Partner Content: The anatomy of a private investment deal – a family office primer

Is there a right and a wrong way of doing a private equity deal? Of course, the answer to that is no, one way might work for some, but not for others, and vice versa. But what can make the difference between a less successful deal and one that sparkles for all parties often comes down to the level of professionalism applied from identifying a business, its acquisition, and its eventual sale.

The purchase of Diedrich Roasters, a maker of premium coffee roasting equipment, by Chicago-based private investment group City Capital Ventures, offers a pretty good crib sheet of how to go about achieving a deal that has all the hallmarks of success.  

People all over the world knew the Diedrich name, but this was still a reasonably small business, and we along with our investors thought there was a lot of potential to do what they do – just a little better – Dan Kipp

Acquired by CCV in March 2016, Diedrich Roasters is a maker of premium coffee roasting equipment. The Idaho-based manufacturer makes highly sophisticated roasting machines that cater to retail shop use all the way up to full-scale commercial use. Diedrich’s top of the range product, which can roast up to 2,464 pounds of coffee beans per hour, sells for as much as three-quarters of a million dollars.

The Idaho-based manufacturer was founded by Stephen Diedrich, whose family were pioneers in the then-emerging speciality coffee market. With coffee in his DNA, Stephen established Diedrich Manufacturing, as it was known before CCV’s acquisition, as one of the most innovative makers of high-quality coffee roasting equipment. His big innovation was the invention of an infrared heating element. Previously, all coffee had been roasted over an open flame, but the infrared process produced a more precise level of roasting and ultimately created a better-roasted bean.

In a market where coffee is increasingly a premium product, such a precise roasting procedure goes down well with coffee connoisseurs worldwide.

From CCV’s perspective, Diedrich represented just the type of business they were interested in buying. “We had been looking at the coffee market for some time, but we weren’t terribly excited about investing in a coffee shop chain,” says Dan Kipp, founder and managing partner at CCV. “Given this, an old colleague from my days at Salomon Brothers knew of Diedrich and thought it might just be what we were looking to buy instead.”

In fact, that introduction proved to be CCV’s eureka moment. That’s because, for CCV, Diedrich represented a much better way to be involved in the world of coffee. “We saw an opportunity to play the coffee theme through a critical component in the value chain, which is the roasting of coffee beans, rather than the retail sale of coffee”, said Allen Tibshrany, Kipp’s co-founder of CCV and a managing director there.

He adds: “We had studied the growth of the speciality coffee market, in both established markets like the U.S. but also emerging markets like China. And we saw in Diedrich a niche business that had proven itself over four decades with an excellent global brand but one that could be taken to another level, given the worldwide growth in speciality coffee.”

To help finance the deal, CCV gathered together four family offices that each contributed, along with CCV’s partners, a sizable sum to acquiring Diedrich. “People all over the world knew the Diedrich name, but this was still a reasonably small business, and we along with our investors thought there was a lot of potential to do what they do – just a little better,” says Kipp. “Quite simply, it was a business where the footprint was bigger than the foot.”

Tibshrany says that it wasn’t a matter of reinterpreting how the business had been run. Stephen Diedrich had hired a proven senior manager in the form of Michael Paquin as CEO a few years before the CCV deal, and he had overseen a doubling of revenues and profits. “It was more of a matter of a lot of little enhancements and giving Mike and team permission to grow,” says Tibshrany. “We didn’t need to create something new.”

Although Stephen Diedrich retired with the acquisition by CCV, Kipp and his investors were adamant that the culture of the business needed to remain in place. That culture was one of a deeply rooted business in its local community, which had gained a worldwide reputation for manufacturing excellence with its products. A business very much about providing for all its stakeholders, not just its shareholders. Diedrich fit perfectly into CCV’s philosophy: finding small companies with big potential at moments that matter most, but keeping the culture of the business in place at the same time.

“With the Diedrich deal, like all our deals, we asked ourselves: ‘how could we help impart some basic good business practices and growth disciplines without killing the vibe of the business’?” says Kipp. “That was the challenge for us, which I feel we’ve carried out quite well in our first two years of ownership.”

For CCV and its investors, the plan is to get Diedrich to a size where the equity holders could either retain the business indefinitely and take cash dividends, or sell the company to a strategic player, of which there are many.

Obviously, a big part of these efforts is to professionalize the business by bringing in new talent at the management level. Diedrich’s CEO Paquin is very much still in place and also owns a meaningful minority stake in the business, but new senior hires have been made. These include the appointment of a chief financial officer to improve internal financial controls. Previously Diedrich relied on an external accountancy firm to do that job.

And last year, Diedrich hired Rocky Rhodes, an established expert in the coffee business, to be its chief revenue officer. New board members were also appointed, including a member linked to one of the family office investors. Improvements in marketing and sales efforts were also completed, and last year, Diedrich moved into a new facility to increase production capacity and achieve greater economies of scale for the coffee roaster maker.

Since the acquisition, revenues have risen, and the pipeline of new business is as robust as it has ever been. Of course, some overhead costs have been incurred, but to make the business more muscular, more profitable and more attractive, says Kipp, you need a level of professional talent and systems to get to a higher plateau.

Those efforts are making a difference, proving that CCV is true to its mantra of finding small companies with big potential at inflexion points. So that “higher plateau” CCV and its investors are looking for might not be too far away for Diedrich Roasters. And that’s a testament to how an independent private investment group can create real value for all the stakeholders.