Financing Growth -- without Going into Debt
BY Thea Singer
CEO/President: Max Oyler Company: Kelmax Equipment Co. (#212 on the 2000 Inc. 500), headquartered in Decatur, Ga. Business: Manufacturer of metal racks and shelving for the food service and supermarket industries Deal: Sold to Leggett & Platt Inc., based in Carthage, Mo., a $4 billion manufacturer of residential and commercial furnishings Goal: To finance growth without going into debt
When Max Oyler, 53, started Kelmax Equipment Co. with partner Frank Kelly, in 1995, the plan was to build a successful business by customizing a product that their former employer had been treating as a commodity. The idea of an exit strategy never crossed their minds. But as the company grew -- by some 25% to 30% annually over the past few years, with revenues reaching $9.8 million in 1999 -- they knew they'd have to either bring in cash or forgo certain growth opportunities. "Getting major financing would have run counter to our philosophy," says Oyler. "We borrowed some money from a bank in the beginning and when we opened our Southwest operation, because the expansion put a squeeze on our cash flow, but we didn't want to go into debt again. We were afraid that if the economy went south, we wouldn't be able to recover."
To advise them on the sale, the founders brought in the Geneva Cos., a business broker headquartered in Irvine, Calif. Although the eventual buyer, Leggett & Platt, had been eyeing Kelmax as a possible acquisition for about two years, Geneva initiated a limited marketing campaign so that at least five other suitors would enter the fray. "We wanted to see if we could get a bidding war going on us," says Oyler. In the end two companies put offers on the table.
Neither Leggett & Platt nor Kelmax will disclose the exact sum of the deal, but Geneva vice president Jeff D. Herndon reports that the price was "less than $25 million in cash," which he claims is "at the high end or a little above" what privately held companies with financials like Kelmax's normally sell for -- around four to six times their pretax income. The transaction also included a three-year earn-out agreement.
At this early stage of the game -- the deal closed on July 10, 2000 -- the only downside that Oyler sees to the cash-out is that the partners no longer have the final word in making decisions. "Now all capital equipment, for example, requires three quotes and has to be properly approved," says Oyler, who remains president of Kelmax Equipment, now a division of Leggett & Platt. "But then, we probably needed that discipline in the past."
Oyler adds: "Before, we could see our investment in the company growing, but that didn't mean anything until we could actually rake it in. The sale has taken the chips off the table and put them in the bank."