I’ve been interested in K&K Screw Products since I sold the founder of the company his first three Davenport screw machines a million years ago. There have been several ownership changes since then. The company now has more than 200 multi-spindles and changed owners once again in December.
One private equity company sold the business to a bigger private equity firm this time around. CapitalWorks out of Cleveland had owned the firm (now KKSP) for five years, paid down the debt used to buy it, utilized the depreciation rules, improved the company by upgrading its data management, and facilitated two plant relocations. It plumped up KKSP’s EBITDA (earnings before interest, taxes, depreciation, amortization), and racked up juicy gains for the equity partners, which included management.
It was a textbook private equity deal and I was keen to find out the ins and outs of the game from an insider. Fortunately, Todd Martin of CapitalWorks was happy to discuss the deal with me.
His private equity firm has partners who came out of the manufacturing world, some have sold family businesses, others have come out of corporate America like him (an Alum of GE). He has a wide network of folks who pitch deals to his group and numerous contacts to quickly find key managers who might be crucial in making acquisitions successful.
I was surprised when he told me that his group usually puts up 50% equity and 50% borrowed money into its acquisitions. I had thought that it would push 80% in borrowed money, but his belief is that less leverage makes for a safer investment, particularly in the early stage of ownership. If things are going well, they might recapitalize as they did with KKSP, two years into the deal.
Martin says that the key to a private equity deal is rapid payback of debt, increasing EBITDA, and use of of the tax code to limit taxes. CapitalWorks usually likes to have top management members take a stake in the company, whether they are inherited from the previous regime or recruited from the outside. Skin in the game definitely focuses the mind on the endgame, which is usually a sale of the company. In KKSP’s case it was sold to Mill Point partners, a New York firm with deeper pockets but a similar focus on manufacturing.
I asked him if larger companies sell for a bigger multiple of EBITDA. He confirmed that is often the case. The management requirement effort for a company with less than $10 million in sales may reduce the multiple to two to four times EBITDA, while a $100 million-dollar company might bring 7-10 times. Martin emphasized that firms that merge to get to the higher sales number often shoot themselves in the foot because they overshoot their managerial competence. A safer strategy may be to pick up smaller companies just to acquire customers and skilled employees. This is something KKSP did under the CapitalWorks ownership.
Todd Martin ended the interview by relating a story about a private equity hotshot from Wall Street with a Harvard MBA who came to a potential buyout meeting with a briefcase and credentials, but no socks. The nuts and bolts owner of the business in play was unimpressed. “Next time find somebody who wears socks,” he told Mr. Martin.
Private equity is the name of the acquisition game today in manufacturing, but you still have to know what you are doing—and wear socks.
Question: Would you prefer to work for a private equity firm or an individual owner.