In the ’90s, Don Grasso was in the midst of a perfectly good investment banking career in Merrill Lynch when opportunity came a-knocking. “My father-in-law offered to back me with debt if I bought a company,” he recounts. “He said I needed a real job.”
While couched in humor, the offer made a lot of sense. At Merrill Lynch, Grasso was charged with prepping $80 million to $500 million businesses for IPOs, a job that essentially required instilling processes, systems and management into those companies, as well as developing solid, strategic growth plans. Why not do all that for a company he actually owned?
Being a thorough kind of guy—and mindful of the debt he would be taking on—Grasso shopped carefully, considering more than 200 businesses on the block at the time. Finally, a friend suggested that he speak with Paul Reilly, founder of Rytec Doors, a manufacturer of high-performance doors for industrial, commercial and cold-storage environments. These high-speed rolling or folding doors are used to minimize the air exchange between two areas, providing greater energy efficiency, security and productivity.
Reilly’s business wasn’t officially for sale, but the meeting led to a conversation about valuation, which, in turn, led to an offer. “I made a decision almost immediately,” says Grasso. “I had worked with two door companies on going public and I knew about the market, so I did my due diligence. I actually ended up paying significantly more than we initially discussed, but I was confident about the opportunity for growth.”
His confidence proved well-placed. Jackson, Wisconsin-based Rytec grew 32 percent the very first year Grasso owned it, and it has had a double-digit, average compound annual growth rate ever since. “We couldn’t sustain 32 percent—that gets harder and harder the bigger you get—but we’ve had consistently strong sales growth,” explains Grasso, who focused on finding new opportunities for the company’s core products. “We were essentially in three markets—industrial plants, food processing and food distribution—all areas where you need to separate clean or temperature controlled environments. So I looked at that and said, okay, what other businesses need to separate environments and how can we service them?”
That simple question led to Rytec targeting pharmaceuticals, airports, automotive plants (and later dealerships). “We are constantly tweaking existing products for new markets or coming out with new products based on a potential market’s needs,” explains Grasso, who cites Rytec’s Break-Away rollup door as an example.
Designed to be quickly reset without tools, the door was developed in 1990, but it wasn’t until Grasso owned the company that Rytec began marketing it to automotive plants and dealerships and airports. “Doors in places like [those] get hit by forklifts all the time, so there’s a real advantage in repair costs and door downtime to a door that can take a hit and be back in operation seconds later. Now, we sort of own the auto market.”
Today, about 50 percent of total sales come from markets the company entered after Grasso purchased it—and new avenues continue to emerge. “After [Hurricane] Sandy, we’ve seen heightened awareness about high-velocity doors in the hurricane zone corridor,” he says. “If you’ve ever seen a Miami-Dade County approved door, it’s really ugly. I’m thinking there’s a market for a sleeker version.”
“A lot of our success has been about looking at how to redefine our products,” sums up Grasso, who offers these learnings from his experience buying and building a company.
Don’t Compromise on Your Criteria
Grasso’s wish list for a target company was formidable—“all the elements of the kind of company I liked to take public,” as he puts it. In Rytec he found a fast-growing company with a dominant position in a sector where the underlying market was also growing and had high gross margins, strong engineering and strong customer support. “It had all the key elements and they looked sustainable, because there were barriers to entry in the form of proprietary products,” he says.
Do Your Homework
The due diligence process should be far more comprehensive than vetting financials. Grasso hired a patent lawyer to make sure the company’s considerable patent portfolio was everything it appeared to be. Reassured that the company’s designs would enable it to maintain both its competitive edge and margins, he was confident enough to proceed. “Everyone is trying to design around what we’re doing; and in so doing, they are creating more complex designs that are more expensive or more costly to maintain,” he says. “In short, we have a better mousetrap.”
Expect Transition Trouble
In general, entrepreneurs sell a business because they aren’t willing or able to take it to the next level. Buyers, therefore, have to be willing to make that necessary investment and shepherd the company through the necessary changes. “It’s a question of growth and scalability,” says Grasso. “As a company gets larger, the little warts that were quirky but manageable become big issues, so you need to work hard to get a solid management team and more regimented processes in place.”
An IPO Is Not Necessarily the Way to Go
“I will never go public,” pledges Grasso. (This may be a good time to mention that he’s no relation to Richard Grasso, the former CEO of the NYSE.) “In fact, in my former profession, I used to try to talk companies out of it. Being a public company means a relentless focus on quarterly earnings, communicating with investors and coping with regulatory compliance issues. You have to ask yourself, ‘Is that really how I want to run my business and spend my time?’”