Association for Corporate Growth 2019

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Corporate Growth&M&A

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7

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16

Trends affecting the globalization of M&A

M&A commercial property considerations

The buyer’s dilemma in determining valuation and earnout

Protecting assets and enhancing value in M&A deals

Corporate Growth&M&A

S2 January 21, 2019

Contents

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President’s Letter

President’s letter

2

Trends affecting M&A globalization PE firms’ need for content marketing

3

Preparing a business for sale Purchasing a distressed business

4

Don’t stifle debate at board meetings

6

M&A commercial property considerations 7 Crossing the revenue bridge

8

Understanding the capital stack 9 Differentiating your company in a sell-side deal Synchronize your deal strategy

10

Developing a buy-side strategy Determining valuation and earnout

12

Materiality scrapes

13

Initiating a seamless and profitable sale 14 Protecting interests in a heated market 15 Buy-side evaluation 16 of net working capital Protecting assets, enhancing value in M&A Blockchain’s potential to upend M&A

17

Succession planning for family-owned companies

18

Deal Maker Awards 19 ACG Cleveland 2018-19 Executive Officers & Board of Directors ACG Events Calendar

CRITICAL INSIGHT MEETS TRUSTED RESULTS. WHERE

ACG Cleveland propels region’s growth, future

By DALE VERNON

C

leveland continues to transform itself into a city of tomorrow — from the continued development of downtown, to the ambitious launch of Blockland Cleveland and startup incubator CityBlock. The Cleveland chapter of the Association for Corporate Growth (ACG) and its membership are proud to be supporters of these growth initiatives.

ACG Cleveland is among the largest and most respected ACG chapters in the country. Our 500-plus members are connected to a diverse membership group and exceptional professional development and networking opportunities. ACG Cleveland has been going through a transition Vernon and is proud to advance programs this year that support Cleveland’s continued growth and the dealmaking community.

In 2018, we launched several new initiatives, including a networking event for business development professionals in both public and private companies. ACG Akron Network launched programming, with the first event attracting nearly 100 attendees. Our golf event had record-breaking attendance, with more than 200 participants at Firestone Country Club. We also offer tremendous opportunities through special interest groups, including WiT (Women in Transactions); Young ACG, for those early in their careers; and the ACG Cup, a case study competition for college students. Finally, we continue to evolve our membership experience through improved event invitation and registration capabilities.

Our members receive many great benefits beyond exceptional profes-

sional development and networking opportunities. They include: n Member pricing and access: to any ACG event globally n Member directory: fully searchable database of more than 14,500 M&A professionals n ACG CapitalLink/Pitchbook: proprietary database of thousands of capital resources n ACG JobSource: for professionals to find career opportunities and employers to use as a recruiting tool n Publications: Middle Market Growth and monthly Mergers & Acquisitions magazine n Web-based resources: webinars and professional development resources.

Finally, our premier event, the annual Deal Maker Awards, will be held on Jan. 24 at the Hilton Cleveland Down-

town. This is an event not to be missed by anyone in Northeast Ohio’s business community. We will honor Northeast Ohio’s top corporate dealmakers for demonstrated success in using acquisitions, divestitures and financing to fuel growth. This year’s honorees include Timken, CPP/Selmet, MediQuant, Align Capital Partners, Anne Pombier and Robert McCreary. We will welcome nearly 800 professionals from Northeast Ohio and around the country to congratulate the winners and enjoy a night of networking.

In closing, I would like to thank all our current members and 18 corporate sponsors for their continued support, and I would like to especially thank my fellow board members and the more than 70 members who are active on ACG committees. Your dedication and commitment are inspiring and make ACG Cleveland a great organization.

Dale Vernon is president of ACG Cleveland and a principal with AB Bernstein.

For more information about ACG Cleveland, visit www.ACGcleveland.org and follow the chapter on LinkedIn (www. linkedin.com/company/acg-cleveland) and Twitter (@ACG_CLE).

About ACG ACG is a global organization focused on driving middle-market growth. Its 14,500 members include professionals from private equity firms, corporations and lenders that invest in middle-market companies, as well as experts from law, accounting, investment banking and other firms that provide advisory services. Founded in 1954, ACG is a global organization with 59 chapters. Learn more at www.acg.org. ACG Cleveland serves professionals in Northeast Ohio and has 500 members. For more information, visit www.ACGcleveland.org.

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January 21, 2019 S3

Trends affecting the globalization of M&A

By CONNIE A. PORTER and PETER K. SHELTON

T

en years after the Great Recession of 2008, many businesses have turned to cross-border mergers and acquisitions and access to new geographic markets to enhance revenue growth during the steady, but generally slow recovery.

When utilizing this growth strategy, businesses should consider certain key trends, including heightened attention to foreign investment by many governments, the changing landscape of trade alliances and greater concern with data protection.

Security concerns, among other things, have resulted in increased

governmental scrutiny and regulation of foreign investments. This trend has been dramatically evidenced in the United States by recent changes in Committee on Foreign Investment in the U.S. (CFIUS) regulations.

For example, CFIUS is no longer a voluntary filing, and penalties are imposed for Porter missed filings. In addition, the number of industries covered has expanded.

Similarly, governments around the world have enacted legislation mandating review of inbound foreign investment.

Many governments have tried to keep foreign products

out of their domestic markets by enacting new tariffs and renegotiating trade agreements. In the U.S., new announcements on tariffs and other trade measures regarding China, NAFTA, the European Union and South Korea have become a common occurrence.

Shelton In addition to the challenges created by this new wave of protectionism, data protection and cybersecurity are now a highlevel priority. The European Union passed the General Data Protection Regulation (GDPR) in May 2018 to protect the personal information

of its citizens. The implementation of the GDPR created a significant amount of compliance work for both EU and non-EU based businesses.

And assessing the amount of access a foreign business will have to personal information of U.S. citizens is now part of determining whether a transaction is subject to CFIUS review.

Despite the hurdles that protectionism and data protection may present, cross-border M&A appears to be thriving based on data from the first three quarters of 2018. Global M&A value increased 22% over the same period of 2017 (according to Toppan Vintage). However, domestic M&A increased in deal value by 27%, which suggests that while the cross-border

M&A market is thriving, the overall landscape for M&A has remained strong — both for domestic and foreign transactions.

In all events, in the context of crossborder M&A, due diligence among both the target company and the regulatory and political environment of the foreign jurisdiction is a critical aspect of any successful transaction.

Connie A. Porter is an associate in Benesch’s Corporate & Securities Practice Group. Contact her at 216363-4433 or cporter@beneschlaw.com.

Peter K. Shelton is a partner in Benesch’s Corporate & Securities Practice Group.

Contact him at 216-363-4169 or pshelton@beneschlaw.com.

Why private equity firms need content marketing

By BRAD KOSTKA

C

ontent marketing involves consistently creating and sharing valuable information with the intention of stimulating interest in a brand and driving profitable customer action. Today, 92% of organizations view content as a business asset. Content marketing is especially beneficial to private equity Kostka firms since it supports fundraising and deal sourcing. Here’s how: LEAD GENERATION: Content marketing generates over three times as many leads as outbound marketing and costs 62% less. It also can help

you generate high-quality leads that fit within your investment criteria.

By regularly providing those leads with useful content tailored to their specific needs, you can build longlasting relationships that result in proprietary deals.

REPUTATION BUILDING: Through creating a repository of online content, you can position your firm as an expert and industry leader in business growth. Leveraging your thought leadership content with news media and social networks can further build your reputation and increase exposure to your target audience. When an investor, advisor or business owner who meets your investment criteria seeks an opportunity, your firm will be at the top of their minds.

