Trivest Has Buying From Founders Down Pat

Year founded: 1981

Investment strategy: Acquires lower mid-market companies generating revenues of $25 million to $250 million in business services, consumer products, niche manufacturing and franchising companies; sellers are typically the company founders.

Key executives: Troy D. Templeton, managing partner; Jamie E. Elias, partner; Chip Vandenberg, partner

Headquarters: Miami, Fla.

Assets under management: $650 million

Fundraising status: Closed its $325 million Trivest Fund IV in 2008; expects to launch Fund V in early 2012

Number of active portfolio companies: Seven in Fund IV, including Allegiance Security Group, provider of security guard services

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The trend of buyout firms becoming more specialized is probably as old as the industry itself.

Sponsors that confine themselves to, say, health care deals or technology deals can gain a competitive advantage over rivals in understanding market trends and in assembling industry networks. Focusing on a particular kind of transaction, like bankruptcy purchases or corporate carve-outs or consolidations, as many other sponsors do, can confer a similar competitive advantage.

Trivest Partners, a 30-year-old lower mid-market shop based in Miami, Fla., has puts its own stamp on the specialization trend. For the past 10 years, the firm has acquired its companies almost exclusively from their founders, in such fields as business services, consumer products and niche manufacturing. Its focus on this particular species of seller permeates every aspect of Trivest’s investing approach, from sourcing to deal negotiations to running the company during the holding period.

On the sourcing side, since 2002 the 21-person firm has had an outbound calling program designed to unearth founders. Every member of the deal team, from beginning analyst up to Managing Partner Troy D. Templeton, calls on brokers, boutique investment bankers, lawyers, accountants—anyone in a position to know of a founder who might be interested in selling a business. The firm, which also calls founders directly, places over 3,000 calls per year. “That’s by far and away our most important aspect of sourcing,” said Templeton.

Those 3,000 calls generate some 700 qualified opportunities per year, which in turn gets whittled down to perhaps 50 that the firm considers serious for a platform or add-on transaction. To boost the odds that brokers think of Trivest first when opportunities arise, the firm runs pools built around the Masters golf tournament and other major sporting events. (These are free to enter, and the firm spends less than $10,000 a year on prizes. More than 1,000 brokers participate, Templeton said.) The firm also started a program five years ago in which it offers an S-class Mercedes Benz to brokers who introduce Trivest to a new platform investment. So far it has handed car keys to six brokers. Last year, a busy one for the firm, Trivest established five new platform companies, in addition to exiting one of its companies.

Flexibility is another hallmark of the Trivest approach. Many sponsors, according to Templeton, require founders to re-invest in a business before signing a letter of intent. Not Trivest. Surprisingly, the sponsor has found no correlation between the success of a transaction and whether the founder re-ups, although 90 percent of the time the founders do re-invest and stay involved in the business in some capacity. The firm also tries to accommodate large variations in how much equity founders want to invest, how involved they want to stay in the company, and for how long. In another mark of Trivest’s founder-friendliness, the firm hasn’t once ended up negotiating a lower purchase following the signing of the letter of intent. “If you change the deal on the founder, you usually lose the deal,” said Templeton, adding that the firm prices the inevitable minor items found during due diligence into the offer price. If due diligence turns up larger problems, the firm typically tries to postpone the transaction.

Why Founders Sell

Trivest began acquiring companies almost exclusively from founders a decade ago after realizing how much unlocked potential they represented.

Founders, according to Templeton, often have objectives for their companies that have little to do with maximizing cash flow or growth. They may hit a certain cash-flow target that they’re comfortable with. Then they might well coast along without feeling any need to continue to grow. Founder-owned companies often don’t take advantage of obvious opportunities to additional channels of distribution—leaving plenty of upside for an aggressive buyout shop like Trivest to help exploit.

Templeton points to Aero Products International, a company it bought and sold in the early 2000s as a case in point. When Trivest first encountered it, the company sold its Aerobed inflatable mattress primarily through 30-minute infomercials. Trivest recognized that its products also had the potential to be sold through retail, and under the sponsor’s ownership the company expanded distribution to Bed Bath & Beyond and other large retail chains. Templeton said the size of the business, under Trivest’s ownership, nearly doubled in less than two years.

Occasionally Trivest Partners comes across a rapidly growing company that hits a bump in the road. That was the case with Endeavor Telecom Inc., an Atlanta-based company the firm was introduced to in late 2009 by Croft & Bender, also in Atlanta. The company helps AT&T and other clients fulfill orders by retailers for telecom equipment (phone systems, video systems, etc.) by arranging for local independent contractors to do the work. Although the sub-$50-million revenue company had a unique technology platform, and had been growing at a healthy double-digit percent annual rate, according to Templeton, it was running out of working capital. The two co-founders, both in their mid-30s, also weren’t sure whether they wanted to stay with the business.

The company talked with other suitors. But Templeton said that maintaining an open mind about the ongoing role of the two co-founders helped seal the deal for Trivest last February, along with being willing to overlook a couple of months of softness in the company’s business during due diligence. (Trivest also closed an all-equity deal before securing senior financing from Amalgamated Capital a couple of weeks later.) In the end, both founders ended up re-investing and continuing on as CEO and COO.

Earnings are up more than 50 percent since Trivest bought the company, said Templeton, and the founders are “probably working as hard as they’ve ever worked on the business.” He added: “We really believe this is one of those companies you come across every once and a while that has a tremendous growth model.”

Sidebar: Advice When Buying From A Founder

* Coddle deal sources and stay in constant touch

* Remain accommodating when it comes to founder re-investment and level of involvement post-closing

* Avoid changing the purchase price or other key terms after signing letter of intent