Case Study: To Take Private Equity or Not

Raising private equity seemed like the best way to rev up Sunrise Windows. But were the stakes too high?

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Joe Vaughn

SPLIT DECISION Gary Delman craved change but he also feared it.

In December 2004, Gary Delman, co-founder and CEO of window manufacturer Sunrise Windows, gathered his executive team in a conference room. The group had just spent four grueling weeks meeting with representatives from eight different private equity firms and taking them on tours of Sunrise's plant in Temperance, Michigan. Now it was time to narrow the list and explore one firm more closely. In democratic fashion, Delman and his team ranked the potential investors on pieces of paper and threw the names into the center of the conference room table. The choice was unanimous: FdG Associates, a New York City firm that specializes in recapitalizing family-owned businesses.

FdG's executives had said all the right things. Their philosophy was based on improving profits by expanding geographically and developing new products, not by slashing jobs and skimping on materials like most of the other private equity firms courting Sunrise. But FdG, typical of a private equity firm, also had some hefty financial expectations; in exchange for its cash, the firm expected Sunrise to boost its annual sales by at least 20 percent, to between $60 million and $75 million, by 2009, and increase profits by 20 percent each year. Delman's own compensation would be tied to performance metrics related to sales targets, customer satisfaction, and new product rollouts.

It was enticing, but Delman was worried. Everything he loved about running a family business--including the fact that he made all the decisions, and that he was home with his wife, Andrea, and their kids by 6 p.m. most days--could change.

In other ways, the deal seemed impossible to pass up. The window industry was evolving quickly, and Sunrise had to make some major changes to keep up with the pace of innovation. Delman, then 44, was eager to revamp the 10-year-old company, but he was reluctant to invest more of his own money in it. Complicating matters further, his partner and uncle, 59-year-old Elliott Delman, seemed more interested in retirement than recommitting. The younger Delman felt trapped. "I saw myself taking a more conservative approach to the long-term future," he says. "I sensed complacency coming in."

Ten years earlier, Delman would have been perfectly comfortable with a slow-and-steady approach. Before founding Sunrise, he and his uncle worked at Great Lakes Window, a manufacturer of vinyl replacement windows founded by Delman's father, Ralph, in 1981. Ralph sold Great Lakes to a public company in 1986, and after he retired seven years later, the new owner began to focus more on cutting costs than developing new products. The younger Delman jumped ship--along with his uncle and Larry VanDeVelde, a family friend--and the trio started Sunrise one year later, determined to do things differently.

Over the next decade, the partners built Sunrise slowly and steadily, forging close relationships with their clients--home improvement and remodeling stores in the Midwest--and unveiling a couple of new colors and products each year. The conservative strategy worked: By 2004, Sunrise boasted about 850 customers and $30 million in annual sales.

Around that time, however, Delman began to notice that his rivals, including Pella and Andersen, were rolling out new products at a much faster clip than Sunrise. Sunrise had recently won the prestigious Crystal Achievement Award for innovative marketing from Window & Door magazine, but customers were clamoring for innovative products, such as decorative glass, as well as more color choices. To give them what they wanted, Delman needed to invest at least $1 million in new equipment and product development.

Delman was also thinking about expanding into new states, including Texas and Georgia, to get a larger piece of the $30 billion U.S. window market. To pull that off, he would need not only capital, but help--and his partners were reluctant to take on the challenge. "I'm the older one," Elliott notes. "Gary's still young and able to work."

In 2003, VanDeVelde retired, triggering a 10-year buyout deal. That's when Delman began to toy with a bold idea: If he partnered with a private equity firm, and recapitalized his company, he could solve all of his problems at once. A private equity deal would bring in both capital and ambitious partners. It also would give him more control than he was likely to have if he sold Sunrise to a larger rival. Finally, recapitalizing would allow Delman to buy out his uncle's shares, which would allow Elliott to retire comfortably without draining funds from the company.

During a brisk walk one day in the fall of 2004, Delman hashed out his options with his wife and decided to explore private equity more seriously. In November, an executive at the capital financing arm of Plante & Moran, Sunrise's accounting firm in Toledo, helped Delman set up meetings with private equity groups. A few weeks later, Delman and his team decided on FdG and began negotiating with the firm. During the next few months, Delman took two trips to FdG's headquarters to get a better feel for his prospective partners. On a personal level, he felt comfortable with FdG's managing director, Doug Dossey, and several other companies that FdG had partnered with gave the firm high marks. Dossey, for his part, was impressed with Sunrise's strong client relationships. "The partnership they have with their customers gets them over the top," Dossey says.

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