Winner | Deal: $25-150M
- Company: Crystal Flash Inc. (transitioned to ESOP)
- Top Executive: Tom Olive, CEO
- Annual sales: Approximately $200 million
- Total Employees: 250
- Business Description: Grand Rapids-based Crystal Flash Inc. distributes propane, fuel oil and other fuels to customers throughout Michigan’s Lower Peninsula.
- Advisers: Warner, Norcross & Judd LLP (legal); Rehmann (accounting); Mercantile Bank (lender); Adamy Valuation Advisors (valuation firm); Charter Capital Partners (advisory firm)
When Tom Fehsenfeld decided to retire from the family business he led for the past 40 years, he found himself in a position familiar to many manufacturers exploring succession options.
Fehsenfeld, who inherited leadership of the Grand Rapids-based Crystal Flash Inc. from his father, needed to balance maximizing the value of his organization with his ethos of putting workers first.
Moreover, whatever path Fehsenfeld chose had to appeal to the fuel distribution company’s Indianapolis-based parent, The Heritage Group. The Indiana firm had opted to spin off Crystal Flash as it did not fit the company’s strategic plan.
The Heritage Group, the majority owner of Crystal Flash, is operated by Fehsenfeld’s extended family.
After announcing his impending retirement, Fehsenfeld set about researching the company’s options, which included everything from taking Crystal Flash public to a merger with another business or offering the company on the market.
During that process, Fehsenfeld came across employee stock ownership plans (ESOP), which seemed to cut the best balance between value and maintaining the company’s legacy in Grand Rapids. The ESOP also offered additional tax benefits that weren’t available if he took the business to market.
“That was one of the factors that made me think about that, in addition to the fact that you feel emotionally connected to your employees and you don’t really want to see the company broken up and split into pieces,” Fehsenfeld said. “You want to come up with a good future for the people you’ve worked with for years.”
In an ESOP transaction, owners can take the profit earned when selling the company and roll that into company stock that they don’t have to pay taxes on, Fehsenfeld said.
For its transition to an ESOP, Crystal Flash was named the winner in the 2016 MiBiz M&A Deals and Dealmakers of the Year Awards in the category for transactions valued between $25 million and $150 million.
While the ESOP presented the best option for Crystal Flash, the parent company had to sign off on taking less money in the transaction than if the company were put on the market.
The deal could have commanded as much as one to one-and-a-half times earnings before interest, taxes, depreciation and amortization (EBITDA) if it had pursued an option other than the ESOP, according to an analysis conducted by Crystal Flash. However, the tax breaks from the ESOP helped make up for the price disparity, Fehsenfeld said.
“You may not get the highest price by selling to your employees because if you just took it out to the market and exposed it to big companies and they get into a bidding war, you might be able to get a really big price,” Fehsenfeld said. “But then there would be all kinds of taxes to pay, especially if you’re starting from a low base.”
Despite the good intentions behind the ESOP, Fehsenfeld still had to convince the ownership group that it was the right option for the company.
“One of the things that became apparent was we’d need bank financing to pay off the owners and there’d be a good period of time where the ownership money would be at risk,” he said. “One of the toughest negotiations I ever had was with my extended family about this. This was an unfamiliar concept to them.”
After a number of meetings, Fehsenfeld received tentative approval to begin the ESOP process in November 2014 on the condition that he find his replacement to lead Crystal Flash. The company eventually courted Tom Olive, who previously served as CEO of Grand Rapids-based True Textiles Inc., to lead the organization following the ESOP.
However, even with much of the research and planning out of the way, the company still had a long way to go before the deal was finalized.
In particular, Crystal Flash’s assets were spread out among several of the Fehsenfeld family’s holdings, causing the company to embark on a two-step transaction process that combined a separate C-corp and partnership into what is now known as Crystal Flash Inc., Olive said.
“It’s a very prescribed process and you need to follow the rule book properly, but once you follow the rule book, it’s a wonderful outcome for the selling family and for the family that’s going to continue with it,” Olive said.
To ensure that the transition to an ESOP went as smoothly as possible, Fehsenfeld, Olive and the rest of the Crystal Flash executive team made it a point to be transparent and educate the employees on the ESOP process. Since closing on the transaction, Crystal Flash has held monthly educational classes that discuss the details of the ESOP and what it means for the employees going forward.
In particular, Fehsenfeld and Olive hope to instill an ownership culture within the organization following the ESOP.
“That’s behind all the work that Tom and the other executives here are doing with helping educate employees about business,” Olive said. “It’s to create an ownership culture where people feel like their future is really tied up with the future of the business and understand how their daily activities can affect the business.”
Editor’s note: This story has been changed from its original version to correct a mention of Crystal Flash’s accountant. The company worked with Rehmann Group in its ESOP transaction.