Published in Small Business
“There are still a lot of individual financial buyers who want to embark on a second career, so they are kind of buying themselves a job,” said attorney Jon Siebers, a shareholder at Grand Rapids-based Rhoades McKee PC. “There are still a lot of individual financial buyers who want to embark on a second career, so they are kind of buying themselves a job,” said attorney Jon Siebers, a shareholder at Grand Rapids-based Rhoades McKee PC. Courtesy photo

Buyers outnumber sellers as more PE firms, individual investors enter the market

BY Sunday, April 01, 2018 11:02pm

When Alan Hartline purchased Kingma’s Market four years ago, he pivoted away from a corporate world in which he was at the “mercy of quarterly earnings and Wall Street.”

That’s why investing in the Grand Rapids food market at 2225 Plainfield Ave. NE made sense, said Hartline, a former executive at the Byron Center-based grocery retailer and distributor SpartanNash Co.

“With a successful career in the corporate world, I learned a ton,” Hartline told MiBiz. “I grew up in this food business, starting bagging groceries and basically did every job in the store, from cashier to night stocker to store manager.”

In jumping from the corporate world to an entrepreneurial setting, Hartline joined the growing ranks of individual investors seeking out a second career by purchasing a business, whether that’s in the retail, technology, service or manufacturing industry. 

Particularly for Hartline, the move from SpartanNash to Kingma’s offered him a different path to the grocery consumer.

“I thought there was a market that was underserved with today’s consumer, and (I would) have the autonomy to do it my way, unencumbered by … publicly-held companies,” he said. “If I want to make an investment or have a bad quarter or a bad year because there’s a longer-range plan, I am accountable only to myself.”

The move out of corporate America to a small businesses is a trend attorney Jon Siebers has seen “since day one” of his 21 years of working in mergers and acquisitions. 

“I don’t think that’s slowed down much,” said Siebers, a shareholder at Grand Rapids-based Rhoades McKee PC. “There are still a lot of individual financial buyers who want to embark on a second career, so they are kind of buying themselves a job.”

COMPETITION CONTINUES

As the M&A market continues at a strong pace, industry watchers expect more dealmaking to continue this year, even if buyers’ options are limited. 

A mergers and acquisitions outlook from PricewaterhouseCoopers LLP (PwC) projects a “robust deal making environment in 2018, buoyed by demand and a number of disruptive factors which we believe will drive opportunities.” Among the disruptors listed in the report, PwC cited federal tax reform as a possible catalyst for increased deal activity in the year ahead. 

“Activist shareholders in the U.S., and increasingly in Europe, appear likely to drive an uptick in divestitures as conglomerates are pushed to break up or shed non-core assets,” according to the outlook the firm issued in January. “Evolving technology, rising populism and political uncertainty are other factors that will create both risk and opportunity. In a hyper competitive environment, private equity funds which can see through the shifting landscapes and capitalize on the opportunities that will be created will prove successful.”

While the pool of buyers has expanded in recent years, the number of private equity funds has noticeably ballooned, said Siebers, whose practice focuses on small companies and lower middle market businesses with up to $50 million in enterprise value. 

Many PE firms have started to move downstream into the lower middle market in an attempt to find returns for their limited partners, he said.

“I have done platform sales for companies as small as $17 million to $18 million to PE groups, but I have had PE groups looking at companies as small as $1 million to $2 million,” Siebers said. 

The proliferation of private equity funds and the growth of family offices has contributed to the recent phenomenon of buyers far outnumbering sellers these days, he said. 

“People keep saying that there is a flood of baby boomer business owners who are going to be selling, and I think that’s certainly picked up,” Siebers said. “(However), I think there are still a lot of sellers that have not made the decision to sell yet that I think will be selling in the next five to 10 years.”

Similarly, Siebers said he is seeing more strategic acquisitions and private equity firms doing smaller deals than they did just a few years ago.

“Because (PE groups) have so much cash, and because there is so much competition for deals out there for larger companies, they are starting to go downstream more,” he said. 

