Brett Motherwell has always been fascinated with buying companies and creating value with them. It’s different than investing in real estate, where he got his start.
“You can create value in a piece of real estate, but unless you’re developing, it’s difficult to create significant value,” says the Kassel Equity Group managing partner. “For the most part, your max potential is capped. Whereas in businesses, you can do a lot more just by changing a handful of things around, focusing dollars and efforts on areas that may have been neglected before.”
Motherwell and his partner, CEO Thomas Werner, have taken majority control in all of their deals. However, the mix has moved away from distressed real estate to cash flow properties and building out Kassel’s subcontracting divisions and other mergers and acquisition-oriented business units.
Here’s how the investment company shifted its buying strategies.
As a host committee member, Kassel Equity's Brett Motherwell has helped shape the upcoming Smart Business Dealmakers Conference (formerly ASPIRE), which takes place on Sept. 25 at the Hilton Columbus Downtown.
Werner started the company, focusing on distressed single-family homes. Several years later, Werner and Motherwell were investing in 40-some houses a year and had branched into larger commercial and multifamily assets, which also were distressed.
“It wasn’t a situation where we’re coming in and throwing some paint on there and a handful of new windows,” Motherwell says. “It was buying an apartment building with 80 units, where there’s 15 percent occupancy and 5 percent of those people are paying, and you have to redo the entire complex.”
At the height of their investing, depending upon the valuation, he says they owned somewhere between $75 million and $100 million worth of real estate.
“We’ve started selling some of those assets and refocusing those dollars on things that we can get a better yield out of in the real estate side,” Motherwell says. “So, right now we have four or five of our properties in contract [to sell] and we have three properties in contract to acquire.”
Since the beginning, Kassel has always run its own rehabilitation to control the process and costs.
Around 2015, during a tenant buildout for a long-term government lease in a 41,000-square-foot office building, a confrontation between a plumber and HVAC guy resulted in lost time and money. That solidified an idea: Let’s buy subcontractors — HVAC, plumbing, electrical, fire suppression, etc. — and consolidate them, because if people only had to work with one person, it would mitigate the potential for mistakes and delays.
“No one was bringing that consolidated package to the marketplace and branding themselves that way,” Motherwell says.
Finding its niche
Kassel acquired its first company in June 2016. By July 2018, Motherwell says, they’d bought eight more to create one of the largest subcontracting companies in Central Ohio with 550 to 600 employees.
As its subcontracting abilities grew, Kassel’s real estate portfolio didn’t need as many contractors. Instead, the acquired companies focused on larger projects — schools, hospitals, corporate headquarters, fulfillment centers and warehouses.
“While there is potential for crossover, that was never our primary focus,” he says. “Our primary focus was to drive revenue growth and efficiency through providing what we felt to be a better service offering to the overall market.”
After a hiccup or two integrating the companies, Motherwell says they’re moving to phase two — replicating the same model in another market, probably in the Southeast, which has a similar make-up to Columbus with significant growth potential and low union penetration. They are actively looking at deals.
While Werner and Motherwell may look at 10 deals a week, they only close a small percentage of them. As majority owners, the two don’t have $50 million sitting on the sidelines to invest.
“We’re not going to look at a deal and say, ‘We’re going to buy this for a 7x multiple and then force 50 percent growth year one, just to make sure we’re covering our debt obligations or our yield obligations to ourselves,’” he says. “That doesn’t make much sense to me.”
Kassel doesn’t chase price — although Motherwell admits to breaking that rule at times.
“Buying and selling companies has the ability to be a highly emotional event, both for the seller and buyer,” he says. “You can say that there are some folks out there that are unaffected, but odds are it’s probably not their capital.
“When you have that type of emotional connection to a deal, don’t chase it,” he advises. “Don’t chase it up and don’t chase it down, on the buy side or the sell side.”
Don’t fixate on a number
When buying companies, Motherwell finds it important to set the stage in the beginning.
“I want to do a deal that has to be a win-win for both sides because after we’re done with the transaction, we keep the management that is in place active within the company,” Motherwell says.
The seller needs to have the interest of the company at heart.
“We actively pursue companies that folks want to stay around — not because they have to, but because they love the business and they love being around the business,” he says. “They love the people, and in most situations that we’ve come across, we’re buying a part of their family, whether it’s a family company or not.”
A business owner may dream of selling for a big number and then playing golf every day, but Motherwell says if you’re 55-year-old, that’s a lot of golf. It’s also difficult to walk away from something you may have done since you were young.
Business owners need to fully understand what they really want — putting time and thought into it. They can’t let themselves get fixated on price, especially if they’re sticking around. They don’t want to sour a relationship with the acquirer, he says.
To help a business owner get back to doing what they like to do, Motherwell and Werner identify the seller’s objectives and set a plan in place before the deal is inked.
Is the owner tired of people coming in and asking for a $2-an-hour raise, or complaints because another employee got a new truck? Perhaps, he would rather be designing systems or running work.
In one family-owned company, the father wanted to retire and the son felt like he was wearing too many hats, Motherwell says. “So, we took some of those hats away. They moved the company onto us, and the son signed a very long employment contract.”