When Clearview Capital acquired Nielsen-Kellerman, Co. (“Nielsen-Kellerman” or “NK”) in 2017, it was attracted to the strength of the company’s brands across multiple end markets. NK’s Kestrel-branded products, for instance, measure local environmental conditions and provide specific metrics around wind speed, temperature and humidity. These and other measurements are critical in certain recreational and professional applications, ranging from long-range shooting and hiking to agriculture and firefighting, among other use cases. Their NK Sports brand, meanwhile, is the leader for performance electronics in competitive water sports such as rowing.
Beyond the opportunity to support innovation in these areas and open up new marketing and sales channels, Clearview’s investment thesis rests in backing a CEO, Alix James, who has both the drive and vision to maintain the company’s reputation for quality while expanding the business outside of its core niches. In a wide-ranging conversation, Alix highlights the valuable role PE can serve in succession planning as well as certain considerations business executives should keep in mind when choosing a financial sponsor as a partner.
Q: You have a fairly unique background in that you were the daughter of cofounder Richard Kellerman. Can you talk a bit about what drove you to join the family business?
A: It’s interesting, because my connection to the company really evolved over time. Initially, though, I had no intention of going into the family business. When I was a freshman in college, the crew team had placed a boat by the freshman dorms to help recruit new team members. What began as a conversation with the coach about the CoxBox, [NK’s marine-audio system for coxed rowing shells], ended up with me joining the crew team and developing a real passion for the sport. That was probably the first connection. But after I received my undergrad degree, I went into law school and embarked on a career path in corporate law. Along the way, I married a Naval Officer, so it was difficult to build a law practice given how often we were moving and, in some cases, where we lived.
When we were stationed in Washington — after the birth of my first child and on an island on which legal career opportunities were few — I had a conversation with my dad about the company’s advertising and, specifically, where I thought it could improve. I ended up joining the company and teaching myself both principles of advertising and marketing as well as graphic design and desktop publishing. At the time, Nielsen-Kellerman only had IP counsel, so I was also able to step in as general counsel and assist with contract negotiations and other legal matters. For about four years, while we continued to move around the country, I served as a contractor in this capacity. When my husband left the military, we moved back to Pennsylvania, where the company is based. I spent another 10 years working across the organization and finally came to the realization that this was what I wanted to do as my career.
Q: Fast forward a few more years, and you had already progressed to the role of CEO prior to taking on a private equity investment. But can you discuss some of the considerations and learnings in navigating succession planning?
A: That’s a good question. NK’s first private equity investment was actually initiated to help facilitate succession. For a little bit of context, though, the company was founded 40 years ago by three partners. The third partner was more of a passive, financial investor whose oversight role was to help break a stalemate when necessary.
The original goal when they first outlined their strategy was for more of a gradual succession. It was originally conceived as a five-year plan. By the seventh year, when they were no closer than when they started to having a firm plan of action, we began to think through some other alternatives. At that point, the owners put in place an ESOP [or Employee Stock Ownership Plan]. There are certainly instances when an ESOP can provide a good option, particularly given some of the tax advantages. What we discovered, though, was that they also come with some challenges. Generally speaking, they tend to work best when implemented at the start of a succession plan, with time to gradually allow the employees to earn into the ESOP while the owner(s) are able to take their value out of the business. When implemented close to the planned succession date, the ESOP must take on debt and risk. Also, the longer an ESOP is in place, the more hurdles you will encounter. For instance, there’s a tendency for stakeholders and employees to become more conservative the closer they get to retirement. The business, itself, also must maintain certain levels of liquidity in order to cash out employees as they retire. ESOPs can certainly provide a nice option for “companies of peers,” such as an engineering firm, but organizations with a more traditional hierarchical structure will encounter more complexity. The main issue for us was just timing – I was ready to fully take the reins and earn a significant equity stake, and that process would have taken at least 10 years with the ESOP.
Private equity really emerged as the most logical solution given the circumstances. When we signed on with an investment bank, there were some initial discussions around whether to solicit strategic buyers, but that was probably the most threatening option. It would likely mean that parts of the business would be stripped out, manufacturing moved offshore, and the focus of the buyer would be on finding synergies. That’s really just another way of saying that you’re going to get rid of people.
