Doug Farren, Managing Director of the National Center for the Middle Market, sits down with Bob Grote of The Grote Company to talk about experiences with M&A, and some tips for beginning the process.
Transcription
Mergers and acquisitions-- it's not just for enterprise giants, but plays a significant role for mid-sized businesses as well. Come learn how one middle market company has experienced the ups and downs of this inorganic growth strategy.
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Welcome to The Market That Moves America, a podcast from the National Center for the Middle Market, which will educate you about the challenges facing mid-sized companies and help you take advantage of new opportunities.
In today's podcast, we'll pick up on some of the Center's recent research on M&A in the middle market and hear about one company's experiences with the process, key challenges, learnings, and advice to share. Hi. I'm Doug Farren, managing director of the National Center for the Middle Market, the nation's leading research center focused on mid-sized companies in the United States.
Located at Fisher College of Business here at the Ohio State University, the Center is a collaboration with SunTrust banks, Grant Thornton, and Cisco Systems, with a mission to ensure the vitality and robustness of mid-sized companies are fully recognized as fundamental to our nation's economic prosperity. Joining me today is Bob Grote, CEO of the Grote Company. Bob has been CEO since 2008.
And in addition to being responsible for overseeing the company's growth, he also looks after the company's partnerships, as well as the latest in food technologies. Bob is also participating in our industry immersion program-- not only as a classroom speaker in the fall, but is also sponsoring a student project with four of our current Fisher students this semester. So welcome, Bob.
Thank you, Doug.
So could you just start out telling us a little bit about the Grote company, its history, and some of its early success?
Sure. I have to say, it's actually a quite interesting little short history. A lot of people here local to Ohio would recognize the Donatos name, and Donatos was founded by Jim Grote in the early '60s. He also happened to found the Grote Company, and he is my uncle.
He had this idea that putting pepperoni on a pizza by hand was difficult and time consuming in his restaurants. So he envisioned this machine that in one swoop would slice pepperonis from the sticks and drop them directly onto his pizza to speed up the process in the restaurant. As it turns out, you don't put big giant slicing machines into restaurants with a bunch of kids running them. It's just not safe. It's not a viable way to go forward.
However, at that same time, frozen pizza was starting to take off. This is the early '70s up in Wisconsin and Minnesota and Kansas, where a lot of cheese is being made. Pizza was taking off. And so somebody told him he should go check that out, and he did.
And what he saw was that each line would have a bunch of people standing there putting one or two or three pieces of pepperoni on the product as it went by. He said he could automate it. He literally got orders from multiple customers on his first trip and had to go back and figure out how to design it.
And he went back, called his brother-in-law, who was an engineer at Delco Electronics, and said, hey, do you want to form a company? And the Grote Company was born. And for the first eight years, all they really did was make pizza topping equipment.
And it became to be known as the Peppomatic. It's a registered trademark to the Grote Company, and it puts pepperoni onto pizza. We still make it today, and the vast majority of pizza throughout the world is still produced with putting pepperoni on it by the Grote Peppomatic.
After that, they got into some of the other things that went on. They got into a slicer applicator that helped to automate food assembly. Frozen foods are assembled. A lot of stuff is done by hand. This equipment does some things that you formerly had to do by hand, you can do with a piece of equipment.
And then the one that really vaulted us forward and another big step was the growth of the precooked bacon market. Most of the bacon you get at fast food service, quick serve restaurants, and that kind of thing is precooked in a factory. And we do all that slicing onto big, giant belts that go through giant microwaves and produce all this bacon that we all love.
The bacon market continues to grow. Our business continues to grow with that. And that's kind of how the Grote Company got its roots and got its jump start. That leads us really into about the early 2000s, and we'll talk about more and our changes for the 2000s as we continue this conversation.
Yeah, that's very interesting. So in addition to some of this, I guess, product development, what have been some of the primary factors of growth for your company?