RESOURCE EFFECTIVENESS: An investment in content will continue to drive business long after it has been published. Online content lives eternally; it isn’t taken down, thrown away or quickly skipped over. Instead, people actively seek it out. Adding content to your website also makes it easier for users to find your business via search engines.

In fact, websites with blog content have

434% more search-engine-indexed pages than those that don’t publish a blog.

These same content marketing concepts can be applied to your portfolio companies to accelerate their growth by generating quality leads, reducing the cost of customer acquisition and conversion and enhancing the reputations of their brands. To learn more about how content marketing can

help drive results for your private equity firm, download our content marketing guide at tiny.cc/CMguide.

Brad Kostka is with Roop & Co., a strategic communications agency with expertise in accelerating growth for private equity firms and their portfolio companies. Contact him at 216-9023800 or bkostka@roopco.com.

TMA Ohio Chapter announces 2018 award winner!

FORMULA FOR SUCCESS IN M&A:

Trust + Analysis + Advice = OPTIMAL DECISION MAKING Diana C. Whisenant, SIOR Executive Managing Director Global Corporate Services E: DianaWhisenant@HannaCRE.com P: 216.861.5398

Nancy Terrill, Inglewood Associates, winner of the 2018 Lifetime Achievement Award, pictured with Mark Kozel, TMA Ohio Chapter President.

We thank Nancy for her leadership and the contributions she has made both in the turnaround industry and our community.

Congratulations, Nancy!

Corporate Growth&M&A

S4 January 21, 2019

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Strategies for preparing a business for sale

By STEWART KOHL

T

he Riverside Co. has invested in more than 580 companies since 1988. We understand what a good sales process looks like, and how business owners can extract the most value when looking to divest.

We don’t just know this stuff from buying companies, of course. Riverside Kohl has also sold, or exited, more than 150 investments after meeting our investment goals. Maximizing value is so crucial for our success that we developed an acronym — SPARCLE

— to help us remember what to do when prepping for a sale.

These are great steps to follow, whether or not a business is selling.

Here’s what each letter stands for: Scrubbed and clean. Internally identify flaws before a prospective seller finds them. Address and eliminate as many weaknesses as possible before going to market.

Powerful management. Great companies are driven by exceptional leaders. Wow buyers with expert managers who know the industry and are backed by a deep bench of talent.

Attractive facilities. You may not have time or budget to do significant renovations, but fresh paint

and bright lighting can do wonders. So can deep cleaning of both office space and shop floors. A well-cared-for facility conveys that the company is well cared for as well.

Rising revenue with favorable margins. Strong financial performance suggests a bright future and is the biggest key to driving enterprise value.

Clear value proposition and growth plan. Know how to explain what makes customers choose your company, and how the company will continue to grow.

Lots of data. Use graphs, charts and dashboards to pinpoint what’s working and what needs addressing.

Excellent preparation. Build a professionally prepared presentation that resonates with prospective buyers.

As institutional investors, we follow these guidelines to prepare our companies, and it’s a blueprint that many business owners could follow.

Some of these may seem daunting.

Professionals can assist with most steps in this process. Their expertise is often worth paying for because you’ll typically see a much better sales price.

Start by engaging an experienced law firm that has completed many sales processes of similar-sized companies to yours. They’ll help guide you and protect your interests.

For smaller companies, it may be

worth engaging an outside accounting resource that can help get your books in order and ensure your data is clear and engaging. Any sized firm can benefit from an outside accountant who will help you take a good hard look at the business — warts and all — to give you an idea of its worth, help set a price and help address significant problems.

Whatever your needs during a sales process, remember that preparation is the key to getting the most out of your business. If you have a really compelling company, maybe it’ll become part of the Riverside family someday.

Stewart Kohl is co-CEO of The Riverside Co. Contact him at 216-344-1040 or info@riversidecompany.com.

Bargain shopping: navigating the purchase of a distressed business

By CHRISTAL CONTINI and MICHAEL KACZKA

A

ll business owners like a good bargain, especially when that bargain might allow for the expansion of a product line or the elimination of a competitor. A business experiencing financial difficulty (a “distressed” company) is often a great tar-

get for purchasers to acquire a business or its assets at a discounted price. While many are loath even to dip a toe into the murky waters of distressed deals for fear of unknown liabilities, others jump in because, if done right, acquiring the assets of a complementary or competing business that is experiencing financial difficulty can yield a significant return for only a modest price.

A bargain-basement price, however, does not come without risk. Distressed companies typically face deteriorating assets, lender pressures Contini and legacy liabilities.

Those purchasers prepared to tolerate such risks can realize material re-

Building Relationships Taft’s M&A Team: Connecting you to a successful transaction.

turns on a distressed acquisition if risk is properly priced. Two important ways to price such risks are to (1) conduct due diligence and (2) utilize Kaczka an acquisition structure that best accomplishes the goals of the purchaser given the distressed company’s financial circumstances.

Due diligence: As with any acquisition, it is important to understand the legal and financial challenges affecting a distressed company.

However, the ability to do thorough due diligence in these scenarios is often very limited. This may be due to poor record keeping, disorganized management or the fact that the financial pressure on the business compels a

speedy transaction. Regardless of the situation, a purchaser should try to best understand the financial condition of the business and be comfortable enough with the purchase price given limited information. Thus, it becomes particularly important when there is limited due diligence for a purchaser to structure the transaction in a way that best mitigates risk associated with the distressed company.

Structuring the transaction: There are multiple transaction vehicles that a purchaser might use to structure a distressed acquisition: an asset sale, an Article 9 disposition or a formal judicial proceeding. Each has its pros and cons and corresponding level of risk depending on the condition of the distressed company and the continued on next page

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tension between speed of closing and the prospect of potential successor liability for the purchaser.

It is generally accepted law that a buyer of assets will not be liable for the liabilities of the seller unless the buyer expressly or impliedly agrees to assume such liability; the transaction amounts to a de facto merger; the buyer is merely a continuation of the seller; or the transaction is entered into fraudulently for the purpose of escaping liability. It is, therefore, wise for purchasers to acquire only assets and address such exceptions when determining the best structure for a given acquisition.

Asset sale: A basic option is to conduct a simple acquisition of the distressed company’s assets. This option is the quickest, but it is also the riskiest. In a typical asset sale, a seller will often give representations and warranties that are supported by an obligation of the seller to indemnify the purchaser if those representations and warranties turn out not to be true. In a distressed situation, a seller is often not in the position to give full representations and warranties about the business. Furthermore, any representations and warranties that could be given would not be supported by a viable indemnification provision because the seller will likely either be out of business or not have the money, or the ability to hold back money, to reimburse the purchaser for any damages relating to the pre-closing distressed company.

Article 9 disposition: In most instances, the distressed company will be in default with its lender, and the lender may be motivated to monetize its collateral. In that instance, the lender can exercise its rights and remedies under Article 9 of the Uniform Commercial Code to sell the distressed company’s assets against which the lender has a lien. Depending on the type of assets, the process can be done by either public or private sale, so long as all aspects of the sale are done in a commercially reasonable manner.

The primary benefits of this process are acquisition speed, the extinguishment of liens and the role of a third party (the lender) in disposing of the assets. The primary drawback is that this process often does not entirely mitigate the successor liability risks.

Judicial proceedings: Finally, receiverships and bankruptcy proceedings provide the most organized and transparent processes for selling assets.

In state court cases where a receiver has been appointed over a business, a purchaser can acquire both real and personal property through a sale from an independent (the receiver) with court oversight on a relatively quick timeline.

