Deborah L. Cohen | August 19th, 2015 | Middlemarketgrowth.org
The DAK Group, a 30-year-old investment bank specializing in middle-market mergers and acquisitions, in June announced the sale of its client, Northvale, New Jersey-based Craftmaster Hardware, to Capital Resource Partners, a private equity group in Boston. Craftmaster, founded in 1951, distributes security hardware, including locks and locksmith supplies for institutions such as prisons, universities and hospitals. Michael Richmond, managing director of the DAK transaction team in charge of the sale, provided some insight about the deal to MMG.
MMG: What was the history of this deal?
Michael Richmond: The deal came about because Craftmaster’s marketing manager was nearing retirement. He was a minority owner and a long-time partner to the owner. They had some meetings and understood the transition would take time to implement. They met and it triggered thinking on the part of the owner—he was also ready for a change. He’d taken over and come into the family business more than 30 years ago, grew it substantially, and was ready to do something different. He believed an acquisition could provide the resources Craftmaster would need to grow to the next level, and wanted to be sure the next owners would preserve the legacy and culture his family had built.
We told him the process would take somewhere between six and 12 months. The company was in the midst of transitioning marketing and rebranding, and beginning to get the benefits of those initiatives. We wanted to run a process that would ensure that the benefits from the marketing initiatives would be included in the company’s valuation. Our process took about a year, and the company did get the full benefit from the marketing and rebranding efforts.
MMG: What was involved in the rebranding?
MR: Craftmaster had primarily marketed the old-fashioned way through flyers. The rebranding now included a new look and logo, as well as launching an integrated marketing program using direct mail, email and the Internet. The rebranding included highlighting and positioning Craftmaster’s key strengths as part of the marketing outreach. One of their strengths was that clients looked to them as not only a provider of the actual locks and hardware, but for solutions to a problem. They have the reputation that, if you had a problem and you didn’t know how to fix it, you called Craftmaster; they could diagnose it on the phone. A customer would sometimes take a picture on an iPhone and say, “Here’s what we’ve got. What do we need to fix it?”
“A lot of the old-fashioned locksmiths are disappearing. Craftmaster anticipated this trend and shifted its business to serve specialized industries that require specific hardware.”
MMG: How big was the company at the time of sale?
MR: Their sales were under $50 million and the number of employees was under 50. The employees hold positions in sales, warehousing, operations and support.
MMG: Had you done similar deals with distributors before?
MR: We focus on middle-market deals anywhere from $10 million in enterprise value up to $400 million. This is an area that is not served well by big Wall Street firms and is too sophisticated for the small guys, such as business brokers.
We have a lot of experience with distributors. The key with a distribution company is to look at two things. First, whether there is a value-added component, which is very important. What does the distributor do that makes a customer go to them versus someone else? And second, will the manufacturers in the long term need the distributor to interface with the final customer?
MMG: What kind of a threat do the do-it-yourself lock kiosks cropping up in retail stores pose to Craftmaster?
MR: A lot of the old-fashioned locksmiths are disappearing. Craftmaster anticipated this trend and shifted its business to serve specialized industries that require specific hardware. What is so special about Craftmaster is that the locks in the industries it serves—prisons and detention centers, hospitals, schools and universities—take a lot of abuse. The value added is two-fold: These are not simple locks. And there’s a trend toward more electronic locks. In both cases, the fix is somewhat complicated. These customers don’t have the expertise to figure out what needs to be replaced, and they need the parts quickly. That is the value-add: Craftmaster has the expertise to tell them what they need, and get them what they need quickly.
MMG: What is the long-term value proposition of Craftmaster?
MR: The value of the company is rooted in its long-term relationships with customers and suppliers, and a history of solid growth performance. With the right buyer and the right synergies, the future growth potential is huge. We looked for someone who was going to appreciate that potential and take the company to an even a higher level. That’s our DAK process. We spend a lot of time determining the strengths of the company. We work with them—sometimes years ahead of time—to maximize these strengths, this pre-transaction planning is ultimately reflected in the valuation of the company. Then, when we do go to market, we target specific buyers who will appreciate the strengths of the company and can grow it to the next level. We sell a lot of family-owned businesses because we understand family dynamics. In this case, not only was Craftmaster interested in maximizing value, but here was a third-generation owner who felt that it was very important to maintain the legacy of his family business. He didn’t want to see this business become part of a mega-company, necessarily, with Craftmaster disappearing.
MMG: How did you market this company?
MR: We looked for both strategic buyers and private equity. With strategic buyers, we were seeking companies that would use Craftmaster as a way to enter new markets. For example, entering the prison market is not easy, but leveraging Craftmaster’s relationships would open doors for the new owner.
We also looked for private equity companies that would appreciate the potential in this market. Craftmaster had excellent market share and penetration in the prison and detention space but really had a lot of room to grow in the hospital and university markets. We were looking for a private equity buyer that appreciated Craftmaster’s strengths and was looking to use it as a platform company; we looked for buyers to grow the existing business and consider add-on acquisitions. In the case of Capital Resource Partners, this is their first investment in this space and they’re looking at Craftmaster as a platform company to launch them into the $100 billion physical security market.