ASG Partners' interview with John Castle, Senior Vice President of Branford Castle, Inc.
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What kinds of companies does Branford Castle generally like to invest in?
Branford Castle is a 23 year old investor in already strong private companies with between $5 and $50 million in revenues. Our investments are North America-based, with three portfolio companies located in the Pacific Northwest.
What are the most important characteristics you look for in companies?
Traditionally, Branford has invested in companies that are leaders in their niche industries (greater than 25% share in a given market) and that have proprietary competitive advantages. A proprietary competitive advantage doesn’t just mean that a company holds various patents, although that can be very helpful. It can also mean that the company has achieved a scale that makes competition difficult, it has developed an advantage because it focuses specifically on a particular product or service that its competitors don’t currently (and likely won’t in the future), and/or that the company has developed a “know how” that others have found difficult to master. A leadership position and a proprietary competitive advantage will often translate to higher operating income margins than are typical within that industry average.
Management is another important item. While many buyers have the ability to find new management should a seller want to leave the business, many prefer to work with pre-existing teams. A business that comes with a management team with a track record of success frequently will be better received in the marketplace
The most important factor for us as we review acquisitions is ‘certainty.’ As we look at investments, we want a high degree of certainty that there aren’t forces that will undermine a company’s position. Technological disruption, off-shore competitive threats, and/or customer concentration are examples of issues that can have serious consequences for a business. We also require a high degree of certainty that the company’s financial records accurately reflect the business’s performance. Furthermore, we want certainty that there will be a constructive working relationship with a capable management – whether management comes with the business or needs to be found post-transaction. Branford will not make ‘bets’ on companies where there is a high degree of uncertainty in any of these key areas. While we are always very interested in a company’s growth prospects, we are even more desirous of businesses whose current position is protectable.
Once you make an investment, what is your typical liquidity strategy/timeline?
Branford is a ‘hands-off’ owner of businesses. We allow management teams to run their companies on a day-to-day basis and also to determine its long term strategies. However, once a business is acquired, Branford will bring its extensive resources to help solidify the company’s internal capabilities and growth prospects. Amongst various ways, Branford can be especially helpful to businesses by shoring up their financial capabilities, helping them better understand their cost structures and pricing positions and providing assistance in the areas of insurance and benefits. Many of our portfolio company executives also view us as a valued partner as they think through important strategic directions. In addition, Branford has been instrumental opening doors to customers through our extensive rolodex.
Unlike many investors that have to sell businesses in 3-5 years to satisfy their investment partners, Branford can and does hold businesses indefinitely. As an example, Washington Chain, based in Seattle, is a company that we have held since Branford’s inception in 1986. We believe that this long-term hold capability allows for better decision making and helps with overall company continuity in the post-transaction period.
How have the economic conditions affected the acquisition market?
Through this recession, Branford has continued to look for investments. Unfortunately, we have not found many companies for sale in 2009 that provide the type of certainty we are looking for as business owners are concerned about receiving less than desired valuations in today’s market. As we review the market, we believe that owners of businesses that have not seen earnings declines should consider this an opportune time to sell due to the following factors: (1) Debt financing has not disappeared for businesses in our acquisition size range as there are many local and regional banks that did not get caught in the sub-prime mortgage business, and (2) there is a scarcity of ‘quality’ companies currently on the market, so those companies that are still performing well are still receiving reasonably full valuations. In addition, there are certain industries that are very ‘hot’ right now including infrastructure, ‘green’ energy, and education. A business owner in these industries especially might still expect a strong valuation for his/her business.
Have credit conditions impacted your ability to make new investments?
As mentioned, there is still enough credit in the lower end of the middle-market to complete transactions. In addition, investors will often ‘over-equitize’ a deal if there isn’t an abundance of debt financing available. The expectation in these instances is that a buyer will be able to access additional debt, and reduce the amount of equity initially invested, at a later date so that they can achieve their expected return parameters.
What advice do you have for business owners who are planning an eventual sale?
In terms of achieving a desired valuation, business owners need to prepare their businesses to be sold. This process can take months, if not years. At a minimum, owners will be expected to produce a significant amount of information regarding their business to a potential buyer, including its operational capabilities, its markets, its competitors, and its financials. Having this information prepared and ready for a sale is an important part of moving efficiently through the transaction process. On the financial front, audited financial statements covering the three most recent fiscal years will provide a good deal of comfort for a buyer. Furthermore, in a best case scenario, an owner will have turned over leadership to the post-transaction management for a minimum of two years to demonstrate their capabilities.
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