Family Business Report: Still Standing
Despite the dire predictions, a large number of privately-run and family businesses in Canada continue to do better than survive. Acquiring or buying out assets of other plastics operations is one the key ways these companies manage to get critical mass or kick start growth on a much faster time line.
July 1, 2002 by Michael Legault
Even in an increasingly global economy, where economies-of-scale and ornery purchasing managers hell-bent on wringing every last tenth of a cent out of operating costs supposedly rule, the family business still plays an important role in the economy of this country. Businesses that are owned by families generate 45% of the nation’s gross domestic product and employ half of all Canadians. In this magazine’s latest Injection Molders’ Survey, more than 65% of the respondents reported having 50 or fewer employees.
While the apparent endurance of the family business may have economists scratching their heads, the vitality of small-scale businesses may have a rather straightforward explanation: the desire make it on your own.
“There are many challenges to running a family business,” says Darlene Lynde of L&L Tool & Injection Ltd., in Calgary. “But the main benefit is that we love it — we’re having a ball.”
Founded by Darlene and her husband Vern as a toolmaking company, today the company has 27 employees and six injection molding machines ranging from 125 to 500 tons in clamping force. It also has CNC equipment and two CAD/CAM software stations to make injection molds, primarily for use in its own injection machines. The company’s main markets are housewares and construction, although it has recently picked up work in the electronics/ telecommunications area. While Darlene and Vern still keep tabs on business, they have largely turned over the company’s day-to-day operations to their three children, Doug, Jason and Sonya.
“We see this company as a chance to build something for the future, for ourselves, not for some director a thousand miles away,” says Doug, who manages the company’s mold shop. “Our parents deserve credit for giving us this opportunity.”
The story of the start, growing pains and maturity of L&L has a classic element to it, one that many family-run plastics companies will find familiar.
Darlene and Vern started the company in their garage in 1989. Vern, a toolmaker, worked a regular day job, then built molds at night in the garage. His “tool room” consisted of a lathe, surface grinder and a milling machine. Tools were tested at a local injection molding shop which owned two injection molding machines. L&L eventually bought out that molder in 1992.
THE BUYING GAME
The acquisition of the molder’s two injection machines and business allowed L&L’s revenues to approach levels of sustainability faster than it might have had it remained solely a tooling shop. Indeed, buying out, acquiring, merging or forming alliances remain key ways smaller companies arise and obtain leverage in markets becoming more splintered, global and difficult to enter from a dead start.
Normand Tanguay was involved in a management buyout of Spartech’s Canada’s food container and molded products division in August of 2001. Tanguay, who was executive vice-president of Spartech Canada, along with three other former executives of the company, purchased the division for $50 million. Equity for the purchase was provided by principal capital investment groups Caisse de dpt and Partenaires de Montral. Tanguay is president and part owner of the new company, Plastipak Industries, which has 450 employees and molding plants in Brampton, Toronto and Cookshire, QC.
Tanguay says that from a strict business view, the buyout made good sense to him and his partners because the division had always been profitable. In essence, Spartech’s board mandated sale of the division in order to support new investment in the company’s core sheet business. The division was also attractive, he notes, because the nature of its business was “high value”.
“The cost of raw materials in the thin-wall food packaging and custom packaging we make is only about 30% of the total cost,” says Tanguay. “Most of the value is added through design, innovation and investment in new technology.”
Ultimately, Spartech accepted the management buyout offer because Tanguay’s group was willing to purchase the complete division, whereas most of the other potential buyers were interested in acquiring certain segments of the business.
Tanguay says the biggest challenge was pulling the financing together during a period when the stock market was suffering and the economy was contracting.
“Negotiating the financing was a long process. I was turned down twice,” he says. “We documented there was a positive cash flow in all phases of our operation, and were finally able to get the deal completed.”
This year Tanguay is projecting sales of approximately $60 million, with about $45 million coming from the thin-wall packaging, and the remainder from custom-molded packaging.
YOU CAN SAY “NO”
As an independent, family business, L&L has kept an open mind about both partnering and acquiring another business.
“We’ve had some partners in the past, but it hasn’t worked out,” Doug Lynde reports. With one of the partners, Doug explains, problems arose over differences in work ethics between the individual and the Lynde family. He says this person did not understand the dynamics of managing a smaller business, which often require working long, uncompensated hours. L&L bought out this partner in the early ’90s.
Jason Lynde, manager of plastic molding operations, says the company gets the usual calls from brokers wanting to list it for sale, but generally ignores these solicitations. It has, however, in at least two instances, looked seriously at acquiring the assets of other companies. Neither panned out.
“We couldn’t work out the details,” says Jason. “In one case, we lacked the space to bring in the new operations, and we learned the other company was losing money.”
The long hours and hard work appears to be paying off. The company has enjoyed a couple of banner years of 10% growth, and is looking to maintain growth in the range of 5 to 10% in the near future. Yet, the challenges of running a family business can often be formidable.
“It would probably be harder to start a family business in manufacturing today than it was 14 years ago,” notes Darlene. “Things like globalization and finding skilled labor make it tougher today.”
One especially tough challenge for small businesses in Canada is obtaining financing for capital investment through conventional banking institutions, notes Sonya Lynde, office manager.
“The smaller you are, the harder it is to obtain financing,” says Sonya. “We’ve turned to the Business Development Bank of Canada for two of our loans. They’ve been excellent to work with and seem to understand us better.”
Indeed smaller companies often find that the financing realistically at one’s disposal is the main limiting factor on aggressive growth plans. Acquiring the right partner or company to kick start that growth is one option any small business needs to keep open these days, the Lynde family concurs.
“We’re definitely not against merging or acquiring another business,” says Doug. “But the bottom line is that there has to be a large benefit for us to do it.”
When it comes to skilled labor, small and large businesses are competing for the same employees. In order to retain those employees, more companies, large and small, are turning to incentives. According to a survey of the IT sector conducted by the Employee Ownership and Incentives Association
37% of the companies offer profit sharing
21% offer stock options
24% have “open book” management
14% have on-site recreational or fitness facilities and a broad mix of incentives.