Sure. It's interesting. Unlike a lot of the companies that were US-based in the early '70s, mid-'70s, Jim-- I wasn't here-- but Jim and his partner Tom said, hey, let's go international. And they did an early international expansion, primarily into Europe at the time. But it brought them into East Asia. It brought them into Australia. It brought them into Latin America very early in the growth of this business.
Today, the export market is well over half of our business and continues to be an incredibly, obviously, important part of our business. So that was the early part of our growth. Strong product development's always been there. We dedicate a lot of resources into product development.
And then being very targeted on how do we expand our product lines, extend our product lines, and then what acquisitions primarily can we utilize to get us into parallel markets and allow us to further blossom. We are a niche equipment manufacturer, and so sooner or later, you fill up your niche. And then you only grow as fast as your niche grows, and so you must find other niches.
And we like being a niche manufacturer, but the one downside of that is the market is very, very-- actually, you have to go worldwide. And you have to expand your niches.
Yeah, so you just touched on what I want to spend most of our discussion talking about, which is M&A. As I mentioned a little earlier, the Center has released some new research on M&A in the middle market. And what we found was it's actually quite prevalent.
Growing companies like your own become both kind of serial acquirers as well as very attractive targets. So I thought I'd ask you a question about your experience. We could spend some time learning about your experiences with the M&A process. And maybe you could tell us about that very first acquisition that you made and what that experience was like?
You know, I hate to say, but I have to tell you about the first two together, because they happened literally three months apart. And here we are. We're a company that was 25 years old or maybe being pushing-- yeah, it's probably 25 years old-- and have not done an acquisition. And this is in the mid-2000s.
And we come along, and we've been working one, who made sandwich assembly equipment over in England-- and working one for literally years, thinking this is a great, great fit for us. Literally, as we're getting closer and closer-- this is summer of 2007-- this one pops up out of the blue out of Iowa in a parallel market.
We understood it. We understood their business model. It just happened to be in a different food niche than we're in. And so we fell in love with that as well.
And so we pursued those and convinced everybody within our team that, yes, it's possible that somebody who has never done an acquisition could do two at one time. And we did. They closed in July and October of '07, and they were night and day.
And this is the reason why I have to talk about them together is the one which closed in July-- which is our very first one-- was a single-owner, founder, longtime, small town, profitable business, but not incredibly profitable-- more of a lifestyle for this guy. He's looking to retire, and he fell in love with trying to sell it to the J.E. Grote company. And what our values were-- they were very similar to his.
And so that one, from day one-- what we paid for it, how we merged it within our group-- we had a perfect person on the bench to put in there to run it in the absence of the owner that we just bought out. All those things worked out beautifully from day one. It was profitable. We continue to grow profitability throughout the years, and it's been great for us for a decade now.
The other one was a bit of a nightmare. We believed that we could do anything at the time. And so we took over a struggling business in a foreign land, even though we have a big presence in the UK-- a struggling business, and struggled with it to say the least. We lost money for quite some time. Ended up having to close a manufacturing facility in the UK and move it to the United States within our current manufacturing here in Columbus.
And it's now an incredibly important, profitable, the largest product line within our overall product line that we offer. And it's a wonderful story of success now, but it took us 10 years to be able to say that. And so I don't know what I learned from all that yet, other than undertaking two of these at one time is not trivial. You're not as good as you think.
And in hindsight, even though it's all worked out now, I don't know if that was the best move going forward. I should have decided I'll do this one first. And if in a year, if that one's still there, then I'll go talk about that one.
Right, right. So what are some of the things that you think about as these opportunities come up? You mentioned the one just kind of popped up out of the blue. What are some of the things that you evaluate or ask of yourself or the organization before you approach these deals?
Yeah. You know, as you mentioned I think in the introduction, I head up that effort. And so I've doing a lot of networking. And what I always evaluate first thing is, does it fit our vision? And everybody has a vision, and everybody talks about it.
