Your Periodic Reminder of the Perils of Private Equity
Yes, there are times when taking the money is the best option. But make sure you are clear-eyed about what is likely to happen to your business.
Here are today’s highlights:
In many states, it’s now perfectly legal to buy a judge.
Here’s another indication that consumers are hurting: car delinquencies just set a record.
A software engineer decides to take on a real challenge: opening an ice cream shop.
In our latest podcast: Do employees of an ESOP really become employee owners in any meaningful way? Join the conversation!
SELLING THE BUSINESS
Here’s another example of private equity doing what private equity does: “At 9 a.m. on a Tuesday in late October, as Nathan Hendricks drove to a cabinet installation job in Elk Grove, Calif., he got a call from his office. His employer, Reborn Cabinets, had shut down. All its workers were supposed to return their company vehicles and iPads by the following day. He was not entirely surprised. The company had changed a lot since Audax Group, a private equity firm, bought it in 2022 and added it to a collection of home improvement brands called Renovo Home Partners. It started using lower-grade materials, forced employees to buy their own protective gear, and pushed them into subcontracting roles, Mr. Hendricks said.”
“He didn’t get his last paycheck, or reimbursement for the $400 he spent on gas driving to job sites over the previous two weeks. About 1,500 employees were abruptly terminated, along with their health insurance. Customers were left with unfinished roofs, basements and bathrooms. Renovo’s websites, email addresses and social media went dark. Nobody answered the phone.”
“‘I thought Reborn Cabinets was going to be a family company for years to come, but they did kind of sell out,’ Mr. Hendricks said. He found work with a small painting company this week, and said he would avoid private equity-owned companies in the future.”
“Renovo’s sudden closure shows how private equity ownership can go wrong for an industry that has been flooded with funds seeking to roll up small businesses with a few million dollars a year in revenue and good reputations in their local markets.”
“The thesis is simple: After gaining efficiencies of scale, acquirers can sell the integrated bundle, or platform, to someone else, doubling or tripling their money. But that bet hasn’t paid off in recent years. Many home-improvement companies have stagnated as interest rates have risen and the housing market has slowed.” READ MORE
Shawn Busse highlights what can go wrong when an owner sells a business for the first time: “Oof. Another tough Oregonian headline: ‘Portland software entrepreneur sues for $350 million, says private equity firm bought his company and then fired him.’ Some highlights from the article:”
‘Founder Jim Wolfston began looking to take on minority investors last year, according to the complaint filed last week in Multnomah County Circuit Court. ... The suit says Wolfston agreed to sell 65 percent of the business to Rubicon and retain 35 percent for himself after receiving assurances that he would continue leading the business. ... Wolfston turned down a bigger offer than Rubicon’s because the other, unnamed bidder, said it planned to cut costs rather than investing in the business.”
“The short version from the owner’s suit: ‘The PE firm told the owner they’d invest and help the owner realize the opportunity to grow. Once PE had control, they started cutting costs and fired the founder.’”
“There are 125 employees at the company. It’s been around since 1977, paying taxes, investing in the community, and helping to pay healthcare. My guess? If the suit is unsuccessful, the company will be shipped out of state within two to three years. Ownership is hard. But what’s even harder is doing something you’ve never done before—like taking outside investments or selling a share in a company.”
“It’s sad because the owner engaged someone to help him market the firm. This person, described as a ‘broker,’ was likely paid for the completion of the transaction, not whether the transaction realized the founder’s vision.” READ MORE