State courts, however, generally do not have the power to order a sale of assets to be free and clear of various liabilities and cannot provide a substantive injunction against the claims by third parties against the purchaser.

Alternatively, sales in federal

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January 21, 2019 S5

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sionals to ensure that they get the full benefit of their bargain and mitigate go-forward risk.

A basic option is to conduct a simple acquisition of the distressed company’s assets. This option is the quickest, but it is also the riskiest. bankruptcy court do provide the greatest protection to purchasers against successor liability. In a bankruptcy sale, purchasers acquire assets free and clear of liens, claims or other encumbrances at a bargain price and over the objection of the distressed company’s creditors.

While this is typically the most timeconsuming option because of potential auction requirements and court oversight, it does provide the most protection for purchasers against third-party claims and legacy liabilities. Both proceedings also create the risk of a purchaser being

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outbid as part of an auction process.

As the financial markets continuously change, there will be more opportunities for purchasers to acquire distressed companies at bargain prices.

It is important, therefore, that purchasers work with experienced profes-

Rollup of telecommunications companies

®

Christal Contini is a member and co-chair of the Mergers and Acquisitions Practice Group at McDonald Hopkins LLC. Contact her at 216-4302020 or ccontini@mcdonaldhopkins. com. Michael Kaczka is a member in the Business Restructuring Services Department at McDonald Hopkins LLC. Contact him at 216-430-2028 or mkaczka@mcdonaldhopkins.com.

Sale to Boise Cascade Building Materials Distribution, L.L.C., a wholly-owned subsidiary of Boise Cascade Company

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Acquisition of ITM Hydraulic & Pneumatics

Acquisition of BlueFrog Technologies, LLC

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Partnership with Flexpoint Ford, LLC

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Stifling debate at board meetings can destroy value at your portfolio company

By CHRISTOPHER J. HEWITT and JAYNE E. JUVAN

I

n order to achieve high-performing results, portfolio companies of venture capital and private equity firms need well-functioning boards that afford room for individuality, debate and discussion. Theranos, the now largely discredited Silicon Valley startup that initially gained a lot of buzz for its revolutionary blood-testing technology, serves as a cautionary tale about how a dysfunc- Hewitt tional board destroys value. The company recently announced that it is closing its doors, and investors have lost significant capital.

According to the account in “Bad Blood: Secrets and Lies in a Silicon Valley Startup” by John Carreyrou, not long after Avie Tevanian, an executive who previously worked closely with Steve Jobs at NEXT and Apple, joined the board of Theranos, he started to have concerns about the company. Founder Elizabeth Holmes allegedly would present optimistic revenue projections based upon deals

with pharmaceutical companies in the pipeline, but the revenue would never materialize. Tevanian asked questions about the deals and requested copies of contracts, but Holmes dodged and weaved. He also asked about repeated delays in the rollout of the company’s products, which were being touted as ready for commercialization, but never received any answers.

Tevanian then objected to a corporate governance move that would increase Holmes’s voting stake in the company Juvan because he didn’t believe it was in line with corporate governance best practices.

Carreyrou reports that another Theranos board member expressed Holmes’s dissatisfaction with Tevanian’s questioning and asked him if he wanted to resign. After additional confrontations, Tevanian decided to step down, in part because the documents provided by the company had “irreconcilable discrepancies.” He believed the issues could be fixed, but action needed to be taken.

About a decade later, the events at Theranos have vindicated Tevanian’s

concerns. In part because of Carreyrou’s investigative reporting, Theranos, once a darling of Silicon Valley, has come under enormous criticism that its proprietary technology did not work as claimed. Recently, Holmes and former president and chief operating officer Sunny Balwani have been charged with fraud, though both vehemently deny the allegations against them.

It is possible that the Theranos story would have had a much happier ending had Tevanian’s questions been taken seriously. Presumably, Tevanian raised these issues before Theranos began rolling out its technology nationwide.

If Holmes and the board had engaged with Tevanian and addressed his concerns, perhaps they could have put a more reasonable timetable in place to perfect the technology before actually deploying it for patient use.

The following are a few lessons from the Theranos situation for boards of venture capital or private equitybacked companies:

The importance of having a well-functioning board cannot be overstated.

Most corporate laws require the

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business and affairs of a corporation to be managed by or under the direction of a corporation’s board of directors.

The board is responsible for overseeing the corporation’s strategy and ensuring compliance with an array of often overwhelming laws and regulations.

Given that boards have enormous responsibilities, they should develop strong processes in an effort to ensure they are well-functioning and behave in a manner that enhances the value of the enterprise.

Board composition should ensure diversity of thought.

Many boards are appropriately characterized as “clubby.” When recruiting board members, it is easy to gravitate toward individuals who are friendly, who will go with the flow and who will take the path of least resistance. Opening up a closed club and recruiting accomplished individuals who do not have deepseated relationships with others will help to avoid a culture of groupthink.

Individual directors should have the ability to express contrary

viewpoints without fear of retaliation.

The board should adopt a shared philosophy that affords individual directors the ability to express honest viewpoints and debate matters. Other board members and shareholders should not pressure directors to refrain from asking questions or challenging decisions. Diversity of thought can help to minimize the number of blind spots the board has and may lead to better decisions that help to bring about more favorable outcomes.

Boards should take care to ensure that politicking does not occur behind the scenes and that the real work of the board occurs in actual board meetings, not in “meetings outside of meetings.” Corporations are stronger when directors are empowered to debate issues, and directors should be able to perform their duties without fear of retaliation.

Christopher J. Hewitt and Jayne E. Juvan are partners and co-leaders of the M&A practice at Tucker Ellis.

Contact him at 216-696-2691 or christopher.hewitt@tuckerellis.com.

Contact her at 216-696-5677 or jayne.juvan@tuckerellis.com.

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January 21, 2019 S7

M&A commercial property considerations Acquiring real estate requires comprehensive deal analysis

By DIANA C. WHISENANT

A

s real estate asset managers, our clients often ask us to describe some of the most important things to consider when acquiring real estate in an M&A transaction.

What it essentially comes down to is having complete and accurate data, documentation and some background information on the physical space and costs. Once this is in hand, you can effectively plan Whisenant for a well-strategized implementation.

The first step to understanding the proposed acquisition is to obtain the property documentation. Both parties would ideally have a central database where leases, lease amendments, property deeds, boundary surveys, environmental reports, title reports, building plans, photographs and more are stored. These are critical documents to collect because they will help

provide an understanding of the overall portfolio and its associated costs.

It is easy to set up a user-friendly property database. Most allow multiple users and edit rights, as well as the ability to store data and documents, run reports and set up critical date notifications. With this type of system in place, data and documents can easily be extracted and distributed or accessed through a passcodeprotected system. It’s critical to have someone with a real estate background abstracting and interpreting the agreements to maintain the accuracy of the data. Once this is complete, you can best determine how to integrate the properties into the existing portfolio.

There are some important factors to consider when reviewing property information of owned assets that might help with integration, cost savings and profitability. A good maintenance record of the facility is key, along with historical operating costs. To be thorough in your due diligence process, a property

inspection should be performed to determine any deferred maintenance and potential future capital that will be required to operate your business in the space. An investigation into any prior environmental studies, such as phase I, phase II, soil studies or wetlands studies would also uncover any unforeseen costs and liabilities.

