A couple of years ago, Joe Zeigler found himself in a bind. As co-owner and CEO of M.H. Zeigler & Sons Inc., a $20-million apple-cider maker in Lansdale, Pa., he ran a company that dominated its market niche with a high-quality product and a nationwide retail distribution system. But the business was "incredibly seasonal," he says, "and we kept hearing from our customers that what they wanted was one beverage company that could provide them with everything from apple to citrus to smoothies to an entire juice-based portfolio. And I knew that we were just too limited in terms of our manpower and capital resources to be able to take advantage of that opportunity."

That led Zeigler to begin thinking about some kind of recapitalization for the company. When the capital markets were thriving, as they were until the spring of 2000, Zeigler (and successful entrepreneurs like him) had an array of options to choose from. But no more.

Fortunately, the activity on one financing front has remained relatively vibrant: strategic acquisitions. In such deals, companies or investor groups buy part or all of a small or midsize business; the impetus is a synergistic merger with another business that makes sense regardless of any stock-market gyrations. The company valuations -- not surprisingly -- are less heady than they were in the high-flying 1990s. But the upside potential for owners who want to sell is still strong, since some of the deals involve the sellers' receiving part of their payment in equity from the purchasing entity, and the value of that equity will presumably increase as the strategic investments pay off.

Zeigler's search for a buyer led him to North Castle Partners, a private-equity firm that has offices in San Francisco and Greenwich, Conn. The firm, which specializes in investments within seven industries, including a food-and-beverage group, acquired Zeigler's company in June 2000, in the midst of the downturn. While many strategic buyers might do an occasional transaction, North Castle has acquired 28 companies in the past three years and has evaluated more than 600 prospects. On a variation of the roll-up theme, its goal is to form partnerships with the management of acquired companies to create large and profitable businesses that will dominate their fragmented market niches and ultimately either attract their own strategic buyers or go public.

However, attractive as strategic transactions may be for some companies, they aren't right for everybody. Business fit is the issue here. An owner has to demonstrate a proven record of financial results, a desirable niche, and a likely growth potential -- the same features that would attract any potential buyer. But an owner must also target the pitch to a company or an investor group that can spot the synergies that will lead to accelerated growth. If the size of the potential market isn't big enough to attract the interest of significantly larger players, a strategic deal is not going to happen.

But that's only the beginning. As Chip Baird, North Castle's founder and managing partner, emphasizes, "These deals absolutely must be right for the seller as well as the buyer. People really need to know that they do want to sell, and many owners in search of capital really don't. And then they have to ask themselves questions like, Do I care about what's going to happen to the company after the sale? Is my ultimate goal to raise the most possible money from a sale -- which might make an auction or a simple sale a better idea than a strategic transaction -- or do I want to position my company for future growth that I can be part of if I want to be? Do I want to create an environment in which my employees can stay involved, too, or do I really not care about that?"

THE CHALLENGE: "We were just too limited in terms of our manpower and capital resources to be able to take advantage of [the market] opportunity," says CEO Joe Zeigler.

For Zeigler and his nearly 70-year-old company, which had been founded by his grandfather, a strategic sale seemed the right way to go. For one thing, the market it was in was huge -- nearly $2 billion was spent on natural and organic beverages in 1999 alone. But Zeigler didn't recognize the opportunity until he hired a financial adviser to help him evaluate his options. "My thought had been that we would try to recapitalize our company in such a way as to be able to finance an accelerated growth strategy on our own," he says, "but this adviser helped us realize that we'd be much better off by selling to a larger company with greater resources to tap into this very large potential market."

Once Zeigler and his adviser composed a summary of his company's finances and market strengths and began putting out feelers to potential buyers, the CEO realized another key lesson about strategic buyers: they're not all the same. "There were some cases when I could just sense that all they were interested in was the bottom line and how to cut corners, scavenge my company, and just pick and choose what would survive over the long run," he says. His impression of North Castle Partners was different in part because of the investment firm's preoccupation with getting to know him and wanting to learn more about his company than just its numbers. Baird says that his firm's nuts-and-bolts examination begins only after all the less tangible issues that will ensure a successful partnership have been resolved, which can take as long as three to six months. (See "Get Ready," below.)

There's tremendous flexibility in the way the deals can be structured. Zeigler ended up accepting the chief operating officer's post at the Ultimate Juice Co. (a North Castle portfolio company), which has sales between $150 million and $200 million, and his compensation includes stock options in the acquiring company. "In other cases, sellers want to receive some or all of their compensation in cash, and firms like ours are certainly receptive to that as well," says Baird.

Any regrets? Not for Zeigler, who says, "It's not the same as it was, but the business world isn't the same as it was, either. By selling our company the way we did, we were able to access additional resources for our company as well as for ourselves as owners. It was the right move for us."

Jill Andresky Fraser is Inc's finance editor.

Get Ready

If you're intrigued by strategic acquisitions, know that they entail being investigated by the most sophisticated -- and cautious -- of suitors. The process is complex and time-consuming. North Castle Partners expects that business owners will satisfactorily answer key questions above and beyond the usual due diligence. Among the details the firm might require:

  • Changes in cost-per-unit by product line (or service) for the previous two years
  • The names of any lost or new accounts in the past two years, with an explanation of what caused the change
  • An analysis of profitability by product line, location, and customer
  • Monthly income statements for the previous year and the current year to date, broken down by product line and division.

Rich Gersten, a vice-president at North Castle who is frequently involved in the firm's due diligence, recalls one company that seemed a likely prospect until North Castle discovered it was actually on the verge of bankruptcy. "I'm convinced that the seller really didn't know, because he had never put his company through this type of analysis," Gersten says. Which leads to a final tip: you'll save yourself time (and perhaps disappointment) if you bring in a financial adviser early to conduct a preliminary due-diligence process.

Hands On

I Remember the Face: Lisa-Adelle Wright's business card used to look like yours or mine. But Wright, whose $10-million Dallas-based company designs marketing materials, wanted her cards to stand out -- to "create a brand identity" for Lisa Adelle Design. So she redid her staff's business cards at the beginning of this year. Now the flip side of every employee's card displays his or her black-and-white photo. "It presents the feel of being a relationship-driven business," Wright says. She estimates the extra cost at about $2,300 for her 26 employees, to cover double-sided printing and photography. Employees were "overwhelmed" by the gesture, Wright says, adding that the photos have eased the task of networking at industry conferences and other schmoozefests. New contacts "remember who you are by the photo, as opposed to your card blending with all the others they collect," she says. --Ilan Mochari

The Whole New Business Catalog

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