In pursuing PE, though, we were confident we were selling an inherently good business with a strong team and compelling value proposition. We believed that it just needed more resources to really amplify our growth. Going into it, we weren’t sure if the business itself was too quirky, but the company was consistently growing revenues by 10% to 15% annually, and becoming steadily more profitable over time.
And as far as executing on a succession plan, the founders were able to retire comfortably, customers and employees benefitted from a transparent transition, and the management team, myself included, were able to align our interests with an equity stake. So it really worked out quite well.
Q: Any advice for fellow business owners or executives that are exploring succession now?
A: There are a lot of considerations, all of which are pretty unique to the specific circumstances. I think the most important thing is to plan ahead. At a minimum, business owners should look three years out, but five years is probably better. You don’t want to end up in a situation where a health scare or something else suddenly changes your priorities.
The team is also important. Investors and even strategic buyers will be scared off when the departing owner or owners are “invaluable” executives at the center of the organization. As part of the planning, too, it’s valuable to have clean books that are regularly audited or reviewed, and to have been following GAAP. Most importantly, though, is just understanding your available options and the benefits and drawbacks of each. This awareness can help you plan specifically for whatever outcome best fits a given situation.
Q: Clearview, which backed Nielsen-Kellerman in 2017, actually represents your second experience with private equity. There’s often a perception among business owners that PE firms are all cut from the same cloth. Speaking generally, can you highlight some of the differences you’ve experienced?
A: At a high level, Clearview is more of a growth investor than your traditional, value-oriented sponsor. I only mention that because there is a bit more of a venture mindset that comes through in their ownership philosophy.
This distinction is particularly important for a company like ours that invests so much in R&D and intellectual property. It can sometimes take as many as two years before these types of investments begin to impact the top line, but they’re absolutely critical to maintain and grow our market share. This might be a generalization, but it’s been my experience that the more traditional PE model is premised on analyzing historical performance and then extrapolating that out to create a fairly rigid investment model. The more traditional approach – again not focused on long-term growth — also wants to see money come out before they’re willing to put money back in. So the emphasis in these situations is more acutely trained on growing cash flows and the bottom line. This is fine and certainly comes with the territory, but it can be shortsighted if you’re forced to pull money out of R&D to meet an earnings target. It just creates longer-term challenges and contradicts the value of PE as patient capital.
The other factor that all business owners should be aware of is just the administration costs. For a small-market or lower-middle-market company like Nielsen-Kellerman, beyond the traditional monitoring fees, if you also have to absorb the cost of an operating partner, it can be burdensome. There’s also a dynamic that’s particularly important for smaller companies in which you have to be careful about being overleveraged. That’s why the highest bidder may not always be the best option, especially if you’re rolling over your equity. In our experience, and it’s just based on our experience with the two firms, growth-oriented investors really understand the payoff of reinvesting in the business. Over the long-term, this will be the most rewarding strategy for all involved – even the next owner of the business. And it certainly makes for the more enjoyable partnership for the management team knowing that the Board is enthusiastic about their vision for the business.
Q: Having served as the captain of the crew team at Yale and still rowing competitively, today, you come from the George Zimmer and Victor Kiam school of leadership, in which you’re not only the CEO but also an avid user of Nielsen-Kellerman’s products. How does that passion translate as a leader and what were some lessons that serve you well today?
A: There’s a reason you see rowing posters on the walls of most businesses. It’s just a remarkable sport in which the team matters above all else. In basketball, for instance, one player can change the fortunes of a franchise. That’s not the case in rowing. If you don’t work together, it doesn’t work. That’s one of the reasons we’ve actually recruited so heavily from that pool of candidates. We currently have eight other rowers on staff. It’s one of those cues that you see on a resume that speaks to a person’s work ethic and their appreciation for the “team” element.
Q: So going back to your time in the boathouse, where did you typically sit in the boat?
A: Well, the bow in the sculling boat steers and makes the calls for the race, while the stroke sets the rhythm. I only ever row bow or stroke, so I guess you could say that I’ve never been content to just ride along in the middle.