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The Tables Have Turned: Private Equity
Eileen P. Gunn
08/01/2005
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The Dwyer Group, a family-owned franchiser of plumbing, electrical and other services for homeowners, suffered a turbulent few years after its founder
died suddenly and without a succession plan in 1994. But the board weathered the
crisis and, by 2001, it had assembled a new management team and cut costs. Sales
began to improve, and the company was poised for substantial growth. It did not
anticipate that raising the money to finance its expansion and acquisitions
would be a problem because Dwyer, based in Waco, Texas, was publicly traded.
 But lacking both institutional shareholders and a sexy dot-com concept, the
company’s stock had languished around $4 a share for several years. The board, a
mix of Dwyer family members and outsiders, came to realize that it would fail if
it sought to raise more capital through a follow-on stock offering. “We went
to an investment banker and said, ‘If we’re not going to get what we need from
the public markets, we need to look at other options,” recalls Dina Dwyer-Owens,
one of the founder’s six children and Dwyer’s CEO since 1998.
The
alternative was to go private. The board assumed this meant selling to a
competitor, since such so-called strategic buyers typically offered higher
valuations than did financial investors such as private equity firms. The
company had even received a few offers from strategic buyers over the years,
“but from real bottom feeders—no one we felt comfortable with,” Dwyer-Owens
recalls.
Suddenly, in 2002, the company became deluged with offers from
private equity firms. “I guess other parts of the market were tough, so they
discovered franchises and picked up the phone,” Dwyer-Owens says. “It wasn’t
what we’d had in mind, but the offers they were making got our
attention.”
One firm, New York-based Riverside, wanted to own the majority of
Dwyer, but also wanted the family to continue to manage it. “They recognized how
important our culture and our relationship with our franchisees were to the
success of the company,” Dwyer-Owens says. The firm quickly became the
frontrunner, but with multiple suitors, Dwyer was able to push the bidding
upward.
Riverside’s initial offer was in the range of $5 a share, Dwyer-Owens
says. The company was eventually able to secure $6.75 per share, a 59 percent
premium over the share price and well above what strategic buyers offered.
Awash in Liquidity
The Dwyers did not know it, but they had caught the
first ripple of a private equity wave that entrepreneurs and family business
owners have since surfed to their advantage. Private equity firms have raised so
much capital that they are vigorously competing with one another for
opportunities to put their money to work. Entrepreneurs and family business
owners, who previously would have had to go hat-in-hand to investors, instead
find themselves inundated with offers. Companies with solid balance sheets, good
management and strong growth prospects are able to tailor deals to their liking,
and to get robust valuations.
“All this money out there means entrepreneurs
might be able to get a better value for their company or sell less of it or
both,” says Patrick Haden, a partner with Riordan, Lewis & Haden, a private
equity firm in Los Angeles. “And it allows you to choose the firm you want to
work with, the firm that can help you the most.”
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