.454.852 € 4.517.774 € 5.117.084 Solvability 42,79% 35,64% 34,42% 29,36% 32,14% 32,00% 7,71% 31,34% Liquidity Quick ratio 78,00% 62,00% 74,00% 74,00% 77,00% 83,00% 103,00% 92,00% Working capital € 974.000 -€ 777.000 -€ 213.000 € 428.000 € 895.000 € 864.726 € 1.438.907 € 1.230.027
And although De Vries brought in the commercial expertise, the success was not possible without Gold Partners, who assisted with the capital to finance the acquisition of Vicom. Moreover, the PE strategies such as the reporting and stock ownership motivation of employees helped to create the conditions under which De Vries could carry out his plans.
Compared to the FB-PE model, this case on the one hand provided the former owner with more capital than he expected and satisfaction about the succession. Moreover, he saw the company maintain its independent identity and perform better than ever. On the other hand, the PE firm tripled the money of its investment and was very satisfied with the deal. Such a success story, however, is not very likely for all FB, as the conditions in this case, such as the planning of the succession and the potential of the business, were extremely good (Interview Groevers).
4.6 Inventa case
Jack Belten started a company in Groningen in 1968 which was named after himself and specialized in fuel pumps for diesel engines (Festo, Feb. 2003). After a few years, Bob Gaastra, who previously advised Jack Belten on export opportunities, became a member of the Board of Advice (Interview Gaastra). In the following years, Jack Belten grew rapidly and acquired and integrated a company in robotics, Robot Nederland, and opened new subsidiaries in Wijlen and Leeuwarden. Moreover, Jack Belten acquired Dricom an engineering company and some industrial activities from Croon BV. After the acquisitions, Jack Belten developed into a full-service supplier of hydraulic, pneumatic and electronic elements (Festo, Feb. 2003). However, these acquisitions were not integrated and potential synergy effects were not realized (Interview Gaastra). At the same time, Belten senior wanted two of his sons to join the company, but they proved to be incapable which lead to their removal from the business (Interview Gaastra).
As the years passed, Belten senior prepared for retirement and wanted to sell the company, as his sons seemed incapable to take over. One of them, however, made an emotional plea to his father to keep the business within the family and convinced Belten senior to appoint him as the new director (Interview Gaastra). Gaastra believed the son to be unfit for this role and stepped down from his position in the advisory board. In the meantime, Belten senior still lacked faith in his son’s ability to manage the company and installed a board of directors consisting of Belten family members to control junior activities. “This was the most dramatic solution he could
ever choose, as his son regarded this as a complete lack of confidence, which lead to bitter arguments” (Interview Gaastra). Also, Belten senior allowed one of the managers, Braamskamp,
As a result, Belten not only lost some of its activities, but also one of the senior managers, which left Belten junior without the support he needed (Interview Gaastra). In the next three years, Jack Belten performed dreadful and the value rapidly decreased. Even the sale of the disappointingly performing Dricom division to the First Investments, a PE investor, did not improve the situation. According to Gaastra: “the company that received an offer from a potential
buyer for 10 million only three years ago was left with 1.5 million debt and no-one willing to buy the company.” At this point, the Board of Directors fired Belten junior and installed a new
interim manager, Dirk Veen. Veen realized that “more financial backup was required for the
company to have a future” (Interview Veen) and found the Belten family eager to sell their shares.
With the help of Gaastra, the First Investments was contacted and after negotiation Veen realized a MBI in Augustus 2002 (Festo, Feb. 2003).
Because of the bad financial situation of Jack Belten, First Investments did not have to pay anything for the shares, but became responsible for the debts. According to Veen (Interview), Jack Belten at that time had to find an answer to “an eminent strategic challenge for Jack Belten;
the decline of the industrial market in the Netherlands and the increasing competition from low-wage countries in Eastern Europe and Asia.” As a reaction on these developments, Veen and the
First Investments devised an integration strategy, which would cluster Jack Belten and Dricom, in order to achieve synergistic effects (Interview Veen). Late 2002, Dricom was added under the management of Veen, and although they were not integrated, Veen saw many synergistic opportunities and had plans to integrate them. (Festo, Feb 2003) Veen (Interview 2005) said that the companies first kept their independent identities and that the integration process started at the back-office to slowly integrate it into front office activities as well. This way, “the companies
could get used to each other, and customers would slowly get accustomed to the new situation.”
