One Road Leads to Rome
…Why Niche Businesses Command Higher Valuations
This is Katalyst Point Insights, a monthly newsletter to help business leaders get better at the art and science of building, scaling, and financing valuable, marketable companies that sell at premium outcomes. Written by me Belinda Bassey Ephraim, founder of Katalyst Point. I have over 20 years of combined sell side and buy side investment banking and financial executive experience, and my passion lies in leveraging what I learned on Wall Street to help Main Street business owners navigate the complexities of mergers and acquisitions. This month's edition is a bit longer than usual and excellent for weekend reading.
Let’s begin.
Charles Leavitt of University of Notre Dame’s Center for Italian Studies and Literatures explains that the proverb "All roads lead to Rome" derives from medieval Latin and was first recorded in writing in 1175 by Alain de Lille, a French theologian and poet, whose Liber Parabolarum renders it as “mille viae ducunt homines per saecula Romam” (a thousand roads lead men forever to Rome). He further states that the proverb's origins may relate to the Roman monument known as the Milliarium Aureum, or golden milestone, erected by Emperor Caesar Augustus in the central forum of ancient Rome. All distances in the Roman Empire were measured from this point and it was regarded as the site from which all principle roads diverged.
In the annals of business wisdom, enduring proverbs such as “All roads lead to Rome”, often emerge, seemingly encapsulating universal truths. Yet, amidst these venerable sayings, one must question their applicability in the dynamic landscape of modern entrepreneurship. While the resonance of this proverb spans centuries, its relevance in guiding business leaders toward maximizing company value warrants scrutiny.
Let's dissect this thesis and examine how it aligns with modern-day corporate strategies. One common misconception among business owners is the belief that a growing employee headcount directly correlates with revenue growth. While it's true that expanding your workforce can contribute to scaling operations, it's not necessarily indicative of sustainable success aka profitability. Instead of a growth at all costs mindset, Harvard research shows that employee experience is what drives revenue and profit. Are you empowering your employees to excel in their roles? Are you fostering a culture of innovation and collaboration? These are the questions that truly matter when it comes to driving revenue growth and building long-term value.
The second misconception is that many business owners fall into the trap of diversifying their revenue mix with adjacent, undifferentiated offerings in the hopes of appealing to a broader market. While this strategy can work in certain situations, they often create a jack-of-all-trades, master of none scenario. A bloated company with a scattered focus becomes less attractive to strategic buyers. Strategic buyers, industry leaders looking to expand their market share, seek to acquire companies that complement their existing strengths. They desire companies that excel in a specific niche and can seamlessly be integrated for rapid value creation. Rather than spreading yourself thin across multiple fronts, the key is to specialize within a vertical and become synonymous with excellence in your field. By honing your expertise and delivering unparalleled value to your customers, you position your company as a coveted high-value asset in the eyes of buyers.
Consider the case of JELD-WEN, a former corporate investment banking client during my tenure at SunTrust Bank and one of the world’s largest door and window manufacturers, operating manufacturing facilities in 15 countries located primarily across North America and Europe. Founded by Richard "Dick" Wendt in 1960, JELD-WEN began as a modest venture with just 15 employees, and they focused on one thing: producing reliable windows and doors. This unwavering commitment to their core product allowed them to build a strong reputation within the industry.
While some companies might be tempted to chase unrelated ventures for growth, JELD-WEN took a different approach growing through vertical integration and acquisitions. Their first acquisition, nine years after founding, was a forest products company – a decision that supported vertical integration of their core business. Similarly, a later acquisition of a trim moldings’ company, further solidified their position within the window and door niche. Even when expanding geographically and integrating new facilities with thousands of employees, JELD-WEN remained true to their core, for the most part. Their big-box retail entry, forty years after founding, demonstrated a calculated move to reach a wider audience within their established niche. Despite facing challenges and housing market fluctuations over the years, the Company’s steadfast dedication to its core business of manufacturing doors and windows set it apart from competitors who succumbed to the allure of diversification.
