Bootstrap Capital, a private investment company, has acquired Clear Automation, LLC from its founders. Clear Automation is an industrial automation technology integrator that specializes in designing and implementing robotics, machine vision, line tracking and custom programmable solutions. Founded in 1990, the company has a history of driving cost and efficiency improvements in a broad range of industries, including cosmetics and personal-care products, medical devices, electronic components and automotive parts and assemblies.
Partnering with the Company’s Founders
“With 26 years in the business and close to $100 million in designed, built and installed automation, this company has major growth potential within its industry,” said Franco DeBlasio, Operating Partner at Bootstrap. “We hope to continue to grow Clear Automation’s capabilities and expand to include other industries.”
The Bootstrap Capital team “is thorough, but arrives at decisions quickly, which made for a smooth process,” said Derek Dibble, CEO of Clear Automation. “They have the vision and the resources to take this business to the next level.”
“With Bootstrap Capital as the new owner, the employees and customers are in good hands and the company’s future has never looked better,” said Ron McCleary, President of Clear Automation. “I look forward to working with the Bootstrap team to grow the business.”
About Clear Automation
Clear Automation (www.clearautomation.com) was founded in 1990 by Ron McCleary, with Derek Dibble later joining him. With a staff of 27, the Clear Automation team has more than 300 years of combined experience. The company maintains a client base in a multitude of industries.
A total of 85 percent of Clear Automation’s business comes from repeat customers, and the company still partners with its very first client.
About Bootstrap Capital
Bootstrap Capital is a private equity firm that respects the accomplishments of bootstrapping entrepreneurs and seeks to honor their legacies. We grow the companies they built and celebrate the legend of how they built them. We acquire and operate small business services and distribution companies at a point in their evolution where they could benefit from a change in ownership.
Our approach is to build our portfolio deliberately, providing day-to-day leadership for an extended period of time after making an acquisition. We provide turnkey succession plans for owners seeking to retire. We work with founders who are striving for the next wave of growth. And we can right the ship when a company has gotten off course.
When entrepreneurs are slowing down, but their children are not yet experienced enough to succeed them, some business owners seek non-family CEOs to bridge the leadership of their companies to the next generation. But finding the right person to be a temporary steward of a family business is much easier said than done.
When the Kids Aren’t Ready
With more people starting families later in life and children taking longer to settle into their careers, we see many business owners facing difficult succession issues. With increasing frequency, some business owners want to retire long before the next generation is ready, willing and able to take over the day-to-day leadership duties.
Making matters worse, when the intention is to hand the reins to a family member, business owners rarely develop a contingency plan and, consequently, may not have a key lieutenant who could step in and keep the seat warm until the kids are ready.
In these situations, the options can be limited. It is extremely difficult to find a leader who (i) has sufficient ambition and capability to grow a family business, (ii) has enough self-restraint to work within the cultural and resource constraints of the family owners and (iii) is willing to take the CEO role knowing that, at best, the job is being offered on only an “extended interim” basis until the next generation family members finish their apprenticeships.
Moreover, because families typically are not willing to give up ownership, when a family identifies a candidate that fits the bill, he or she often seeks considerable (perhaps even above-market) cash compensation. Therefore, the non-family CEO option can be available only to those businesses large enough and sufficiently profitable to accommodate a generous current compensation package.
For the other businesses, unfortunately, the only truly viable options are for the entrepreneur to delay retirement and gut it out until the children can take over or to sell the business.
Both options are painful, but when the decision is to sell the company, Bootstrap Capital can help make the situation more palatable.
For starters, we are comfortable with the sellers rolling over a significant amount of equity so that, for instance, they do not have to completely exit an attractive investment just because of a succession timing issue.
We are also comfortable having family members remain in the business and to continue their professional development. We understand that the non-standard career tracks in family businesses can make finding employment elsewhere challenging. And we also value the unique perspectives about the business that family members can provide.
Several years ago, a former business owner participating in panel discussion told the audience, “I never realized how unpopular I was until I sold the business.” He went on to admit that he had not properly prepared for life after ownership, that he had not been aware of how much of his identity was linked to his role as CEO of the family’s business. Of course, the issue was not that he was simply unpopular. Rather, when he was no longer a decision-maker, the company’s employees redirected their inquiries to the new CEO.
The Risk of Winging It
Without a number of activities or other roles that are completely independent of the activities of the business, business owners stumble through their transitions to life after ownership. Over the years, we have even seen some former owners struggle with depression. Buth we have watched others smoothly segue to this new phase in life and never look back.
When we encounter business owners who can describe only vague expectations of their lifestyles after they sell their companies, we get concerned that they are not serious sellers and may end up holding onto their enterprises. In these cases, we proceed with caution. Unless a seller is fully committed, both parties could end up investing significant time and money, with nothing to show for it. And one way we gauge commitment is the specificity (and passion) with which an owner describes his or her future.
