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Lessons to be learned from the sale of a fabricator

Even for a company not ready for an ownership transition, preparing for a sale is a good thing

The pull back home can be very strong, as anyone who has returned to work in a family business can attest. Lisa Wertzbaugher can vouch for that fact.

After several years living in Chicago and working in the medical device industry, she made a pretty dramatic life change in 2013. She went back to work for her parents, Larry and Gloria Dlouhy, and the family business, Superior Tube Products in Davenport, Iowa.

The metal fabricator was looking to create a formalized revenue growth strategy, and after having done that for a large multinational company, Wertzbaugher felt it was time to apply her skills on a project that was a little closer to her heart. Like any metal fabricator, Superior Tube Products had done well in building a lineup of satisfied customers, but the largest one represented 37 percent of overall sales. The tube fabricator wanted to expand its customer roster and look to grow with some of its smaller customers.

Joined by a new chief financial officer around the same time, Wertzbaugher said she noticed some opportunities to improve company operations outside of sales and marketing. For instance, the company didn’t have a very structured human resources department, lacked the ability to generate timely and thorough financial reporting, and really had no formalized board of directors, which hindered strategic planning.

“So we started working on additional strategies,” Wertzbaugher said. “I was there for about three years when my parents decided that they were going to sell the business as an exit strategy.”

The announcement didn’t come as a total surprise. Both parents were in their mid-60s, and she said that she anticipated a change could come within five years of her going to work for her parents. (She had no other siblings involved in the family business, but her sister’s husband works there.) They may have been spurred on by some of the changes taking place at the shop.

By 2015 the CFO and Wertzbaugher had created better financial reporting. Company leadership now was able to look at monthly sales, budgets, and balance sheets much more easily and track things like quotes and part deliveries. They also had the ability to drill down to find out such things as the total cost of work for projects and better manage sales schedules and priority work.

Human resources practices were modernized as well. The employee handbook was revamped for the first time in a decade, and it detailed important policies such as medical leave, disciplinary penalties, referrals, and benefits. The latter covered a more complete health insurance program, a wellness program, a retirement plan, and policies addressing time off and flex time.

The company now had formal guidance for job interviews and exit interviews. Job descriptions were created and documented. A training plan was created for each job function. Reviews were created and regularly scheduled.

It also formalized compensation activities. It created wage brackets for job functions and established a documented bonus and commissions policy. Labor reduction and wage freeze policies also were established in case severe action was needed to address a downturn in business.

These bent and laser-cut tubes are examples of parts that Superior Tube Products fabricates for its customers.

The changes and focus on diversifying and growing revenue led to Superior Tube Products finding a suitable buyer in early 2018. ESP International, with headquarters in Cedar Rapids, Iowa, has been a supplier of seals and rubber products to the off-highway OEM market for almost 50 years. ESP International and Superior Tube Products shared many of the same customers, but ESP International has a much larger footprint. The employee-owned company has branches in Dallas; Shenzhen, China; and Chennai, India. It also is involved in contract assembly, logistics management, and vendor-managed inventory programs for some of its customers.

Wertzbaugher is now leading her own consulting practice, helping other small and midsized companies create sales plans to grow revenue and generally modernize front-office practices. She’s also helping out her husband’s business, Wertzbaugher Services, a fabricating and welding shop that also offers freight hauling in the Iowa City, Iowa, area.

She shared Superior Tube Products’ journey in a presentation at the Fabricators & Manufacturers Association’s annual meeting in Nashville in early March. In the presentation, Wertzbaugher shared valuable lessons that the company and her parents learned during the five years leading up to ESP International’s acquisition. Here are some of those lessons.

The Earlier the Start, the Better

If the owners of a metal fabricating business are thinking about selling the shop as an exit strategy, they can’t just flip the switch and expect to maximize the sale price in a three- or six-month stretch. A lot of work needs to be done.

Wertzbaugher said that even though her parents officially didn’t announce a plan to sell the business when she started in 2013, they already were taking steps to make that happen. Formalizing the sales effort, diversifying the customer base, and filling the pipeline with work were going to put the tube fabricator in a much stronger position down the road, whether it was for sale or not.

“For a company of their size and considering where they were at as a starting point, I think five years was comfortable for them to make the transition,” Wertzbaugher said. “You can always expedite progress, but it’s going to put stress on the organization.”

Focus on Revenue

Nothing is going to influence that multiple more than sales revenues. If a fabricator wants to maximize the sales price, it better have a robust customer base with a strong forecast of future work. That’s why Wertzbaugher was brought on to focus on sales growth at Superior Tube Products.

“Revenue always comes first, because when you can get the money coming in, it takes the pressure off operations. It buys time to get the house in order,” she said. Also, additional revenue creates the means to invest in personnel, software, or machine technology that can help to improve operations.

By the time that Superior Tube Products was sold, it had seen revenues grow 32 percent from 2013 to 2018, and the number of active customers grew from 44 in 2013 to 52 in 2019.