A few opportunities to monetize the owned asset may also exist. Is there excess land that could be sold off? Is the location a critical one for this business? If it is, perhaps making an investment into the facility would make sense, but also look for local government incentives for capital improvement projects and/or job retention. If the location is not wellsuited for the future business growth or if certain operations could be consolidated, how much value is tied up in the real estate? Is the market and timing ripe to sell and relocate?

Finally, what is a fair market value for the property?

Commercial real estate leases

present their own nuances that need to be explored. How long is the lease commitment, and what are the future costs? Much like owned property, can historical operating expenses be obtained to make more accurate projections of increases over the term? If applicable, determine if rent costs are in line with the market.

Sometimes the rent initially seems high, but there may be a reason behind that, such as tenant improvement costs that have been added to the base rent and amortized over the term.

It’s important to understand what work has been performed at what cost, so the actual base rent can be determined, if not explicitly stated in the lease. By determining this, the rent can be readjusted after the improvement costs have been paid for over the committed term.

Some leases provide options to renew beyond the current term. If they do not, the company should start planning and talking with the landlord at least 18 to 24 months before the lease expires if the desire is to stay.

This will also provide enough time

Through 30 and almost

to negotiate the rent and ask for any building improvements that may be required to effectively operate your business in the space. If you find that time is running out with an expiring lease, it’s important to note what the holdover provision says in the lease.

Tenants can sometimes be required to pay an overhold rent up to 200% of the last month’s rent in the lease term.

Having an overall view of what is owned and leased, what the current and future costs may be and any capital required is critical to understand before merging with or buying a company.

Again, the hope would be that the portfolio is well-organized, and data and documents are readily accessible.

If that is not the case, this should be one of the first items in the due diligence process to be prepared to fully integrate the facilities into the existing portfolio.

Diana C. Whisenant is executive managing director at Hanna Commercial. Contact her at 216-861-5398 or dianawhisenant@HannaCRE.com.

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Crossing the dreaded revenue bridge Articulating your company’s growth story to investors requires detailed preparation

By ANDREW P. MALE

H

igh-growth companies aspiring to raise institutional capital must be thoroughly prepared to articulate to potential investors how their strategic initiatives have driven, and will continue to drive, the company’s revenue growth. That story is best told through an M&A analytical tool called a revenue bridge.

Why are revenue bridges important?

In today’s M&A market, investors propose enterprise values based on complex risk-reward analytics and exhaustive confirmatory due diligence. A company’s ability to confidently present and defend a “bottom-up” financial fore-

cast that (1) demonstrates compelling, predictable growth opportunities and (2) mitigates perceived business model risks has a direct impact on its likeliness of garnering a premium valuation. The process for developing and defending a revenue bridge requires significant resources and, to Male help you get started, I will outline a few of the key terms and best practices we have used with our high-growth clients.

Components of a revenue bridge Revenue bridges are built on a foundation of detailed historical data

and logical projection assumptions.

For investors to be excited about where you are going, they will need to understand how you’ve gotten where you are. Developing the historical section of a revenue bridge requires detailed sales data and a set of business model hypotheses to test.

For example, you may investigate how revenue growth characteristics of customers acquired in 2016 and 2017 compare to those acquired in 2018 and, therefore, what growth, acquisition and retention assumptions are fair to assume for 2019. Your specific industry and business model will dictate the hypotheses and assumptions you will use.

Securing investments and enhancing returns Aon helps protect our clients’ investments from unknown risks through representations and warranties insurance and can help ring-fence potential tax risks through tax insurance. We can also help mitigate exposure to known issues and pending litigation through a suite of contingent liability solutions.

To learn more about our deal protection offerings, contact Jay Moroscak (216.623.4143 | jay.moroscak@aon.com) or visit aon.com/transactionliability

Phase 1: historical growth drivers Building a revenue bridge begins with a detailed analysis of customer purchase behavior, which requires a database of clean, segmented customer information.

Allocate time and resources to procure, clean and analyze this data. Your objective is to segment customers by type and analyze cohort results over time.

Study customer tenure, customer churn and revenue retention as measurements of how effective your team is at retaining business. Research why customer revenues have expanded or contracted over time. Expansion opportunities, such as cross-selling and up-selling, inform investors as to your ability to retain and grow existing customer relationships. Revenue contraction situations, such as completed projects or terminated engagements, inform investors as to the relative risks of your revenue model.

For example, losing an occasional customer because of acquisition has a materially different risk profile than losing those customers to a competitor. Being able to demonstrate historically predictable revenue and limited customer attrition is critical for convincing investors of a low-risk business model.

Phase 2: projected growth drivers The second half of the bridge entails a detailed “bottom-up” explanation of organic and acquisitive growth opportunities. Investors will expect you to present detailed pipeline reports to make those points. Pipeline

reports provide probability weighted revenue opportunities by sales cycle category (such as prospects, proposals, negotiations and verbal engagement).

Clearly convey how much of your projected annual revenue can be attributed to each sales cycle category and how much is “go get” revenue. The customer acquisition logic uncovered in your Phase 1 data analyses needs to inform your projection inputs and answer common investor questions around existing client expansion opportunities versus new client acquisition. Considerations vary by business model — for example, SaaS-based companies analyze subscription renewal rates, while direct sales force models analyze new hire “sales ramp” and compensation logic. Having a vetted list of attractive M&A targets is also appealing to investors seeking to deploy capital.

Phase 2 growth logic must also be informed by an important ancillary analysis: addressable market size.

Investors will want to know how large your market is and if new business will come mostly from market share gains or converting new customers. Similarly, what international growth or new product market opportunities may exist?

Recommendations for new bridge builders Building a revenue bridge for M&A purposes is not a one-time process. It is a recurring task that needs to become like muscle memory for your team.

As such, we recommend preparing accordingly: continued on next page

WHERE WILL YOUR GROWTH COME FROM? Copper Run’s merger and acquisition advisory professionals provide senior level attention on every transaction. We help our clients transition ownership, grow through acquisitions, or secure financial partners for future growth.

SELL-SIDE ADVISORY | BUY-SIDE ADVISORY | VALUATIONS Copper Run Capital LLC | 614-888-1786 | Copperruncap.com

Corporate Growth&M&A

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January 21, 2019 S9

Understanding the capital stack in an M&A transaction

By MICHAEL D. MAKOFSKY and JOSHUA G. BERGGRUN

I

n any M&A deal, it is imperative that both sellers and buyers understand the different layers of financing, or capital stack, that can go into funding an acquisition.

There are a number of ways to structure a deal, whether through equity financing, debt financing, cash or a combination of financing vehicles.

One strategy to consider is equity financing, which involves investors contributing cash to the buyer’s capital in exchange for percentage ownership of the target business. Although equity financing carries an expectation of higher rates of return, it provides flexibility that is not available with debt financing, such as no mandatory interest and principal repayments.

Rollover equity is a method of seller financing, in which a seller contributes, or rolls over, equity from the divested entity into the acquirer. This reduces the buyer’s up-front capital investment and results in certain post-transaction ownership by the seller. This strategy can be particularly attractive to buyers eager to retain a seller’s key management employees after the acquisition.

An alternative or supplement strategy to equity financing is debt

financing, in which the buyer obtains a loan to fund an acquisition. Lenders often require a buyer to contribute a significant amount of Makofsky its own capital before making any loan. However, buyers and target businesses that convey financial strength and sufficient collateralization

could be in a position to take advantage of debt financing. This strategy involves a senior lender making certain secured loans to the buyer in the Berggrun form of term loans or revolving lines of credit. There may also be mezzanine capital to bridge any shortfall in the capital stack.

Buyers realize major benefits from debt financing, such as ownership retention and tax advantages from writing off interest payments.