Developing a Plan
We recommend that business owners who are considering a sale of their companies should first work diligently on mapping out the pursuits that will replace the sense of self and the fulfillment that comes from running a business. While a noble pursuit, spending more time with my family simply doesn’t cut it. Our experience is that, after years of being in charge, most business owners need to be solving problems and driving measurable improvements in some sort of organization.
Some examples of how we have seen business owners fill the void created when they step down from their leadership roles include joining boards of other companies and philanthropic organizations, taking on civic projects (whether for local governments or other communities, such as a homeowners association or a country club) and writing, for instance, the great American novel.
The principals of Bootstrap Capital have sold their own companies and made their own transitions to life after ownership. In fact, the founding of Bootstrap Capital is at the core of our strategy for managing the transition. As a result, we are keenly in tune with the issues business leaders face when they decide to sell their companies, as well as many other nuances of transacting in the lower middle market.
In situations where a business owner is working through these issues Bootstrap Capital is, at a minimum, a patient counterparty and, even better, frequently a constructive partner in helping him or her through the process.
In our discussions with business owners, not long after we learn about a company’s business model and its most basic financial metrics, the conversation turns to the topic of value. We ask the owner, “How much do you think your business is worth?” Or we ask the broker, “How much does your client want for it?” The answer is frequently a lot more than what we think we could pay for it. Admittedly, we do not always see as much value as the ultimate buyer does, but sometimes the entrepreneur is simply asking for much more than the business is worth.
Our experience is that there are many reasons for this bid-ask spread. For one, entrepreneurs tend to be more optimistic than most people and place more value on future opportunities than potential buyers do. Also, owners have strong emotional ties to their companies and have trouble putting less-than-extreme values on their “life’s work.” However, a less intuitive phenomenon that we see is what we refer to as “The Interest Rate Paradox.”
In the Interest Rate Paradox, the puzzling effect we see is that, after years of having nearly all their net worth invested in a risky, illiquid and smaller-than-micro-cap company, some entrepreneurs cannot bring themselves to sell their companies until the point that investing 100% of the after-tax proceeds in U.S. Treasury securities would yield enough interest income to fund their lifestyles. This paradoxical trap keeps them tethered to their companies far longer than necessary, with an illogical bias preventing them from selling.
It is true that, after (i) retiring and giving up a salary, (ii) paying off the company’s debt, (iii) paying capital gains taxes to the IRS and (iv) reinvesting the net proceeds in a lower-risk, diversified portfolio, a business owner should have lower expected cash flow. But over time, that cash flow should undoubtedly be more than the yield on Treasury securities.
We encourage business owners who are considering, or are in the process of, selling their companies to work with a skilled financial planner to map out their future cash flows under several scenarios. Over the years, while we have seen sellers who, once they had done the analysis, realized they needed to keep the business for several more years, we have also seen owners who, once they realized that the proceeds would be more productive than they had anticipated, decided to take their businesses to market.
It’s not clear why some business owners become victims of The Interest Rate Paradox, but we can say that many are able to make much better decisions once they have worked with a financial planner.
Our sense is that it is simply human nature for someone who is facing the prospect of relinquishing control to seek extreme risk reduction. Since selling a company is one of the more emphatic ways to give up control, it stands to reason that, upon a liquidity event, some business owners will seek extreme reductions in the amount of risk they are taking. Said another way, entrepreneurs place incredible value on the control they have over the risks they face in their businesses. When they have to give it up, they sometimes no longer want to take any risk at all.
Bootstrap Capital’s principals are in tune with the Interest Rate Paradox and many other nuances of transacting in the lower middle market. In situations where a business owner is working through these issues, Bootstrap Capital is, at a minimum, a patient counterparty and, even better, frequently a constructive partner in helping him or her make an informed decision.
Over the years, we have heard every excuse imaginable for why a business owner has not developed a succession plan. Clearly, there are some very real emotional and personal issues that are involved when a business owner steps aside. But even in cases where an entrepreneur has crossed the “emotional chasm” and desperately would like to hand the reins to a successor, not all are able to do so. Why is it so difficult for even the most committed business owners to groom a successor?
Prioritizing the Lifestyle
Our experience is that, in the lower middle market, many businesses are just not big enough or profitable enough to accommodate a key lieutenant who could someday run the company. It’s a common trap for entrepreneurs to become reliant on the cash flow from their businesses to support their basic lifestyle needs, incapable of funding the investment in a potential successor.
There are only a few ways out of this potentially endless cycle. The owner can initiate austerity measures in his personal life. He can borrow money in the hopes that adding a senior executive will grow the business and produce enough cash to service the debt and support his lifestyle. Or he can sell some or all of his business.
Often, the idea of reducing personal expenditures is not even a remote possibility. Since it is the solution most in the entrepreneur’s control, if he or she were going to do it, it usually would already have occurred. Similarly, borrowing money is rarely a legitimate option because, in these situations, the company’s size, profitability or balance sheet typically cannot support it. And selling a portion of the company and dealing with the dynamics of a partnership is so unappetizing that it would not be worth discussing.
