Earlier this year, Ricart Automotive bought the three-store A.D. Farrow Co. Harley-Davidson dealership, and America’s oldest Harley dealer became part of one of the nation’s largest and Central Ohio’s oldest car dealers.

Fred Vorys was one of the investors who helped Bob Althoff buy A.D. Farrow in the early 2000s. He also worked with Althoff on the sale, encouraging him to think like an investor.

“You get so ingrained in operating the business, where you’re totally consumed with the customers and the employees and the competitors and how you’re going to fund things, but at the end of the day, until you put the cash in your pocket, you don’t have a gain,” Vorys says. “You need to think with the discipline of an investor about how you’re going to monetize what you’re building. It doesn’t just happen.”

While you still want to think like an operator to keep a business successful, you also have to spend time and invest money into how you’re going to get out of it, he says. In addition, any time you’re selling, if you really think the organization can grow under new ownership, you might want to think about holding on to a piece of it.

“If it’s really the right buyer, why, as an investor, would I want to leave it? Why would I want to leave 100 percent of the investment behind?” Vorys says.

The founder and principal of Aegis Advisors walked through the A.D. Farrow sale at the Smart Business Dealmakers Conference in September.

Looking with clear eyes

Over the 18 years that Althoff ran A.D. Farrow, he modernized the business operations and substantially increased the valuation from what the investor group paid for it, Vorys says.

“He was a fabulous operator, but the strategy to exit was someone was going to buy us some time, somehow, for some amount of money,” he says.

Vorys helped Althoff see that they were being too passive about protecting the generational wealth that was the company stock. They needed to act more like a private equity investor with a proactive strategy to get out of a deal, so that Althoff’s personal wealth would not be too tied up into an illiquid asset.

“When you’re figuring out whether to monetize and how to do it and when to do it, in particular, it’s a pretty standard checklist that you walk through,” he says. “And Bob was really not much different than most people.”

The minority investors hadn’t received a return in a long time, which created a liquidity situation, as they were looking to diversify or redeploy capital into other investments. In addition, Althoff had a concentration problem in his personal portfolio — the unrealized value of the company stock — that caused him to run the business conservatively and cautiously.

However, Vorys says, there was a bigger issue. The valuation was flattening for the business, as charted on an annual basis.

“The conclusion that we reached was that the existing group just didn’t have the resources and the talents to really get the business to the next level,” he says. “We had taken it up a level, but we couldn’t take it to the next one.”

The business needed a different majority owner, and it probably needed a different CEO with different skill sets, different ideas and a new burst of energy.

Setting up a successful deal

Vorys says they didn’t talk to any other potential buyers besides Ricart, because it was the most logical option, even though, as a family office, the deal had a lot of perspectives.

“Now, we did have a good backup that we are very confident about, so that firmed our backbone during the negotiations, but we never actively pursued anyone else,” Vorys says.

In addition, about halfway through the negotiations, the cultural fit started to help move the deal along. People started getting excited about being in business together.

However, there were still a few issues to deal with.

  • Ricart Automotive had always owned 100 percent of every business it ran; it wasn’t interested in doing a partnering deal.
  • Ricart Automotive is a very disciplined buyer. It’s never the highest cash bidder for a property, and the company won’t participate in a deal process.

Therefore, the sellers didn’t run a process, he says. They knew it was going to take a lot of time. They had to be patient and grow a thick skin, dealing with any cultural frictions the buyer had toward the deal.

Althoff, Vorys and the other investors also broke the deal into components.

“We wanted them to buy the operating entities, which we’d acquired, but then each property was on a developable piece of real estate that was in attractive parts of Columbus — Franklinton, Delaware and Etna,” Vorys says. “So, we gave them their choice. We said, ‘You can pick whatever real estate you want to buy, and we’ll keep the rest and any other unwanted assets.’ We didn’t force the whole thing on them.”

Finally, the purchase timing was broken into two pieces. The Ricarts bought the majority interest immediately, and they will buy the minority interest in five years, at a negotiated formula.

“The theory behind this is that if we take the cash that we got at the closing, and then you take the present value of what the minority piece will get paid for in five years’ time, and you add those two together, we believe it’s going to be a substantially larger number than the highest cash pay bidder that we would have gotten today,” he says.

So far, everything looks good, but Vorys says the investors will only know in five years whether Ricart can increase the value of the business as expected.