Allow me to highlight two pivotal moments in JELD-WEN's journey, among many others, that demonstrate how this impacts not only a company’s valuation, the terms of the transaction, but its ability to negotiate from a place of strength or not. The first pivotal moment was a partial liquidity event, in 2011, when Onex Corp., one of Canada's top private equity firms, invested $871 million (a 58% ownership stake) into the Company to support its investment thesis on the recovery of global housing markets after the global economic financial crisis of 2008. The deal structure recapitalized JELD-WEN’s balance sheet and included: $700 million of convertible preferred stock; and a $171 million convertible note that can be redeemed within 18 months with proceeds from the sale of certain non-core assets and, if not redeemed, will convert into additional shares of convertible preferred stock. Notably, JELD-WEN's foray into non-core assets, most likely picked up during its acquisition spree, explains the convertible note stipulation. One would assume they divested their non-core assets because if they were unable to do so within the specified time frame, it meant they were giving up an 11% ownership stake to Onex. This emphasizes the downside of diversification and how it can dilute a company's value proposition and minimize one's ability to negotiate from a place of strength.
The second pivotal moment I want to highlight occurred last year when JELD-WEN divested its entire Australasian business to Platinum Equity, a global investment firm, for AUD $688 million cash. Not a small executive decision considering the Australia segment represented 10 percent of global revenues. JELD-WEN, now a publicly traded company on the New York Stock Exchange, had struggled since the acquisition of these assets from a freight costs perspective and the mere fact that it was too far away from head office. "The closing of this transaction represents a significant milestone in our strategy to simplify and streamline the company while maximizing shareholder value," said JELD-WEN Chief Executive Officer William J. Christensen. "The sale of the Australasia business enables us to focus on our two largest and core regions, North America and Europe, and to strengthen our balance sheet." With the infusion of cash, the Company used the funds to repay debt and recapitalize its balance sheet.
Fast forward to the present day, JELD-WEN stands as a testament to the power of specialization, focus, and constantly reevaluating one’s business to ensure that you’re making the right decisions for all stakeholders involved. While it may not be the darling of Wall Street equity research analysts, the company's rock-solid foundation and unparalleled expertise make it an enticing prospect for a strategic merger or acquisition. My prediction is that they’ll be acquired by a larger strategic, initiate a merger of equals with a competitor, or explore the possibility of a take-private leveraged buyout by a private equity firm seeking to combine JELD-WEN with a competitor. Regardless of their future path, one undeniable fact remains: JELD-WEN continues to build something truly valuable and non-replicable in their space.
So, what's the moral of the story? Whether you're a small startup or a well-established corporation, window and door manufacturer or high-growth software company, on the cover of Fast Company or not, the key to maximizing the value and marketability of your business lies in building a company that dominates a niche, not one that chases a hundred roads at any cost to growing revenue by growing headcount. This specialization will create a company with an irresistible value proposition for the right strategic buyer, ultimately leading to a successful exit and transition of the business on your terms.
Contrary to the notion that myriad paths exist to achieve premium valuations, I beg to differ and state that, “A thousand roads led men forever to Rome and then Rome failed. Therefore, only one road leads to Rome. ”
In conclusion, remember that the proverb, “a thousand roads lead men forever to Rome” is a fallacy when it comes to building a valuable and marketable company that is truly exceptional. Embrace the power of specialization, cultivate a culture of excellence, increase profitability, generate cash flows, engage a team of advisors who will hold you accountable, always reevaluate your business, and stay true to your core strengths. In doing so, a buyer will pave their own road to Rome for the premium acquisition of your company.
Here's what we’ve been consuming.
M&A Masterclass with Frank Quattrone: “With over 650 M&A deals worth over $1 trillion under his belt, Frank Quattrone, often hailed as the "OG" of M&A, shares his wealth of knowledge. In this must-watch interview, legendary dealmaker Frank Quattrone shares his insights on navigating the M&A landscape, from navigating rising interest rates to the influence of political figures like Trump on M&A activities to driving the highest price for your company.”
The Kingdom or The Crown - Addressing the Owner Dependence Dilemma: “Building a successful business often leads to a founder-centric structure. While this may work in the initial stages, it poses a significant challenge when scaling or transitioning out of the business because owner-dependent businesses are less attractive to potential buyers, investors, and lenders. This insightful article, explores the critical shift from wearing the crown to a more sustainable "kingdom" model where leadership is decentralized, and the company can thrive independently of the owner.”