But we really live by ours. Ours is created-- or I should say recreated-- by our people. And we sat around, and we created this vision to feed a growing world together. And what it is-- we believe that we're more than just an equipment manufacturer. We're contributing to the ability to feed the world and to more efficiently bring food from farm to your fork and those kind of things and make it able to get much more out of the thing.
We're just a small cog. That's why together's in there. We're just a small cog, but I want to make sure that the companies that we're looking to acquire or to merge with have a similar belief-- that it's more than just I'm just trying to make a buck banging out some equipment or just trying to solve an individual problem. Are they concerned? Are they focused on hey, we play a really important role in that?
And so honestly, I look at that. I know it sounds a little bit fuzzy, but I really look at where they believe they fit-- and then a little bit from just a pure practical standpoint. You look at, is it market channel I understand, or is it something new? I get nervous about that. We don't do a lot in retail. It's all B2B industrial, so I'm very cautious about that.
Is the product related to something already selling, or is it a pure leap off the other side? What is my competitive environment? What is their competitive environment in that regard? There's a lot of long-established companies in this business. Am I going to be fighting a good one?
Is it worth it to me? How do I increase their ability or their market coverage? If their market coverage totally overlaps mine, I won't grow. If they're not strong in an area or geographic area where I am or a market that I am, then I feel like, oh, wow, I could grow that further. So I look at those kind of things.
And then finally, but always the straw that can break the camel's back, is once it gets to the point where I'm visiting, and we're talking to them, it's the culture. As soon as you walk into their location, you can smell, you can feel, you can taste their culture. And it has to fit.
Jim Grote put a company of goodwill and principles. And you can tell when you walk in. You can tell when you talk to the person. And when I've messed up the most-- because we've done some small acquisitions where we kind of overlooked the principles of the owner-- it turned out that there were some things in the closet that came back and bit us. And so I'm very weary now. I'm very weary now when it comes to the culture aspect.
Yeah. That sounds like there's quite a few boxes to check that you listed off there. Two part question-- one is, how long is that preparation process? How long does that take to complete typically? Does it vary in your experience?
It does vary dramatically based on where the company is that I'm talking to in their desire to sell. Are they prepared for sale, or is this something that I sprung on them and they go, oh, that would be a good idea? If it's that, then literally you just have to spend the time to get to know them to pull out the information that you need so you can do a proper valuation to be fair to them on an acquisition, as well as be fair to the buyer.
So it can be months. We worked on some that took us a year and then failed. We had that Vanmark one I mentioned in the beginning that just popped up. It popped up in February, and we had to close by July. So it cam go very, very quick.
I think the number one driver is, where is the seller at in their cycle to sell, if you know what I mean? I don't know if I explained that well. Where are they at? Did they already prepare this? Do they have good financials already?
They can explain their business well-- or is this just something that they go, that would be a good idea. I like Bob. Maybe I'll sell it to him. And then it just takes a lot longer.
Right. And what are the other resources that you relied on for advice, or insights, collecting data. Because I'm sure this isn't something you just do in a vacuum. Are there other resources that you tap into?
There's definitely quite a few people involved as we get through it. I'm kind of like the point of the spear, so to speak-- the first guy that said, hey, this will be interesting. You guys got to check this out.
And then my discussion typically at that point will start with my brother, who's my partner in the business, and my uncle, who's still one of the owners and partner in the business. And we'll have a discussion. And we will flesh out the what ifs and all those things I mentioned about what I'm looking for.
The what ifs-- I wonder if they're in this part. I wonder if this-- and so what we want to learn more about. If we think it might smell good after that, then I may just reach out to the owner or the ownership group that's looking to sell and ask for some of those things so I can get a better understanding of the business.
Or at that point, I may also pull in my CFO. My CFO came from a much larger company. He joined us about six years ago, and he was involved in a lot of these. He's a serial acquirer, and so he's really good at this from a financial standpoint-- asks all the right questions. And I'll get him involved and maybe talking to their CFO. And they just talk and talk and get a lot information.
Then the next step would be, OK, now I want my sales guys involved so they can figure out, OK, how do we sell it? Can they sell it? Do they know the market for it? Is this a good thing, bad thing-- get their input.