Limited Exit Options
These are the reasons an entrepreneur can become trapped. Without the cash to invest, the business stalls (or potentially declines) and the owner has to wait until the proceeds from a sale will support him and his family through a shortened retirement. Moreover, when he sells, he will need either to attract interest from strategic investors (which is not always easy for small companies to do) or find another buyer who can step in and run the business, someone who can essentially offer a pre-packaged succession plan.
In situations where a business owner has not developed a succession plan and there may be limited interest from strategic buyers, Bootstrap Capital is an excellent solution. Our owner-operator model can provide liquidity to retiring business owners and deliver the leadership to keep the business from missing a beat.
It is amazing how many businesses we have seen plateau at $5 million in revenue. Since the late 1990s, this magic number has been stubbornly consistent, even across industries. Countless entrepreneurs seem to be able to build their businesses to $5-10 million in revenue, only to then stall. We have seen it happen with value-added-resellers, branded products companies, professional services companies and in other industries. Why is it that so many business owners, so consistently cannot grow their revenue beyond this point? What is so special about the $5 million mark?
Delegate or Peak
The issues appear to be linked to the command and control structure of these businesses. At some point, in order to grow, an entrepreneur must relinquish substantial control to one or more able lieutenants. This is an uncomfortable transition and, as a result, many refuse to do it or fail to do it properly.
Our point of view is that $5 million in revenue is a proxy for the point that the entrepreneur can no longer find time to visit even one more customer or deal with one more operational snafu. It’s the point where the business must develop into something more than a personal sales support team and turn into a fully functioning (and growing) enterprise.
One of the problems business owners frequently cite is that it is costly and time consuming to train people to take over customer relationships, new account sales and other key functions in the business. It is always easier to just do it yourself than to coach a new guy how to do it. Since most entrepreneurs are already busy, it can be impossible for them to bite the bullet and slow down long enough to train someone.
Another, and potentially more important issue, has to do with expertise. We have seen many extraordinary sales people, for instance, build their companies from scratch quite skillfully. But some of these excellent sales people are not also great business builders and managers. When they try to step away from the first-hand interactions with customers, they stumble and find themselves gravitating back to the front line activities. Reinforcing this tendency is the fact that many of these business owners have developed personal relationships with their clients, and miss the daily interactions with their friends.
Time to Sell?
When businesses hit this command and control plateau, it might be time to sell the business. We see many great businesses that could thrive under new leadership that is willing to delegate control and make the investments in the senior leadership and infrastructure necessary to help the business thrive. Whether the business has plateaued at $5 million, $10 million or more revenue, these are situations where Bootstrap Capital can be a great solution.
In our work with business owners, we have noticed a pattern of decision making which most entrepreneurs go through when selling their companies. We have seen very few who do not wrestle with each of the key decisions at some point before closing. In our approach, we use this simple framework to gauge the likelihood that a deal can get done. When entrepreneurs have difficulty demonstrating that they have gone through the full decision tree, we suspect that it is unlikely that they are really ready to sell their businesses.
It is no secret that many owners have great emotional ties to their companies. If an owner thinks of his company as a family heirloom, then it is very difficult for to part with it. On the other hand, if he views it as just another financial asset, then the decision to sell can be straightforward. Early on in our processes try to gauge where on the continuum between heirloom and asset the owners are. Similarly, we look for signs that the seller’s identity is broader than “business owner.” When they view themselves as much more than the owner and have a clear sense of what they want to accomplish after the sale, we know that the odds of a deal increase substantially.
When business owners sell their companies, their financial profile changes significantly. For instance, many owners retire when they sell their companies and experience a decrease in income. We are careful to make sure that sellers have calculated whether the after-tax proceeds from the sale of their companies will be enough to sustain their lifestyles and potentially fund any aspirational goals they have, such as making a donation to a favorite charity. If they have not done so, and it is not readily apparent that the sale will provide a surplus of liquidity, we recommend the business owner first work with a skilled financial planner.
Selling a company and investing the proceeds in a balanced portfolio of stocks and bonds can greatly reduce the riskiness of the owner’s holdings, but it almost always comes with lower expected returns and cash flow. This reduction in both risk and reward will be even more pronounced if the owner’s company had borrowed money and, as a result, “leveraged” the equity returns. Finally, the size of the balanced portfolio will be reduced by the amount of capital gains taxes the sellers owe upon the sale of their businesses, adding to the financial hit the seller will take.
Our experience is that, unless there is a strong personal or strategic rationale for selling, it is rare that a business owner will see enough value in the risk reduction to accept the lower expected returns of a diversified portfolio. For this reason, we do not see a lot of private business owners selling simply because there is hot market. As such, we take great comfort when there is a bona fide non-financial reason for a business owner to be selling.
When a business owner no longer has emotional ties to the company, has done the analysis to confirm the sale will provide asset sufficiency and has identified a bona fide reason for the selling the company, the stage is set for a transaction.