Sales diversification also had taken place over those five years. Whereas agriculture represented 68 percent of total revenue in 2013, it accounted for 48 percent in 2018. Superior Tube Products had boosted sales in the lawn and garden, fitness, and industrial products sectors at that time.

Several Purchasing Options Exist

The decision to sell a business is a “very emotional” one, Wertzbaugher said. In the case of Superior Tube Products, the owners had developed close relationships with many of the people who worked for them, and that family had grown from 2013 to 2018, from 42 to 65 employees when the company was sold. The Dlouhy family certainly wanted to maximize the sale price of the business, but they also wanted the company to be in the hands of an attentive and caring owner.

Superior Tube Products worked with a broker to find the right buyer. Wertzbaugher recommended a shop thoroughly vet and interview multiple brokers to find one that is the right fit for them, because a strong working relationship is needed, especially if disagreements arise along the way.

“It’s the biggest decision you’re ever going to make in your life. That’s what they do. They have experience. They know the tax laws. They understand the process. They know the key players that need to be involved. They have access to accounting firms and attorneys,” she said.

The fabricator found the right buyer in ESP International, but that’s not the only alternative that shops have. They could seek out private equity funding, which could provide company management while keeping key employees. Sellers also could work with employees to create an employee stock ownership plan company or even arrange for a select group to purchase the company.

Seek out Expertise

Wertzbaugher said a company can benefit from an outsider’s perspective. That’s one of the reasons Superior Tube Products was in the midst of adding a non-company member to its new board of directors before her parents announced their intentions to sell the company. It’s also one of the reasons that her parents found the relationship with the broker to be so valuable.

“It brings valuable experience and ideas that your team might not see or think of because they’ve been in the same environment their whole career,” she said.

Don’t Underestimate the Work Involved in Due Diligence

The Dlouhy family signed its letter of intent to sell Superior Tube Products in September 2018, and the closing wasn’t until April 2019. Even with a strong CFO in place, a lot of work was needed to pull together valuable business details to keep the business purchase on track. Wertzbaugher said that the CFO pretty much spent the entire six months prior to the sale working on nothing but the due diligence related to the transaction.

During this time, a lot of back and forth occurs, and some issues have the potential to get a bit heated. For example, a listing of inventory delivered to the buyer only leads to more questions. What is the accuracy of the count? What is the likelihood of items being shipped? Negotiations continue even after the letter of intent is signed.

“We were not expecting it to be such a long process,” Wertzbaugher said. “But it was thorough, so that was good.”

Having the CFO in place really helped, she added. He understood the language of accounting and allowed the company managers to keep running the business while he focused on providing the backup material that supported the data upon which the sales price was determined.

“A smaller company should be prepared to handle this due diligence and maybe have a resource on staff that can be dedicated to this task,” Wertzbaugher said.

The Hard Work Is Worth It

Wertzbaugher doesn’t sugarcoat it: Preparing for this type of transition is not for the weak. As revenues began to grow, the pressure to keep up shifted to the operational side of Superior Tube Products. That meant integrating new employees, staying on top of current job commitments while bringing in new work, and implementing new technology and processes to accommodate the new opportunities.

“By the time we closed on the deal, there was not a moment that [my parents] looked back,” Wertzbaugher said. “They felt they had put in so much time and invested so much energy in the strategy that we deployed and in the two years we went through the sales process, that by the time they got to the finish line, they were done.”

In the end, the Dlouhy family got an offer that was more than the valuation they had done, and they felt the company was in good hands with ESP International. As a matter of fact, ESP International was recognized as The ESOP Association’s Iowa/Nebraska Chapter 2019 ESOP Company of the Year in February. The award is based on involvement with the ESOP Association and its programs and the nominated company’commitment to employee participation, wealth creation, and individual dignity and worth.

A Final Piece of Advice

Even if an owner of a fabricating company is not considering selling the business anytime soon, he or she still might want to have an independent valuation done. Wertzbaugher said her parents had three done, pulled together by the brokerage firm that handled the sale, an independent accounting firm, and the company’s CFO. It’s good to know where the value of the company stands in the eyes of others.

“It’s always good to gauge whether you are making progress,” Wertzbaugher said. “Sure, it can be time-consuming and pricey, but it’s worth it.”

It’s also good to update every five years are so.

“It shows whether you are moving the dial or not,” she said.

ESP International, www.espint.com

Superior Tube Products, www.superiortubeproducts.com

Wertzbaugher Services, www.wertzservices.com

About the Author
The Fabricator

Dan Davis

Editor-in-Chief

2135 Point Blvd.

Elgin, IL 60123

815-227-8281

Dan Davis is editor-in-chief of The Fabricator, the industry's most widely circulated metal fabricating magazine, and its sister publications, The Tube & Pipe Journal and The Welder. He has been with the publications since April 2002.