As sellers and buyers evaluate potential deals, they must be mindful of the available financing strategies and the implications on post-transaction ownership.

Michael D. Makofsky is a principal in

McCarthy Lebit’s Mergers & Acquisitions, Banking & Finance, and Business & Corporate practice areas.

Contact him at 216-696-1422 or mdm@mccarthylebit.com. Joshua G. Berggrun is an associate in the Business & Corporate, Mergers & Acquisitions, and Real Estate practice areas.

Contact him at 216-696-1422 or jgb@ mccarthylebit.com.

CONNECT with

continued from previous page

Invest in proper systems and staff. Your sales team needs a CRM system that can segment customers by various characteristics, a robust pipeline reporting tool and management dashboards to summarize the results. Your CFO needs a detailed financial reporting system and to begin building projection model templates based on “bottom-up” assumptions and predictive modeling.

Instill a culture of realistic and disciplined reporting.

You get no credit for “sandbagging” in M&A and meaningful misses have valuation implications. Incentivize and instruct your team to develop and hit realistic targets.

Turn case studies into folklore. Tout customer success stories that exemplify winning new business, expansion with an existing customer and entering new product or geographic markets. Similarly, understand why lost customers exited and what control your team has to minimize those risks.

With these tools, your team can master the challenges of building a detailed revenue bridge and convey your company’s growth potential to investors.

And then, what awaits you on the other side of the revenue bridge? The EBITDA bridge, but that’s another story.

500 local and 14,000 global

DEAL MAKERS

Association for Corporate Growth Driving Middle-Market Growth

www.ACGcleveland.com

Andrew Male is a director of Western Reserve Partners, a division of Citizens Capital Markets Inc. Contact him at 216-574-2104 or andrew.male@citizensbank.com.

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S10 January 21, 2019

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Give that pig a bath before you take it to market Differentiate your company in a sell-side process

D

on’t get me wrong — I’m not saying your business is a pig.

I’d never say that; I know it’s your baby. But we’ve all heard the expression “putting lipstick on a pig.”

It just doesn’t work. Unfortunately, many sellers do just that, shortcutting the preparation process, relying on the perceived “country club” value of their business and rushing to market. Instead, a seller should clean up and perform due McRill diligence to better understand the true value of the business.

Follow these five steps to help your company stand out in the sale process.

1

Take stock emotionally

The first step is to do some soul-searching and really decide if you want to sell. It seems obvious, but so many sellers neglect this first step, causing unnecessary heartache for themselves and potential buyers. In fact, I’ve seen potential sellers literally walk away from the altar at the 11th hour when reality hits them.

Often, selling a business creates a void in the owner’s life. So, before you decide to sell, it’s good to ask yourself some serious questions. What do you plan to do with the money from the sale? Is it enough to live on? How will you spend your days? Do you have philanthropic interests? Do you have hobbies? Truly take stock and talk to your family and your most trusted business advisor to make sure you’re emotionally ready.

2

Gather your team

Now that you are ready to let go, reach out to your closest trusted advisor, generally your attorney, accountant or banker. Ask them to help you develop a team of experts — including accountants, lawyers, wealth advisors and investment bankers — with deep transaction experience. This could require an honest assessment of your current team of professionals to ensure they have the right skill sets for the job.

Many sellers try to embark on this process alone, without a team of professionals who “do this stuff for a living.” This approach is very risky, and although on the surface it may seem like a prudent way to save money in the near term, it often distracts you

‘‘

If you haven’t prepared your management team to take over, you won’t be able to walk away from your business after the sale.

‘‘

By SCOTT MCRILL

from the day-to-day running of the business. Not having a team can result in a lack of control over the process, significant erosion of transaction value and a completely failed process.

3

Professionalize your management team

The other team you need to focus on is your management team. Many entrepreneurs pride themselves on running a lean operation and being the one person who’s key to everything at the company. This serves many businesses well in the early years, but to differentiate your company to potential buyers, it’s often wise to upgrade and professionalize the management team

in advance of a sale transaction.

By having a professionalized management team in which key customer and vendor relationships are not all tied to one person — generally you, the owner — potential buyers will have the confidence that the business can thrive after you are no longer at the helm. If you haven’t prepared your management team to take over, you won’t be able to walk away from your business after the sale. As a result, the buyer will likely hold back a significant portion of the purchase price.

4

Get your house in order

If you have not already realized the need, your team of external experts can significantly help you get your house in order. This stretches all the way from locating and organizing key documents (such as articles of incorporation, by-laws, minute books, S-corporation election, tax returns, financials and insurance policies) to performing sell-side quality of earnings to understand the true cash flow potential of the business. It even might include literally sweeping the shop floor. It may sound silly, but you wouldn’t try to sell your house without making sure it was clean first. This same common-sense approach should apply to your business.

5

Control the process

Whoever controls the process will have the upper hand in negotiations.

With proper preparation and assistance from experts, the seller should control the process. Set the right tone and make sure you don’t let the buyer control the process. Fix what you can before entertaining potential buyers, and be sure to set and manage expectations along the way. With appropriate sell-side diligence, you will be prepared to respond with control to buyer diligence inquiries.

Be methodical, and release information only as dictated by the stage of the process — less information during the indication of interest phase, more information after letter of intent with exclusivity in place. Hold highly sensitive, confidential information to the end.

If you follow these five steps, you’re more likely to get the price you want for your business instead of settling. After all, it’s your baby and you’ve spent a good part of your life meticulously building it. Why not apply that same level of detail and care to the selling process? It’s a better strategy than simply making the business look better by applying lipstick.

Scott McRill is a shareholder at Clark Schaefer Hackett. Contact him at 216-526-8125 or slmcrill@cshco.com.

Synchronize your deal strategy

Involve leaders, organization to help execute successful transition

By MATT STENCIL

I

n a year of many hot breaking business trends, it may well be the hottest of all: In just three months, the world’s corporate leaders struck $1.2 trillion worth of deals, the fastest start to a year ever. Even the banking sector, which hasn’t had much activity for most of a decade, had 19 announced deals, and analysts believe that merger mania Stencil is only just getting started, thanks to higher U.S. interest rates and potentially looser regulations.

But the reality is that over 70% of these deals will fail. And it’s been this way for decades. So why the same story over and over?

Often, it’s because organizations focus on the wrong things. Financial structuring, market share, products, tech, revenue forecasts and EBITDA are important parts of your deal’s strategy. But afterwards, 90% of your transaction’s success will depend on your intangible assets: your organization

structure, culture, leadership and talent.

Some key considerations for a successful deal include: Leadership: Get your leadership in sync. If your leaders share the same purpose, they’ll be better positioned to champion your new strategy, communicate it clearly and make faster and better decisions.

Organization and culture: Set up your new organization for success: design and build one strong culture where everyone is working toward one vision, purpose and strategy.

Talent: Bring your talent along for the journey: Big transaction deals always raise questions: Is my job safe?

Do I want to stay? Does this business have a purpose I can get behind?

Answer these questions and you’ll create engaged teams that will help your new organization grow.

Thinking about the intangible assets from the outset will bring returns that go well beyond your initial investments.

Matt Stencil is a senior client partner at Korn Ferry. Contact him at 312-5260525 or Matt.Stencil@KornFerry.com.

SCA - Crains Ad FULL rev.pdf

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2:13 PM

2018 ACG DEAL OF THE YEAR C

M

SIGNET CAPITAL ADVISORS, LLC CONGRATULATES MEDIQUANT,

Y

CM

MY

INC. ON WINNING THE ACG CLEVELAND – 2018 DEAL OF THE YEAR AWARD IN THE BUYOUT VENTURE CAPITAL CATEGORY.