Sieber said if sellers want to get top dollar for their companies, they must sell when the economy is strong — like now.

At some point, business leaders who are “on the fence” about whether to sell are either left with the option of selling quickly or “they will have missed the window (of opportunity),” he added. 

Still, the robust market has advisers like Siebers engaged with plenty of work, even if some sellers still remain on the sidelines. 

“I am busier now than I have ever been,” he said.

FINDING A NICHE

Jason Byrd, a partner at Grand Rapids-based Concurrence Capital Holdings LLC, a Grand Rapids-based investment and management firm, said private equity groups like his are finding niches to differentiate themselves from other buyers. 

“The trend in this market is to pick a niche and run with it,” Byrd said. “You’ll see a lot of the middle-market, institutionally funded private equity groups going out and hiring people to sit on the bench that have an experience in an industry that they are interested in.”

Concurrence Capital launched in 2017 to focus on long-term investments in middle-market, family-owned businesses involved in manufacturing and business-to-business services with sales of more than $5 million, plus $1 million to $8 million in EBITDA. The firm made its first investment last spring with a deal for Holland-based Mission Design & Automation LLC.

According to Byrd, the reason the private equity sector has become so active in dealmaking stems from investors chasing yield and returns that typically “outpace that of the public market.” Although the market has done “phenomenally,” much of the institutional capital is “getting pumped into the private equity space,” he said. 

“We’ve been in a recovery for eight, nine years… (and) I don’t understand why there aren’t more sellers coming to the market,” Byrd added. “Interest rates continue to be historically low, tax rates are low today … and banks are willing to lend. It’s hard to imagine in this environment that if somebody is thinking about selling the business in the next three to five years, why they wouldn’t be doing it now.” 

CHANGING THE COURSE

For an individual investor like Hartline, the ability to apply his years of corporate knowledge to a new career provided a promising pathway to a new venture. 

So far at Kingma’s, Hartline has been able to grow the company, outpacing industry averages for grocery operators in an era of flat or declining sales at national publicly traded companies. He declined to disclose annual sales for the business. 

Hartline attributes the initial success at Kingma’s to serving customers how they want to be served, in more of a “European model” for shopping focused on fresh-from-the-field produce and butchered meats. 

“The Millennial, hipster or Gen-Xers are a little disenchanted with (corporate culture) … and are flocking to something local,” he said.

The move to a neighborhood market also afforded Hartline the ability to work on the business at whatever pace he chose, rather than at the speed Wall Street investors demanded. 

“At Kingma’s, I could sit back, learn about the model, the people and then over time evolve the merchandising flow and the products,” he said. “After a couple of years, I learned that this is a model that can definitely be scalable in today’s environment.”   

Separately from Kingma’s, Hartline also continued to look for investments. Last year, he invested in Fish Lads of Grand Rapids Inc. — which operates the Carvers Grand Rapids’ Finest Meats store adjacent to it in the Grand Rapids Downtown Market — helping co-founder Jeff Butzow buy out a business partner. 

Then, when Kingma’s opened a 14,000-square-foot second store in Ada last September, it featured a Fish Lads-branded counter inside, as well as more of the “culinary flare” inspired by Carvers at the meat counter. 

According to M&A and succession plan advisers, more people like Hartline could jump into the market as buyers in the coming years. 

“Sixty-three percent of individual buyers say their number one goal or motivation to buy a business is to be their own boss,” said Max Friar, principal at Grand Rapids-based Calder Capital LLC. “That’s a perennial thing. That’s in any environment. I get calls daily and from more than one (person) who wants that situation. In a good economy or a bad economy, that’s going to be a driving factor.” 

Additional Info

  • Image_Position: Full
Read 2177 times Last modified on Friday, 06 April 2018 09:04
SUBSCRIBE TO MIBIZ TODAY FOR WEST MICHIGAN’S FINEST BUSINESS NEWS REPORTING >