OLBRAMOVICE, CZECH REPUBLIC —
Vladimir Jehlicka and his business partners spent 25 years building up their Czech machinery firm before deciding to call it a day.
However, they faced a problem that is growing as the first generation of post-communist entrepreneurs nears retirement.
Their children weren't interested in running the shop but equally Jehlicka and his three partners didn't want to sell their life's work simply to the highest bidder: securing a future for the firm was as important as the sale price.
In the end they found a suitable buyer for STS Olbramovice, which employs 90 people making cattle feeders and other farm machinery. The sale went through in January, part of a business that is long-established in western Europe but new and rapidly expanding in former communist countries such as the Czech Republic: managing ownership succession at family firms.
“We decided to sell after a long hesitation,” 63-year-old Jehlicka said. "Our children's focus is very varied, there was no interest to take over running the firm.”
“Our main criterion for picking a future owner was a pledge to maintain production and jobs,” he told Reuters.
Four decades of communism largely eliminated legal private enterprise in the country and its neighbors such as Hungary, Slovakia and Poland. But after 1989, managers or employees often clubbed together to buy frequently decrepit state enterprises, while other entrepreneurs started businesses from scratch.
A quarter century later, many of these owners now need to hand over what have become valuable firms. Some find successors in the family; most look for other options including management buy-ins or a sale, creating an opportunity for investors.
Sales of family firms are in vogue. Consultants KPMG said they accounted for 30-40 percent of the Czech transactions it took part in over the last two years in the 20 million-60 million euro range.
The country's small bourse and cheap acquisition financing mean direct sales are preferred to stock market floats.
The trend is likely to accelerate in Slovakia as well.
“This is a transition from the first founder generation to the second. In several firms it is already happening, in most it will happen in the upcoming period,” said Mario Fondati, a Bratislava-based partner at Amrop consultancy.
A good match
Jehlicka's firm, based in the village of Olbramovice about 50 km (30 miles) south of Prague, has annual sales of 5 million euros ($5.3 million) and EBITDA operating profits nearing half a million euros. In SkyLimit Industry it believes it has found a buyer that is a good match.
SkyLimit is a new Czech investment fund that targets machinery-making firms facing generational change, with up to 500 million crowns ($20 million) in annual sales. It took on another fund, RSJ Investments SICAV, as a junior partner in buying STS Olbramovice.
SkyLimit says it wants to keep its holdings for the long term, acting more like a strategic investor, and help company managements in making major decisions.
STS was its first transaction — it says only that the price was in the single millions of euros — and plans about two to three purchases a year to build a group of manufacturing firms.
The fund's board member Michal Bakajsa told Reuters that smaller industrial companies in the sector can be found at lower multiples of their operating earnings than bigger firms. It aims to assure sellers of their businesses' future and make sure there are managers who will stay on under the new ownership.
“Many companies reject classic financial investors, they fear what would happen with them. Many are in smaller towns, the people know each other, the owners employ people for many years, they are often friends,” Bakajsa said. “We look at companies that have in some way an independently functioning management, where the company does not stand and fall with the owner.”
Petr Kriz, head of mergers and acquisitions at consultancy EY in Prague, said there were 310 M&A transactions in the Czech market last year, up from 185 in 2015. A few dozen were related to succession, with the market in general lifted by a surplus of liquid capital.
A survey by the Czech Association of Small and Medium-Sized Enterprises among 400 family-type companies last year showed 60 percent would consider a sale if an attractive offer comes.
A fund run by Genesis Capital bought 75 percent last year in Quinta-Analytica, a firm supplying analysis and clinical studies for drug makers. Genesis bought the stake from three out of five owners who wanted to exit after 20 years in the business.
“[Generation shift] is an important and large share of deal origination for us,” said Genesis Capital's managing partner Jan Tauber. “What we can offer is creating structures allowing owners to depart gradually.”
Last year Genesis sold AZ Klima, an air conditioning and cooling systems supplier, along with the firm's founder Jiri Cizek who still held a 30 percent stake. AZ Klima's purchase by Czech energy firm CEZ completed a five-year ownership transition: from Cizek and his partner, who together built up the firm in the early 1990s, through the financial investor Genesis to the strategic buyer CEZ.
Some entrepreneurs are reluctant to invest their wealth outside the companies they founded at a time when the loose monetary policies of the U.S. Federal Reserve, European Central Bank and Czech National Bank make good returns hard to achieve.
Zbynek Frolik, 63, founded Linet in 1990 and now employs 900 people making hospital beds for customers in over 100 countries.
He has handed over daily business to an executive director and is considering what to do next, but is not selling his 33 percent stake for now.
One reason is that the best way he knows to manage his money is to invest it back into his own business. In his experience, putting it elsewhere doesn't work.
“You'd have to be solving the problem of what to do with money at a time when the Czech National Bank, the ECB and the Fed are all printing money like it was a contest, and everyone is looking where to invest,” he said.
Still others are looking at a philanthropic exit, such as Dalibor Dedek, 59, who founded the Jablotron group in 1990. He sold a 40 percent stake in the firm, which employs 600 making house alarms and other electronics, to its executive manager Miroslav Jarolim last year. Dedek plans to hand the rest to a charitable body and not his children.
“I want my share to be put into some foundation or an institution that will not die with me,” he told Reuters. “I did not build the firm for the family. I do not want to punish my children by forcing them to deal with money problems.”