Palingen is About People: Owners
Kindred-Spirit Capital for Legacy-Minded Owners
Buying a good business is hard, sure. That’s more or less common knowledge in the investing world. But you know what else is hard? Selling a business that you have built over the course of decades and care deeply about. That’s hard - really hard. In addition to the sheer amount of time, work and effort involved in selling a business, parting ways with an organization you built and poured your sweat and energy into can be a very difficult time in an entrepreneur’s life. Your business is your baby - you dreamed it up, got it off the ground, guided it through highs and lows, and led employees that became family. And it is not easy to entrust that to anyone else.
One business owner we recently spoke to, the second generation operating his family’s manufacturing company, was ready to sell - had been for a while. It was time to retire and start spending more time traveling with his wife and visiting his grandkids. The hold up? Finding a new owner for his business who would maintain the incredibly high-quality standards he prided himself on and who would care for the employees he viewed as extended family, dependent on the business for their livelihoods. We found he was wrestling with the same three questions we hear frequently:
WHO should I sell to?
WHAT happens after I leave?
HOW do I start spending my time and energy?
When we started Palingen, we knew that we wanted to prioritize the people that we touched in the process of buying and stewarding great businesses. Of course that meant loving and caring for our employees, but what about the business owners whose companies we buy? What does it look like to humbly and genuinely serve these men and women at a pivotal moment in their lives? And how could we, as Palingen, provide compelling answers for the big questions they faced?
In speaking with this business owner who felt stuck, we had the opportunity to tell him how Palingen could help be the solution:
WHO should I sell to?
Palingen, structured as an evergreen holding company, isn’t a strategic competitor or a short-term, buy-and-flip PE firm. We acquire and hold for the long term, allowing us to make decisions that prioritize long-term value and the holistic wellbeing of employees.
WHAT happens after I leave?
Palingen aims to preserve the legacy and build on the success of the businesses we acquire. We work with sellers to craft a company-specific transition plan prior to close, and we apply the Palingen Talent Model to serve and invest in employees. We will continue to prioritize customers based on our guiding principle of serving others.
HOW do I start spending my time and energy?
Selling to Palingen is an invitation to become part of our family. We offer a portion of the purchase price in Palingen units to align interests and to share upside, and we will seek to use a seller’s skills and expertise to advise other Palingen portfolio companies (if interested). If desired, we can connect sellers to coaching and chaplaincy services during a strategic transition period. And all sellers are invited to join in Palingen events and retreats.
Focusing on the needs of a seller goes beyond helping owners decide if we are the right next steward of their business. When we commit to acquiring a business, we also commit to acting with integrity and consistency throughout the full transaction, from diligence to closing and beyond. Thankfully we have a lot of relevant experience (both good and bad), including many years’ worth of buy-side and sell-side transactions. We base our approach on some key lessons we have learned along the way:
Due diligence is about more than numbers
Due diligence always means pouring through financial statements and revenue projections. Far less frequently, though, do we see management teams and buyers asking questions about culture and shared values. And yet, we believe this can be one of the greatest areas for generating a shared foundation to continue the legacy post-sale.
We’ve learned a great deal about being up-front with our concerns and probing for potential areas of commonality and vision alignment. As legacy-minded owners, we are committed to honest conversations and a long-term vision for growth. Active change management during a sale process can reduce unnecessary confusion and foster a more trusting relationship with and among management teams and staff.
Ask the hard questions early
We also believe in the value of asking questions long before (and long after) a potential sale or generational transfer. Asking questions helps shed light on potentially uncomfortable topics. However, without asking those questions, these same topics fester in the dark, and can undermine valuable relationships.
We have witnessed an owner’s reluctance to discuss retirement plans and a management team who, instead of asking openly about what his transition plan was, whispered to each other, developed their own scenarios, and began looking for jobs elsewhere. This created unnecessary friction between key leaders in the organization. They were distracted from their work, which further reduced productivity. We watched as fear and anxiety began to erode the very foundation that the owner had worked so hard to build over many years. It was only after we began to push into that uncomfortable area with the owner that a healthier dynamic began to emerge. Once the management team was able to openly discuss the transition, the team felt the freedom to air their questions, actively cooperate in planning for the inevitable changes, and organically create a plan that had buy-in from the company’s key leaders.
Collaborate on the transition plan
Exploring the decision to sell a company, or transfer leadership, requires significant introspection and data gathering. We believe that an honest discussion about what a transition might look like, including succession planning, ongoing involvement, growth plans and corporate culture are all healthy and critical pre-transition conversations. No two sales processes look the same, and we have the experience to sit with the owner’s leadership team, ask and answer questions, explore various strategies, and arrive on the right plan for a specific organization.
Consider all stakeholders
Deals usually consist of just the buyer and seller negotiating, but there are far more stakeholders involved in the sale of any business. The employees of the business, the families of the employees, the customers, and the communities the business operates in all matter. Each should all be considered and valued in the process of transferring ownership.
Design the right capital structure
As a long-term holder, Palingen structures every transaction in a way that prioritizes and incentives long-term decisions and long-term value. We use conservative leverage appropriate for the company and industry as a tool to optimize the company's balance sheet. And, unlike most financial buyers, our goal is not to create a short-term IRR - our goal is to grow operating cash flow as we steward excellent businesses to new levels of greatness over a long-term hold.
There’s no question that transitions - especially something as pivotal as a generational transfer, leadership change or complete sale - require courage and stamina from both the outgoing owners and the new buyers. With over 40 years of combined experience, we are confident that our hands-on due diligence process will help smooth out some of the inevitable bumps along the road. But most important, our commitment to loving and serving the owners we buy from means that selling to or partnering with Palingen will be a very different experience than working with a traditional capital provider.
If you are thinking about selling your business or are an investor for whom this approach resonates, we would be thrilled to connect with you!
Tuesday, May 18th, 2021
Special thanks to Elisabeth Wadsworth for her help with this article