CY

CMY

K

CONGRATULATIONS ALSO TO SILVERSMITH CAPITAL PARTNERS, MEDIQUANT’S NEW EQUITY PARTNER. SIGNET CAPITAL ADVISORS IS PROUD TO HAVE SERVED AS SELL-SIDE ADVISOR TO THE SHAREHOLDERS OF MEDIQUANT.

A B O U T S I G N E T. Signet Capital Advisors, LLC provides sophisticated investment banking services to select owners of middle market companies throughout the U.S. Signet services include SELL-SIDE ADVISORY (selling all or part of your business); BUY-SIDE ADVISORY (helping shareholders grow their company through acquisition); and, CAPITAL RAISING (equity, junior capital and debt).

T O L E A R N M O R E , P L E A S E C O N TA C T MICHAEL PAPARELLA Managing Director

BRIAN MCMILLEN Vice President

at 216-658-2595 or

at 216-658-2592, or

mpaparella@signetcapadvisors.com

bmcmillen@signetcapadvisors.com

200 Public Square Suite 3270 Cleveland, Ohio 44114

216-658-2590 signetcapadvisors.com

S12 January 21, 2019

Corporate Growth&M&A

Developing a buy-side strategy Starting an acquisition program should begin with a playbook

By MICHAEL SHAW

I

nterested acquirers fall short of acquisition growth goals due to several factors: lack of consistent outreach, unpolished communication documents and unorganized or lengthy processes.

Maintaining a refined M&A playbook is a cornerstone in executing a successful acquisition strategy. A buy-side playbook

should have all the resources necessary to find, evaluate and close deals efficiently. All critical processes and tools utilized throughout the buy-side process Shaw should be well defined.

Critical processes to articulate should include: (1) research and identification

of targets, (2) marketing and communication strategy, (3) collecting, organizing and evaluating data of interested targets, (4) making offers and (5) due diligence and closing activities.

Tools that seasoned acquirers create, update and utilize on a regular basis as part of a buy-side playbook include: n External communication documents such as an acquirer profile, intro-

ductory letter and a nondisclosure agreement. These communication documents help personalize and professionalize the acquirer’s appearance and message to targets. n Evaluation tools, including a corporate scorecard and financial model to help streamline the decision-making process. The scorecard grades key corporate criteria such as culture fit, industry reputation and strength of management team. The financial model should produce a result within a specific tolerance depending on the type of return the acquirer is seeking. n Due diligence templates such as information request lists. Request lists

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should streamline the process by only asking for key information required to make a decision without burdening interested targets.

When deals fail to close or acquirers are not cultivating attractive opportunities, the cause is generally poor execution or lack of a well-defined playbook. Investing time and resources into a playbook that can be executed consistently will be the cornerstone to long-term success in growth through M&A. Michael Shaw is partner and managing director at Copper Run. Contact him at 614-888-1786 or mshaw@copperruncap.com.

The buyer’s dilemma in determining valuation and earnout Strategies to help finalize purchase price agreement

By BENJAMIN M. COOKE

a percentage of top-line revenue. No matter the deal, the overall purchase price is rightly the focus of the initial negotiations. When buyers and sellers cannot find middle ground, conditional purchase price, or an earnout, is often the solution.

other milestones, the buyer may agree to increase the purchase price based on those achievements.

In these deals, an earnout is structured into the purchase price and the payment of a portion of the purchase price is conditioned on the performance of the seller’s business continued on next page

Congratulations to all 2019 ACG Cleveland Deal Maker Award nominees and honorees!

Calfee congratulates Align Capital Partners as the 2019 ACG Cleveland Deal Maker Award Recipient in the Private Equity category.

Calfee also celebrates the accomplishments of Robert G. McCreary III, Managing Director and Founder of CapitalWorks, LLC, the 2019 Lifetime Achievement Award Recipient.

Calfee is honored to represent many private equity funds such as Align and CapitalWorks that partner with owners and management to drive success in the middle market and generate wealth in our region and beyond.

We’re also grateful for the opportunity to work alongside Robert G. McCreary III who has achieved the highest level of sustained success, personally and professionally, over a lifetime of deal making.

Cleveland | Columbus | Cincinnati | Washington, D.C. | Calfee.com

©2019 Calfee, Halter & Griswold LLP. All Rights Reserved.

1405 East Sixth Street, Cleveland, OH 44114

B

uyers and sellers value businesses differently, but most businesses are valued on a cash-free, debt-free basis prior to any sale transaction. In the end, however, a

business is worth what a willing buyer and a willing seller agree it is worth.

In middle-market transactions, the parties can arrive at the purchase based on several formulas, such as: a multiple of earnings/EBITDA, a multiple of seller’s discretionary earnings or even

A structured earnout solves the valuation problem by forcing the seller to carry some of the transaction’s valuation risk. That is, if Cooke the business performs beyond historical averages or achieves

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Corporate Growth&M&A

January 21, 2019 S13

Why I loathe materiality scrapes (unless I’m representing the buyer)

By DOMINIC A. DIPUCCIO

B

uyers’ lawyers increasingly are getting more successful in adding so-called “materiality scrape” provisions to acquisition agreements.

As seller’s counsel, this trend frustrates me. I find them awkward and risky.

I push hard to resist them — not on philosophical grounds, but on grounds of improper agreement construction.

Here’s why.

As far as acquisition agreements go, what’s “market” is constantly evolving. Understanding the history of materiality scrapes is important to a proper DiPuccio understanding of these provisions.

Fundamentally, every acquisition agreement allocates risks between buyers and sellers. Starting with the general premise that we don’t live in a perfect world, it is well-accepted that buyers must assume some level of risk when it comes to unknown, unanticipated and immaterial matters that arise after an acquisition.

Appreciating this, sell-side lawyers push hard to qualify seller’s representations by concepts of materiality and to secure sizeable indemnity baskets that limit post-closing indemnification to amounts in excess of agreed-to thresholds. Most sophisticated acquisition agreements contain elements of both of these concepts.

Somewhere along the line, an astute buyer’s counsel observed the unfairness of the outcome when both concepts are present. Since a seller representation qualified by materiality is not breached unless it crosses the materiality threshold and there is no indemnification for such breach unless it exceeds the agreed-to indemnity basket, it is tantamount to double materiality. Thus, the materiality scrape was invented.

These provisions generally provide that for purposes of determining

continued from previous page

as operated by the buyer post-closing.

There are any number of milestones that would trigger the buyer’s obligation to pay the purchase price as an earnout, such as a patent or other intellectual property application that is granted, a key customer contract is signed or a key government approval is awarded.

Earnouts can be structured off a percentage of revenue, a percentage of EBITDA or some other operational formula. Additionally, earnouts can be structured with a limitation — such as the buyer pays the seller a percentage

post-closing indemnifiable losses, concepts of materiality embedded in representations will be ignored.

Double materiality scrapes provide that concepts of materiality also will be ignored in determining whether a representation has been breached in the first instance. These provisions are the ultimate in take-backs.

While sympathetic to a buyer’s objection to a double materiality standard, the materiality scrape seeks to resolve the issue in a clumsy way. It has unintended consequences (certain representations need to be carefully carved out from the effect of the materiality scrape); leads to unnecessary extra legal work (sellers are advised to over-disclose immaterial items that the buyer isn’t interested in in the first place); and potentially adds confusion to already highly complex documents.

The issue the materiality scrape seeks to resolve is purely economic. Its essence lies in determining sellers’ postclosing indemnification obligations.

