The Middle Market Review Insights on the Middle Market.

Subscribe Subscribe

Subscribe Today

I want to receive:

Thanks for subscribing!

Six Deals Down, More to Go

Tags

Texas Private Equity Firm Rox Capital Targets the Industrials and Manufacturing Markets

Former high school friends Mark Sparrow and his business partner, Al Cameron, spent much of their adult lives as managers in Corporate America — until early 2018, when they joined together to form Rox Capital, a private equity firm in Austin, Texas. Five years later, the firm has acquired six companies and subsequently sold four of them. 

Of those deals, Amifast – a Texas-based provider of fasteners and hardware to the construction and precast concrete sectors – was acquired by Rox in 2017, and later sold in 2021 to Afinitas, a strategic buyer in the precast concrete industry. Also in 2021, the firm bought Scruggs Company, a Houston-based manufacturer of valve products and valve technology to the water and wastewater industries in Texas; a deal which they sourced on the Axial platform. 

And most recently, Rox Capital used Axial to find and snap up Alpha General Services Inc. a Sebring, Fla.-based maker of fiberglass septic tanks, pumps, and other related products. The deal closed on July 15th of this year, and Rox is now immersed in transitioning the company for future growth. 

Sparrow, a managing partner at Rox Capital, talked recently about the Alpha General deal, his firm’s focus and distinctiveness, and their plans for the future. 

You recently closed your acquisition of Alpha General. How did that deal come about? 

MS: We were actually late in reviewing it, and it had probably been listed for three weeks when we reached out to a broker. That was on a Thursday and they were expecting LOIs on Monday. We spent 24 hours digging into the industry, and within the next 24 hours, I had a flight booked to Florida to do a Saturday on-site visit. Then we negotiated terms on Sunday and signed the LOI on Monday. We are a small group and can make decisions very quickly.

What really attracted you to this company?

MS: First and foremost, we felt that the sellers were good, honest people. We try to find sellers that we trust and that we will work well with in the future. Relationships need to endure past closing, so finding the right sellers whom we have a connection with and have professional chemistry with is critical for us.

What else do you look for when targeting companies to buy?

MS: We’re looking for long-tenured businesses that have been around for more than 20 years. Alpha General has been around for more than 30 years. Scruggs has been around for more than 100 years. Companies that have been around that long have weathered all kinds of financial conditions. We’re also looking for EBITDA in the $1.5 million and up range. 

And we’re looking for a good work dynamic. It’s not necessary that businesses have a leader in place to run the company in the future — a lot of times we’re bringing a leader in — but the rest of the team must be strong.  We also look for companies that are not sexy and not attractive to the broader market. Septic tanks are not very interesting. And Scruggs makes water and wastewater valves. These companies are not chased by some of the larger groups. 

What is your plan for Alpha General?

MS: The company does not have an outbound sales effort, and has basically maxed out its capacity — everything they make, they sell. So step one: we’ll successfully transition the business and its employees, customers, and suppliers. Step two: we’ll put systems and processes in place so we can get good data out of the company to make wise business decisions. And step three is growth: Once we have steps one and two completed, we’ll work on increasing capacity, so we can have an active outbound sales effort. 

You moved quickly on the Alpha General deal. Is that typically how you operate?

MS: Yes, it is. It’s really competitive. For Alpha General, there were five or six companies that submitted LOIs, and we weren’t the highest. But we were the only group that went to see the company before the LOI.  Doing in-person visits shows you’re serious, you’re interested, and it allows you to explain the benefits of working with your firm. 

What role do valuations play in making your deals more cutthroat?

MS: Valuations are up 30% compared to four or five years ago, and there’s a lot of capital out there that is looking for a home. If you have excess dry powder out in the market, it drives prices up and deals become more and more competitive. 

What sets Rox Capital apart from other private equity firms?

MS: Ultimately, it’s our ability to connect with the founders. When we talk with a seller, we do a good job of relating to them and making them comfortable with Rox Capital. We’re not cutting employees and not cutting expenses, but our program is to build upon the foundation that they already have. That resonates with a lot of sellers. 

What mistakes do some sellers make during the deal-making process?

MS: Some sellers look at the bottom dollar versus looking at the structure of the deal. They need to know what goals they are trying to accomplish with the sale. They will want buyers to take care of their employees and match the cultures that they have instilled, and buyers who take that mantle of responsibility seriously to bring their companies to the next levels. It’s definitely a hard and emotional process for sellers to work through. 

Given this, how do you mitigate the risks of a deal falling through?

MS: We do proper diligence up front and make sure we really understand the business, the market that it is in, and the sales channels it uses. Also, we stay in close contact with the sellers, and talk with them frequently. We visit the site bi-weekly during the transaction. Concerns will pop up in their minds that they may or may not tell you, so the more present you can be, the better your chances of subverting these concerns before they become a larger issue. We want the team to be comfortable with us, and not worry about losing their jobs. 

How will M&A change over the next few years, especially in the industrial and manufacturing sectors?

MS: We’re going to see valuations start to tick down. There will be a struggle for people to get deals done in the next two years because the sellers will have increased revenues due to costs, which have gone through the roof. We buy a business for its future performance, and sellers look at past performance. So there could be a disconnect there over the next few years. 

What’s in the pipeline now for Rox Capital?

MS: We’re targeting another new platform acquisition by Q1 of next year. We target two platform acquisitions a year, and then may have miscellaneous bolt-on acquisitions that could happen on those platforms. We’re also looking to hire a chief operating officer for the firm, and operations personnel to help us manage our portfolio companies. 

Long term, we want to be the private equity firm of choice for lower middle market industrial deals. We have a unique approach as to how we work with sellers, and a unique structure for our investors. 

Learn More About Joining Axial

Request Information

Subscribe to Middle Market Review

Subscribe to Middle Market Review

Subscribe Today

I want to receive:
Subscribe

Thanks for subscribing!