And our operations guys-- hey, how are we going to make it? Are we going to keep it there? Are we comfortable with it? Is there any synergies in our manufacturing capabilities-- that kind of thing.
And then we have an array of outside consultants-- what we need-- that have been long involved with Jim Grote as well as the Grote Company and myself for years that are good either financially or operationally or even just legally. We have had a long relationship with [INAUDIBLE] here locally. And they bring a lot to the table, because they do a lot with M&A. And so they can give us some advice. And they're not afraid to say, are you sure about this, and really challenge you.
So it is a process that can-- upwards of seven to 10 people can be involved in a conversation sometimes, trying to beat this up a little bit before you make the big deal. The smaller ones, honestly-- we bought some things that was more just like buying a product line. That one is, hey, my brother and I look at each other and say, this is cool.
We tell Jim Grote, hey, I think I can pull this off. And we might bring the CFO in and let him know he's going to have to write a check. It can be that quick sometimes depending on what it is.
In our research, we learned that one of the common frustrations or maybe misconceptions is around the valuation process. So what tools or steps do you rely on for that?
My CFO, as I mentioned, he's been heavily involved in it. He will put a sanity check on the valuation or whatever that quote asking price by our customers is. We also involve a firm here in town sometimes, where we may ask them to do an official valuation for us.
But in my world in the middle market here and what we're doing, it is really-- the value is less what is the [INAUDIBLE] of their EBITDA. It's more what can I do with a product line, and where can I bring it? Because if it's just going to be I'm buying it, and it's going to stay status quo and grow at 4% or 5% a year, it's not valuable to me. That's not what I'm trying to build. That's not what we're trying to do.
It's does this product line fit within what we're trying to do, and then can I take it big? And so I may buy something that, literally, they have almost zero earnings and pay a good number. So you couldn't really value the company.
It's the idea, the design, the gamble, I guess, that this thing-- I can take it big, because I have the distribution network. I have the manufacturing capabilities. I have the brand name-- whatever the heck it is, that will allow me to move it forward.
So the traditional ones where, OK, I have a high performing company, and they put it out for market. And there's 22 people looking at it. Yeah, that's going to be a gut check on how much you're going to have to overpay. And as a middle market guy, I have a lot of trouble competing against the money people out there that have that funny money-- that somehow they can just overpay and somehow justify it.
I can't, because I've got to worry about cash flow and everything else. And so I don't know if I answered your question there. It's such a nuanced look at it.
Right. Hey, final question for you, Bob. If you had one piece of advice to give to a middle market company who is maybe looking to do their first deal, what would you tell them?
Sure. I'll call it this. Start by being publicly curious about acquisition. And when I say publicly, do that within your market network. Be the guy waving the flag. Go out and go to your industry events. Go to your things and let people know you might be curious.
Word spreads, and introductions will be made. They'll think about you. You'll make some relationships. You'll develop those relationships. You'll develop some business partners that you might end up doing business with. They might private label for you. They might do some of these-- you might become their customer. Who knows?
And then it just happens, and then the acquisitions kind of follow along with that. It's not a fast method to it, but what it is-- I believe it's a more sure way of making sure you don't make the blunders just because you want to get an acquisition under your belt. Do it slow that way.
I say slow, I don't mean deliberately slow. I mean let it out. Get your name known as somebody who might be on the market to buy something, and do it from the top. Do it from either the owner of the mid-market business that's looking to acquire, or the CEO, or whoever that might be. Do it from the top. Because then they know this is serious, and you can make real decisions moving forward at the point that is necessary during these discussions.
Great advice from a serial acquirer. So I want to thank you, Bob, for joining us today. It's been a great discussion, and I loved learning about your point of view on this topic.
For those interested in learning more about our research on M&A in the middle market, visit our website at www.middlemarketcenter.org. And to subscribe to our podcast, visit iTunes, Stitcher, and wherever podcasts are found. And thank you for joining us today.
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