Rita's Water Ice sold to private equity firm again: what it means

Quietly reported yesterday, though not announced on either company's website, a private equity company called Falconhead Capital, LLC, has bought Rita's Water Ice. Rita's had been owned by a private equity group since 2005. So though this was merely paperwork (and the exchange of an undisclosed but likely eight-figure amount of money) it's still a good opportunity to talk about what it means when a business changes from operating as an independent company to being owned by a private equity firm.

It means the business is no longer a company of its own, but is merely an asset in the equity firm's diverse portfolio of brands. And as soon as it starts underperforming, the firm's portfolio managers will treat it as any asset that produces income for members of of the firm, not as a company employing and serving people: the asset will be sold off or terminated. The business will enter into bankruptcy or will wind down; workers will be laid off, shops will be closed, and money that would have moved around the local community from customers to workers and managers, and from employees to the places where they spend their paychecks, will no longer move around.

Companies are managed for their stakeholders. In our capitalist system and under our state and federal laws, it's the legal and ethical duty of the company's directors to do what they have to for the stakeholders. When any company's income is down, the company has to respond for the benefit of its stakeholders. The stakeholders of a private equity company are the investors in the company's portfolio. The stakeholders of an independent company are employees, customers, management, and stockholders. So compare. When a company is just a company, when it underperforms the directors choose from options like shaking up management, cutting some jobs, closing a few storefronts, or choosing some strategic planning option, like enduring a few quarters of decreased income while anticipating increased future income through investment in their plant, on the assumption that in the long run it's best to keep the company itself a going concern. But when a company is a line item in a portfolio of assets, when it underperforms it gets taken out of the portfolio. That's the only legal and ethical option, once a company has been sold, as Rita's has, and is nothing but an asset of a private equity firm.

It's what happened to Harry & David, the mail-order fruit gift box people. And there's a good possibility that sooner or later it'll happen to Rita's, too.

The end result of selling a business to a private equity firm so that it's just one brand out of many is uncertainty -- among the business's employees and local suppliers who lose their income. In the local communities that see an eventual loss of the money that the business had kept moving around. And among the customers who are disadvantaged economically with a lack of competition and with quality of life issues that enter in when the only choices at the strip mall are remotely-owned mega-chain restaurants and stores.