Rich Dougherty, president of LabRepCo, has had the experience of buying the company from the founder, selling it to a third party then unwinding the sale.
Dougherty says in 2004, his mentor gave him an opportunity to buy LabRepCo. He led a management buyout of himself and four partners who operated the business together. In 2014, the company was doing a feasibility study on becoming an ESOP, when it unexpectedly got a solicitation from a very large players in its sector. Flattered, LabRepCo went through a third-party sale process.
“That didn't work out so well,” Dougherty says. “In two months we did a rescission and we ended up buying the company back.”
But there were valuable lessons learned during that time. From the buy-side, he says purchasing it as they did in 2004 gave the company a clear 20-year horizon to work with: Ten of those years were planning for the founder’s departure and the next 10 would be for he and the leadership team growing the business.
“So, I wouldn't have done anything different there,” he says. “I think what worked out so well for us was that we had really kept our egos in check. It wasn't about the last penny. It was really about, for the betterment of the company, what we can do to have him retire and at the same time us take over the company and have the necessary funds to grow.”
On the third-party sell side, Dougherty says the company was comparing it to the ESOP and ultimately had the experience of working both simultaneously, trying to make a pick which way it wanted to go.
“We were leaning towards the ESOP most of that time,” he says. “But as we got closer and deeper into it, the more we said, ‘No,’ the higher the price went.”
Dougherty says he became very interested in the size of the transaction, the multiples, which he thought were extremely important. However, he didn't realize the company was a venture capital-based and going through an IPO. He was informed about the status later in the process, which led the company to change course.
“It was pretty evident that we were not a good match,” he says. “We were the classical small family business. We had this really complementary culture. And then joining a $5 billion enterprise, we just were a fish out of water.”
For those who may be considering a third-party sale, Dougherty says family businesses ask for a commitment from their people. When a third-party sale is involved, it can be seen as a betrayal.
“As a seller, I really had a hard time with the guilt and that process,” he says. “And I think that that made me even more interested in wanting to buy the company back and taking it to a different place.”
Dougherty, along with Michelle Rondinelli, president of Kitchen Kettle Foods; Steven Staugaitis, director of auditing and accounting at Kreischer Miller; and John Reed, partner at Barley Snyder; spoke at last year’s Philadelphia Smart Business Dealmakers Conference about figuring out the plan for a family business’s future. Hit play on the video above to catch the full panel conversation.