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The Growing Private Equity Buyout Trend in Cabinetry

“Don’t find fault. Find a remedy.”

—Henry Ford

We have witnessed a trend in private equity firms buying up cabinetry companies for a couple of years now. This trend has seen compounded buyouts affecting several SEN Cabinet Vendor Partners. As you may know, Cabinetworks, which included big name brands like Kraft-Maid, Medallion, Merillat, and Yorktowne, was bought out by Platinum Equity earlier this month. This advisory will shed light on the method and aim of private equity (PE) group buyouts, and what it means for dealer owners and sales designers in the Kitchen and Bath Industry.

The ever-growing buyout trend

In general, merger and acquisition (M&A) activity picked up in the second half of 2020 with cash investments being made because of (a) Covid-related uncertainty subsiding and (b) the low cost of borrowing, which is in the 3-4% range right now. Specific industries had been identified as markets of prime candidacy for technology to be leveraged, with the goal of transforming a leading company in these markets to gain dominant market share.

In February of last year, acpi and Masco Cabinetry aligned to become The Cabinetworks Group. As a result, eight of SEN Design Group’s 17 cabinetry vendor partners were brought under the Cabinetworks Group umbrella. Now, ownership has changed again. On April 5th, Platinum Equity of Los Angeles announced that they have purchased Cabinetworks for an undisclosed amount, with the mega-deal to be closed next month.

While buyouts mean the acquired company will undergo big changes, there are certain consistencies an industry professional may expect from doing business with a cabinet company that has been bought by a private equity firm. In many ways, the acquired company is unchanged by their acquisition. While offering the same products and services, portfolio companies often improve by streamlining operations to better serve the customer, while making significant interior changes to reduce costs and generate the maximum amount of net profit.

General practices of PE firms

PE firms typically take three types of value-increasing actions: financial engineering, governance engineering, and operational engineering. They aim to identify the strengths of not only the CEO but of the entire staff, doubling or tripling the workload of those who are kept on board as the company moves forward. Usually, a private equity firm will retain an acquisition for 2-6 years before making their exit returns.

Going into 2020, private equity firms held $1.5 trillion in “dry powder” (cash) to invest and that figure stands at $1.7 trillion today. The Covid-necessitating pause left them anxious to make investments, which is why there has been such a recent burst of acquisition activity.

Ostensibly, the objectives of PE firms include identifying targets to create the advertised high returns for their investors, be they pensions, institutions, university endowments, insurance companies, or high wealth individuals. The Kitchen and Bath Industry is a smart choice for private equity groups to target, with roughly $158 billion spent on kitchen and bath remodeling in 2020.

Studies conducted by Harvard Business Review and Boston Consulting Group have written on how private equity firms create value from their acquisitions. In a 2016 article, BCG reported that 91% of firms surveyed used M&A to create value from portfolio companies.

How PE firms create value from portfolio companies

Expectedly, PE firms will grow their acquisitions – such as Cabinetworks – and resell them for 20-30% annual returns! Compare this to the historical 8-10% returns of the stock market. As one of the most lucrative ways of doing business in open markets, private equity has been earning these huge returns since first being conceived as a financial vehicle in the 1970s.

The PE firm executives don’t know the business of the acquired company, and they don’t really want to learn to run it themselves, instead, they stake decision-making control over a company while using the pre-existing personnel to continue running it. Nevertheless, after a private equity firm acquires a company, everything is not “business as usual.”

Typically private equity firms want the founder and/or CEO to remain after the sale for a short time because he knows all the ins and outs of the business. They’ll want to keep the CEO around for his leadership skills, as well as key executives, to ensure the smoothest possible transition as they decide how to strategically grow the business.

But this continuity won’t last forever.

Private equity firms behave like banks — not entrepreneurs — and so they make calculated business decisions based on analytical data, cutting costs in order to make their desired net profits. PE firms will typically put their acquisitions into debt, and let the debit build in order to maximize the amount returned on investments and tax breaks.

PE firms tend to operate with lean business management tactics. Operations may only look the same from the outside looking in. Old ways will eventually change. Whoever doesn’t perform well will be fired. Multiple reps of a single division may very well be consolidated to one or two, while other departments deemed unnecessary are simply done away with.

They’ll seek quick payment from any clients owing the company money, and push out payments to suppliers in order to retain as much cash on hand as possible. This is no doubt frustrating for the Founder/CEO, but it should not be a surprise. No PE firm acquires a business to be in the service that their acquired company provides; they seek only to get the highest amount for their exit returns.

Other changes in SEN cabinetry vendor partner ownership

For nearly two decades, Dura Supreme has been a superstar vendor partner for SEN. Eighteen months after being bought out by GHK Capital, a private equity group out of Greenwich CT, they purchased Bertch Cabinet Manufacturers out of Waterloo, IA in January of this year.

Bertch is one of the nation’s top cabinet manufacturers, ranking 75 out of a list comparing the annual sales of 300 furniture-making firms. Some industry leaders surmise that the two are a good fit as Bertch excels in bath vanity furniture sales whereas Dura Supreme is better at producing kitchen cabinetry.

The good and bad of buyouts

SEN’s outlook is positive. The cabinet industry is attractive to PE groups! A number of our cabinet vendor brands are part of these buyouts. It’s gratifying to know that skilled business people see opportunities for greater growth in our kitchen and bath industry.

Moving forward we may expect to see:

The SEN Design Group recommends member firms carry no more than 3-4 cabinet brands to draw from to populate the good, better, and best options available from your company on the DesignAlign technology platform. However, as an insurance policy against losing a favorite cabinet brand, SEN suggests members consider supporting a smaller, lesser-known brand of comparable quality from within our Vendor Partner Offering.

Such independent, typically family-owned companies are less likely to be picked up during the current, private equity, buyout frenzy. Some can also be private-labeled with your own company logo stamped in the drawers. While we can never be sure which mergers will lead to PE buyouts, it’s in good form to carry quality products that are not found elsewhere.

—Bryan Winemiller, SEN Design Group