Cashing Out

A few years before Dunn Lumber reached its 100th anniversary, Sam and Barry Dunn recognized the need to divest themselves and other family shareholders in the business. With no obvious heirs to assume control and ownership, they first initiated an ESOP with key employees, then eventually sought to sell the business to an outsider.

FAMILY MATTERS: Peter Ganahl, president and COO of Ganahl Lumber, has been working on a succession and ownership plan that passes the business onto his four children, although just two work with the company. Photo: Tim Rue “We looked at every option,” recalls Sam, with the top priority being to divest with a reasonable financial return and, ideally, protect employees through the transition.

The smartest thing they did, he says, was hire a professional to broker the transaction. “When you are personally attached to a business, you need a buffer,” says Dunn, adding that the practical process of negotiating such a large-scale sale was over his head. “It’s so complicated, there’s no way I could have done it.”

George Spilka is one of those pros. He’s spent 30-plus years as a mergers and acquisitions consultant, primarily representing owners of small, family-owned, closely held businesses, including LBM and other distribution ventures, selling to larger companies.

In Spilka’s experience, corporate buyers generally look to acquire well-grounded, profitable small businesses for a variety of strategic reasons, “where the combination of the two firms will provide a higher value than what they are separately,” he says, rather than to simply eliminate a competitor or cash in on its success.

Recognizing a mutual benefit makes it far easier for companies like Dunn Lumber to choose that route. “Most sellers who don’t want to or can’t pass the business on to a younger generation look at an independent acquisition as the best option,” he says.

Spilka’s job is to protect his clients’ interests from typically more sophisticated suitors. “Most sellers have no idea how confrontational the process is,” he says, noting that there’s no room for emotion or protecting the relationship. “Sellers are considered pushovers, so you’d better be feisty, sharp, and know the buyer’s weak spots” to come out of the deal with your priorities intact.

Though Sam Dunn, his family, and vested employees walked away from the table financially satisfied and retaining key management positions, the deal included replacing the Dunn Lumber name with the ProBuild banner. Dunn is convinced that subsequent slow sales and employee cuts at then-Dunn Lumber locations are the result of hard economic times in Florida rather than a shift in management philosophies with ProBuild.

That said, the track record of corporate acquisitions generally, and in the LBM realm specifically, even before housing’s slowdown, is not stellar. “Large public companies have an arrogance about their management abilities that is laughable when you look at their results compared to the privately held companies they bought,” Spilka says.

Dunn was willing to give up some things to get others, and Spilka advises sellers to work from a position of leverage as long as they can. “Remember that you have something the buyer wants–the company,” he says. That lets sellers make reasonable demands, including continued employment for key managers, during negotiations. “Once you sell the company, you lose your ability to control the operation.”

The ESOP Option

ESOPs are complicated legal and financial transactions, but they can help transition ownership from a family to others without selling to outsiders, especially when company sales and profits are healthy.

Ganahl Lumber, for instance, initiated an ESOP in 1976, first as a tax hedge but soon as an effective way to keep more eyes on the health and growth of the business. “The stewardship of the company is now among more people,” says Ganahl, noting that more than 600 employees own a 30% stake in the business.

Similarly, Alpine Lumber, a 17-location, $148 million operation in Westminster, Colo., launched an ESOP in 1989 for eligible employees to transfer ownership from a family concern, also for tax purposes. Ultimately, the ownership structure fostered a “company first” culture and enabled employees to share in the company’s profitability and growth.

“I’d like to think that we would have enjoyed the same success under the original ownership, but … the opportunity to own a piece of the company has certainly helped us attract exceptional employees,” says president Bill Miller, noting the addition of several lumberyards, door and millwork shops, and truss plants since the shift.

For similar reasons, Dunn says that his company was more attractive to suitors because of the ESOP he put in place two years before the ProBuild deal, indicating a core group of employees vested in the success of the business. That said, the time it would have taken Dunn Lumber employees to pay back the Dunn family turned out to be too long and too dependent on the market, prompting Sam and Barry to consider other sales options.

For Spilka’s clients, many of whom look to reap a return on their lifelong investments in a company, ESOPs satisfy neither financial goals nor necessarily protect or benefit employees.

“An owner risks not having all of the notes satisfied if the business fails after the transaction,” he says. “The continuity and health of the business is probably better assured in the long run with a strategic acquirer,” including the financial and employment futures of the workers.

–Rich Binsacca is a contributing editor to ProSales.