Invisible Culture – How to Spot Change and Predict the Future: “Culture is often invisible but holds immense power in shaping the direction of a company. Invisible culture will tell you where people are willing to be pulled. It will reveal what direction they’re inclined to move in. By spotting these cultural shifts, businesses can better anticipate the future and adapt accordingly.”
Gaining an Edge in A Market Reset: “2023 was the year that buyers and sellers couldn’t agree on valuations. This Bain report provides valuable insights into the current state of the market, along with predictions for the future and the impact of factors like generative artificial intelligence and regulatory scrutiny on dealmaking.”
Recent Deals.
Following bankruptcy, BowFlex, a prominent home fitness equipment producer, has successfully sold its assets to Johnson Health Tech for $37.5 million. This strategic move responds to the evolving landscape of the post-pandemic home exercise market. With Johnson Health Tech's acquisition, BowFlex anticipates a revitalization under new ownership, leveraging Johnson's diverse portfolio and established market presence to thrive in the competitive fitness industry.
In a landmark agreement, FatBrain AI and Genius Group Limited have announced their merger, aimed at revolutionizing AI education for entrepreneurs, enterprises, governments, and students. Boasting a projected combined revenue exceeding $80 million for 2023, with an impressive year-on-year growth rate exceeding 100%, this merger creates a formidable platform supporting over five million students and a vast marketplace of fifteen thousand partners. Together, they offer AI solutions across various sectors to SMEs, enterprises, and government institutions, paving the way for innovation and advancement in the field of artificial intelligence.
Assure Holdings Corp., a leading provider of outsourced intraoperative neurophysiological monitoring (IONM), has entered into a definitive agreement to be acquired by Danam Health, a prominent healthcare technology and pharmaceutical logistics company, through a reverse merger. This strategic acquisition aligns with Danam Health's vision to focus on pharmaceutical and healthcare services, driving the advancement of its micro health ecosystem. Additionally, Assure Holdings has divested some assets related to its intraoperative neuromonitoring (IONM) business to Texas-based MPOWERHealth for up to $4.5 million. This divestment, deemed necessary due to strategic growth plans, entails a cash payment of $2.5 million at the initial closing, with the potential for an additional $2 million based on an earnout payment linked to case volume from the acquired assets over the next 12 months.
One last thought.
In today's ever-changing business landscape, adaptability and specialization are indispensable qualities for success amidst deal complexities and market disruptions. Consider the journey of Lotus Foods, a revered Rice is Life® company. For three decades, the founders' unwavering commitment to sustainable rice cultivation and nurturing farmer relationships has forged a brand synonymous with excellence and innovative regenerative agriculture practices. Their recent foray into rice noodles at Expo West 2024 exemplifies their dedication to meeting evolving consumer demands while remaining steadfast in their niche. Moreover, their strategic decision to appoint a CEO signals a deliberate move towards scalability and sustainable growth.
Lotus Foods stands as a beacon of niche leadership, positioned strategically for success and presenting an enticing prospect for larger companies seeking entry into the healthy food sector, irrespective of their intention to sell. Their story underscores the significance of recognizing one's strengths and delving deep into a chosen niche. By remaining true to their core mission and values, Lotus Foods has not only cultivated a valuable and marketable brand but has also fostered profound connections with employees, communities, and stakeholders alike.
In closing, let us draw inspiration from the resilience and long-term vision of companies like Lotus Foods and JELD-WEN as we navigate the complexities of M&A and corporate strategies. Until our next correspondence, let us strive to build enduring businesses that thrive through innovation and purpose.
Yours truly,
Belinda Bassey Ephraim
Founder & CEO
Thank you for reading Katalyst Point Insights! If you enjoyed this newsletter, please share it with colleagues/ forward it to a business owner who could use this information and subscribe if you haven’t already. I email once a month, sometimes more, sometimes less. For more on mergers and acquisitions, corporate strategy, and innovation, head to katalystpoint.com or follow us on LinkedIn.
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