Artificially creating breaches when they don’t exist to fill an indemnity basket is not good form. Unraveling the hard work to tighten and limit representations and warranties in one swoop of the pen is counterintuitive and risky from a drafting point of view.

More elegant resolutions are available through the indemnification baskets (amount or type) and mini-baskets.

Sellers, if you must agree to a materiality scrape, fight hard to resist the double scrape, increase the size of the indemnity basket and any minibaskets, and be sure to exclude certain representations. Then, be ready to address the next new buyer-friendly provision proffered in response.

Dominic A. DiPuccio, Esq., is partner and chair of the Mergers and Acquisitions Group at Taft Stettinius & Hollister LLP. Contact him at 216-241-2838 or DDiPuccio@taftlaw.com.

or a maximum dollar amount (whichever comes first) or the earnout can be limited based on time without any dollar cap. All of these structures are available to protect buyers and shift some of the risk of acquisition back on the seller.

That said, buyers should consider the oversight that sellers will require into the buyer’s business, particularly its accounting books and records, postclosing.

Benjamin M. Cooke, Esq., is an attorney at Wickens Herzer Panza.

Contact him at 440-695-8060 or BCooke@WickensLaw.com.

Any leader knows the inevitable ebb and flow of the business. For North American Dental Group, that might mean closing multiple deals in some quarters and carrying on “business as usual” in others. Ken relies on Benesch throughout the cycle, dialing up when matters are pressing— acquisitions, employment matters, regulatory requirements, tax matters—and dialing back when his in-house team is taking the lead. It’s a flexible relationship that puts the needs of the business first.

“I like that Benesch will dial up or dial down their services as we need them. They accommodate our business seamlessly.”

KENNETH COOPER CEO & Founding Partner North American Dental Group

To learn more about our relationship with North American Dental Group, visit beneschlaw.com/myteam

www.beneschlaw.com

MY BENESCH MY TEAM Benesch’s North American Dental Group Team IRA C. KAPLAN

RICHARD F. TRACANNA

COREY R. SPARKS

FRANK CARSONIE

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S14 January 21, 2019

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Steps to help initiate a seamless and profitable sale

By BRENT M. PIETRAFESE and LYDIA E. WARKENTIN

S

elling a business can be a long and arduous process. However, sellers can engage in several preemptive measures to reduce the chance of future complications and, most importantly, downward price adjustments.

There are three preliminary steps for sell- Pietrafese ers to take to ensure the transaction is as painless, and profitable, as possible.

1

Select the appropriate transaction team

The transaction team is composed of certain members of the seller’s internal management team and external specialists such as lawyers, investment bankers and accountants.

At a minimum, the seller’s chief executive officer or president and chief financial officer should be included in the management team. As a deal pro-

gresses, the seller will need to include in the management team additional individuals, such as the vice presidents of sales and operations. The management team serves as the primary link between the transaction team and seller’s board of directors and is involved in all aspects of the sale process, from responding to due diligence requests to negotiating transaction documents.

Warkentin The management team will likely need to outsource certain tasks, which will require the assistance of an outside law firm, investment banker, accountant and other strategic advisors.

Together, the management team and external specialists form the transaction team. The outside law firm primarily would be responsible for drafting and negotiating the transaction documents, as well as facilitating due diligence and coordinating the signing and closing of the transaction.

An investment banker would help the seller identify potential buyers,

market the company and create a data room. Accountants would assist in the preparation of financial statements and financial projections that may be used in marketing.

When assembling the transaction team, sellers should choose legal advisors, investment bankers and accountants with significant and successful M&A experience selling businesses similar in size to the seller’s.

2

Conduct internal due diligence

Before a prospective buyer conducts due diligence, the seller should conduct its own to confirm there are no problems that could delay or otherwise adversely impact the sale. If the seller discovers any issues during this stage, rather than the buyer discovering them later (which could negatively impact price or the overall consummation of the deal), the seller has time to cure or develop negotiating strategies to deal with those issues. Information gathered during this step can also be used during preparation of the seller’s disclosure schedules, which are an important risk

mitigation tool for the seller.

Areas inspected and information gathered during a seller’s internal due diligence should include: (1) financial statements and other financial information; (2) corporate records; (3) material contracts, paying special attention for change of control or anti-assignment provisions; (4) material relationships to third parties; (5) seller’s assets; (6) employees and employee benefits; (7) governmental permits and licenses; (8) legal claims, including pending or threatened; (9) real estate issues; (10) environmental issues; and (11) insurance coverage.

Recently, we have seen an increased number of sellers having their own quality of earnings (QofE) and Phase I environmental reports conducted before going to market.

While the cost for performing a QofE and/or Phase I is not immaterial, identifying early on the types of issues that typically are not covered by those processes can go a long way to limiting, or eliminating entirely, those issues’ negative impact on price or deal certainty — or both. There is

some risk that a buyer will still want to have their own reports done, but if the seller chooses a well-regarded firm to perform the work, there is less of a chance of that occurring.

3

Formulate a sale strategy and marketing plan

The seller, with the help of the transaction team, needs to identify prospective buyers and decide how to approach them — either individually or by holding an auction. If the seller chooses an auction, there are many issues to consider, such as whether the auction will be open or closed, the cost and the potential interruption to the seller’s daily operations.

Additionally, the seller will need to prepare a descriptive memorandum, or a confidential information memorandum (CIM), to provide prospective buyers with enough information about the seller to elicit meaningful bids. The CIM usually contains a description of the seller’s industry, business, history and principal assets, as continued on next page

Digital insights that turn potential into the exceptional Our teams have pioneered proven methods to utilize the technology, industry insights and social listening necessary to build a macro- and micro-view on the right path for your deal.

For a deeper discussion on deal considerations in the US or abroad, please contact your local PwC partners: Brian Kelly (216) 875 3121 brian.kelly@pwc.com

Thorne Matteson (216) 875 3441 thorne.matteson@pwc.com

Learn more. Visit pwc.com/us/deals

© 2018 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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Corporate Growth&M&A

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January 21, 2019 S15

Protecting interests in a heated market Insurance services, products evolve to minimize risk

By JEFFREY J. SCHWAB

F

ollowing on the heels of 2017’s record-setting financials, mergers and acquisition activity has continued to accelerate in 2018, all while competition for deals continues to be very intense.

Given the current environment of deal velocity and heightened deal competition, the danger of losing a deal to another buyer immediately when the period of exclusivity expires will continue.

Seasoned advisory teams, working together to address the financial, legal and insurance elements, help buyers success- Schwab fully get deals off the starting blocks and over the finish line.

Due diligence can make or break a deal. Too many buyers find themselves inheriting unfortunate surprises, such as an uninsured seven-figure cyber claim, a safety and health violation from a self-insured or captive insurance company, extraordinary health care premium increases and claims, or issues within a company’s retirement plans.

The relentless pursuit to uncover the gaps in coverage, inappropriate/ inadequate policies and noncompliance issues that can severely slow or even derail a transaction is paramount in the due diligence phase, be it assessment of insurance coverages, employee benefits, 401(k) plans and more. Once the gaps are identified, placing the right protections can reduce future uncertainty while saving time, and in the long run, costs.

Higher volumes and faster pace

mean that managing and allocating risk during the transaction period is more important than ever. As a result, and for good reasons, the use of representations and warranties insurance (RWI), while not new, continues to increase as a means to transfer risk during buy/sell.

As RWI continues to gain traction, more insurers enter the market, creating

a more competitive environment. This increased competition has led to RWI policies with improved terms, including reduced premiums and deductibles.

