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STRATEGY

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?

Joe Vaughn

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

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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.

Still, Delman knew that selling a big stake to a private equity firm, even one that seemed to share his philosophy, was risky. At Great Lakes, he saw first-hand how an ownership shift can change a business. Though Delman would still be Sunrise's largest individual shareholder, FdG would hold three of the five seats on Sunrise's board of directors, to which Delman would be required to give quarterly reports--a far cry from his low-pressure relationship with his uncle and VanDeVelde.

Delman's conversations with Dossey helped set him at ease, but he still worried that bringing in a new partner--a private equity firm from New York City, no less--could damage Sunrise's relationships with its customers. Would they stop thinking of Sunrise as a reliable family business? Delman wasn't sure he wanted to find out.

The Decision

At 5 o'clock in the afternoon on March 29, 2005, Delman gathered his sales staff in Sunrise's conference room and broke the news: A few hours earlier, he had sold a 70 percent stake in Sunrise to FdG for $50 million in debt and equity. Delman laid out his case, explaining that FdG's capital infusion and strategic expertise would only strengthen Sunrise, making their futures more secure.

The next morning, Delman held a similar meeting with Sunrise's office workers and, that afternoon, he met with the company's shop workers on the factory floor. To convey a united front, his uncle attended the meetings, along with Mike Roncato, Sunrise's vice president of sales, and Cliff Langdon, vice president of operations. Though some employees were skeptical, most took the news in stride, and nobody quit.

Delman spent the next four days calling most of his top 50 customers to give them the news, reassuring them that Sunrise's customer service would remain the same. Many clients were concerned, but Delman assured them that, as the company's largest individual stakeholder, he would continue to run the show. He also reminded them that the private equity infusion would allow Sunrise to roll out a wider selection of products at a faster pace.

Delman didn't waste any time. With the help of a team of industrial engineers, he reconfigured Sunrise's plant to boost efficiency. The factory now has separate production lines for different types of windows, slashing the time it takes to make each one from six and a half days to five days. In the past 18 months, Sunrise has rolled out a new line of beveled leaded glass and added three new colors. The company has expanded into three new markets, and now ships windows to 1,000 clients as far away as New England and Texas.

There is one downside to branching out: Delman now spends a few extra days each month on the road, courting new customers. But his efforts are paying off. Since 2004, Sunrise's sales have jumped 27 percent, to $38 million, and the company has remained profitable despite the extensive capital expenditures. Best of all, Delman still feels as though he's in charge. After the deal with FdG closed, for example, he called Dossey to talk about allocating $20,000. Dossey's response? "Gary, thanks for asking me things like this, but just make the decision and do it."

The Experts Weigh In

It's a bad move

I would not have done it. The private equity investors are telling Delman things that they know he wants to hear regarding fast growth and expansion. It takes a lot of work and good connections to accomplish those goals. For example, Delman will have to find enough qualified employees who know the window business as well as he does to support such fast expansion. Dealing with cultural differences in various parts of the country can also be challenging.

William Shull
Counselor
SCORE
Toledo

It won't be easy

When you run a family-owned business, you get to pick and choose what you want to do. When you have investors looking for rapid growth, on the other hand, you have to make some hard decisions to meet their expectations. Delman's success is going to depend on the scalability of Sunrise's office services, manufacturing, and sales infrastructure. He has to leverage those things to keep expanding.

Brian Opielski
Owner
Apex Management Group
Malvern, Pennsylvania

A great opportunity

The window industry is composed of many players, and the larger players have been more successful. If executed properly, this deal could end up being an excellent opportunity for Sunrise, giving the company additional sources of capital and the opportunity to merge with another company over time. The deal will probably help Sunrise reduce its overall cost of capital. And it will allow Delman to diversify the personal assets that he has invested in the business.

Paul Aran
Vice president
Moody's Investors Service
New York City

What do you think?
Was a private equity deal the right move for Sunrise Windows? Let us know at casestudy@inc.com.

Last updated: Nov 1, 2006




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