In the meantime, however, the cluster was named Inventa, and already started marketing the new activity, which was a full service process, providing design, support and maintenance of industrial installation. This model was designed to react on the fierce competition from low wage countries and the trend in western countries to offer full-package solutions (Interview Veen). During the integration process, Veen had to overcome the cultural differences, the obstacles for synergy effects and the lack of capital to finance the changes. Only with the financial help of the First Investments and due to a phased plan, the integration was a success. “In the end, however, it
It is extremely difficult to analyze these results, as it involves the integration of several companies which occurred very recently. It is clear, however, that the integration of Jack Belten, Dricom, Belten Wijlen and Croon almost tripled the company in size. The number of employees increased from 26 to 90 and the turnover increased from €3.401.931 to €8.000.341.
Compared with the situation just after the MBI, the solvability and liquidity significantly improved and the owners equity increased from -€326.748 to €176.693. However, most of the growth was non-organic and resulted from the integration of the various companies. Therefore, the success of this cluster strategy was not the growth itself but the successful integration. After all, Veen and the First Investments successfully integrated the various companies whereas the Belten family had been unable to do so. As a result, Inventa changed from a company in distress into a company that again has a promising future (Interviews Veen; de Vries). On January the 13th 2006, the integration was completed and the independent identities were fully integrated into Inventa. “The future looks more promising now”, Veen says, “as the new concept is better
equipped to face the competition from Eastern Europe and China.” “At this point, Gaastra argues
(Interview) “it is time for First Investments to exit the company and realize a good profit.
To conclude, all of the parties agree that the MBI of Jack Belten in 2002 saved the company from liquidation (Interviews Veen; Gaastra; de Vries). And although the former owner of Jack Belten regrets not selling the company at an earlier stage, he is glad that the MBI saved the existence of his organization, albeit under a different name. The MBI provided the company with a good manager, Veen, who could lead the large reorganization and integration process. The PE firm, the First Investments assisted with managerial advice and the capital to cover for the losses and finance the acquisitions. Together, Veen and the First Investments managed to innovate the business model in order to create a company that is able to cope with Asian competition. In the end, all parties expect the First Investments to be able to sell their stocks at a very good price, realizing an attractive return on investment.
F i n a n c i a l y e a r 2 0 0 5 2 0 0 4 2 0 0 3 E m p l o y e e s 9 0 2 6 2 5 2 6 R e s u l t s T u r n o v e r € 8 . 0 0 0 . 3 4 1 € 3 . 4 0 1 . 9 3 1 € 3 . 0 2 4 . 4 0 4 E B I T D A € 7 4 6 . 9 4 1 € 2 6 5 . 3 4 2 € 2 1 9 . 0 8 3 N e t r e s u l t € 4 2 3 . 7 5 1 € 2 0 7 . 8 3 0 € 1 8 7 . 4 7 0 R e t u r n o n e q u i t y 9 , 2 2 % 1 0 , 3 7 % 9 , 5 8 % B a l a n c e s h e e t O w n e r s e q u i t y € 1 7 6 . 6 9 3 € 6 9 . 7 6 2 - € 3 2 6 . 7 4 8 T o t a l e q u i t y € 4 . 5 9 6 . 4 2 0 € 2 . 0 0 3 . 2 4 5 € 1 . 9 5 6 . 1 7 1 S o l v a b i l i t y 3 % 3 , 4 8 % - 1 6 , 7 0 % L i q u i d i t y Q u i c k r a t i o 8 9 % 6 4 % 5 8 % W o r k i n g c a p i t a l € 6 1 1 . 8 0 8 € 1 5 . 9 1 8 - € 2 9 . 5 3 4
Table 4.3: Financial results Inventa
4.7 Conclusions
The cases studies gave three unique and interesting views on a PE-financed succession. In all cases, the former FB owners, although based on different motivations concluded that the PE solution for their succession problem worked out for the best. The PE investors were extremely satisfied and expected very attractive profits. Table 4.4 shows the preconditions of both FB and PE firm. The next chapter discusses and compares these results to theories and expert interviews.
A t i r a E n d u r a I n v e n t a S u c c e s s i o n p r o b l e m M a n a g e r + + + + + C a p i t a l 0 + + 0 S a t i s f a c t i o n + + + + 0 I n v e s t m e n t o p p o r t u n i t y A g o o d p r i c e + 0 + + A b i l i t y t o a d d v a l u e + + + + P o t e n t i a l t o r e a l i z e g o o d p r o f i t + + + + + Table 4.4: Success factors cases