Buyers are also more frequently recognizing the value of other services and products, such as tax liability protection and contingent liabilities.

Unique types of protections, such as cyber liability or environmental

liability, are used more frequently. We expect this risk reduction specialization to continue.

Additionally, technology advancements overall continue to lessen the time and costs of completing deals, with digital technologies and analytics tools providing quicker and more detailed intelligence at all phases of the transaction.

Brent M. Pietrafese and Lydia E. Warkentin are attorneys practicing in the Corporate and Capital Markets Practice Group at Calfee, Halter & Griswold LLP. Contact him at 216-622-8623 or bpietrafese@calfee. com. Contact her at 216-622-8453 or lwarkentin@calfee.com.

Jeffrey J. Schwab is senior vice president of Private Equity Services at Oswald Cos. Contact him at 216-658-5208 or jschwab@oswaldcompanies.com.

Deal Counsel Who Understand the Language of Business We take a creative approach when advising our clients on transactions to arrive at customized solutions that drive better business results.

continued from previous page

well as information about the seller’s management and employees, and, depending on the sensitivity of the information, major customers and contracts. Before distributing the CIM to any prospective buyer, the seller should be sure the buyer executes a confidentiality agreement.

While selling a business can be complicated and time-consuming, sellers who take the above steps early in the process will mitigate the risk of problems down the road.

Time and execution clearly matter when it comes to deals of today; the strength and synchronization of the full advisory teams, working to make each minute, and dollar, count, will help buyers toward a successful closing and on a path to a more valuable transaction.

Christopher J. Hewitt

Jayne E. Juvan

christopher.hewitt@tuckerellis.com

jayne.juvan@tuckerellis.com

Chris and Jayne are co-leaders of the M&A practice at Tucker Ellis.

tuckerellis.com

tuckerellis.com/lingua-negoti-blog @linguanegoti

Visit our blog “Lingua Negoti,” which means “the language of business” and is dedicated to transforming the practice of corporate law so legal issues do not interfere with achieving high performance.

Corporate Growth&M&A

S16 January 21, 2019

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The buy-side evaluation of net working capital Transaction advisors can help buyer identify terms, debt obligations

By STEVE SWANN

I

n a business acquisition, the buyer should receive sufficient net working capital, or (NWC), to operate the business in its ordinary course. The assessment and negotiation of NWC is important; however, it can be challenging due to numerous factors. For example, is the seller experiencing rapid growth? Are Swann there changes in payment terms with key customers or vendors? Are there issues with inventory costing practices?

NWC is commonly defined as (a) current assets excluding cash, less (b) current liabilities excluding debt. Depending on the industry, tax structure and composition of the seller’s balance sheet, there can be many accounts that should be excluded from NWC, such as: n Owner discretionary items n Extended / out-of-trade terms receivables n Other non-operating current

assets, such as unusual prepaid expenses n Prepaid and accrued income taxes n Deferred income tax assets

and liabilities

n Extended / out-of-trade terms payables n Equipment purchases within

accounts payable n Non-operating accrued expenses n Customer deposits n Deferred revenue n Transaction-related balances Oftentimes, the buyer’s analysis of NWC leads to the identification of debt-like obligations. These liabilities — either on or off the seller’s balance sheet — could represent additional financial obligations for the buyer if not properly identified and negotiated.

Debt-like obligations represent further reductions from a seller’s enterprise

value. The buyer would request such liabilities be excluded from the deal, or be treated as a purchase price reduction.

Typical debt-like obligations include: n Accrued income taxes n Income tax exposures from

improper deductions, elections,

credits, etc. n Extended / out-of-trade terms payables n Outstanding checks n Capital lease obligations n Unrecorded incentive compensation n Employee severance liabilities n Customer deposits

Deferred revenue for self-insured

medical plans n Contingent earnout from a prior

business acquisition n Unfunded and unrecorded benefit

plan obligations n Unrecorded environmental

cleanup liabilities The buyer should work closely with its transaction advisors to identify these items and ensure the purchase agreement is adequately constructed to define such liabilities. n

n Accruals

Steve Swann is partner within BMF’s Transaction Advisory Services Group.

Contact him at 330-255-2417 or sswann@bmfcpa.com.

Deal or no deal? Protecting assets and enhancing value in M&A deals

By JAY MOROSCAK

W

hen evaluating an M&A deal, organizations must strike a balance between minimizing risks and maximizing value.

Insurance solutions are often the preferred means to protect against various risks involved in M&A deals.

These insurance programs are eclipsing

traditional protections involving escrowed funds, indemnifications, clawback provisions and other contractual measures. n Representations and warranties insurance (RWI) allows a buyer in an M&A deal to recover from the insurer losses resulting from breaches in the seller’s contractual representations.

RWI can replace the escrow funds that

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MORE THAN STRATEGIC ADVISORS

might be required of the seller, thus improving the buyer’s offer. n Tax insurance protects buyers against adverse tax rulings related to the seller’s previous tax disputes.

Among the expenses it covers are tax, interest, penalties and costs associated with contesting the taxing authority’s action. Tax insurance continues to be a powerful tool for M&A professionals

since uncertainty around taxes can create a hurdle in the deal. Tax insurers’ risk appetite has expanded to include a willingness to insure the accuracy of numbers and valuations, as well as more traditional tax opinion matters.

Tax insurance can Moroscak also be flexibly used as a corporate risk management tool outside of M&A. n Litigation insurance can offset pending or potential litigation risk or limit the buyer’s liability exposure once the deal is complete. Litigation insurance helps sellers avoid substantial escrow requirements and allows buyers to ringfence the cost of damages from an adverse judgment.

Along with tax insurance, litigation coverage can also be used to protect companies from catastrophic loss from an adverse judgment.

2019 and beyond Whatever the overall pace of M&A activity in 2019 and beyond, companies embarking on an acquisition need to assess risks they might encounter and take the necessary steps to address them.

These proven insurance techniques are available to business leaders to help them achieve success and meet their M&A goals, while providing benefits to both the buyer and seller.

Jay Moroscak is a senior vice president in the Cleveland office of Aon. Contact him at 216-272-2155 or jay.moroscak@aon.com.

Celebrating Two Decades 1999-2019 2018 Year in Review CapitalWorks Portfolio Company

DELIVERING ON YOUR M&A PROMISES You have a clear vision for the future—but need help to bring it to life. We help make your deal a success by bringing your leaders, organization and talent in sync.

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A trusted partner in investing in and improving middle market businesses.

For investing and acquisitions, contact Kellie Work at kwork@capitalworks.net.

2019 ACG Deal Maker Lifetime Achievement Award recipient: Rob McCreary capitalworks.net

Corporate Growth&M&A

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January 21, 2019 S17

How blockchain could upend M&A and other deals It’s time to start evaluating the technology in a different way

By BRIAN KELLY and BRAD THOMPSON

M

omentum around blockchain is growing. Ohio recently joined a group of U.S. states enacting legislation that recognizes data stored and transacted on blockchain. And last month at Blockland in Cleveland, more than 1,500 attendees, 150 guest speakers and 21 industry representatives gathered for the inaugural conference focused on bringing real-world business solutions using blockchain.

As a tamper-proof Kelly shared ledger that can automatically record and verify transactions, blockchain and distributed ledger technology (DLT) could change how investors value, negotiate and execute deals. This will take years to develop, but the potential can be found in two areas: smart contracts and tokenization.

Tackle trust issues with smart contracts Smart contracts can automate agreements and self-execute when certain conditions are met. In the coming years, the technology will likely prompt investors to rethink how they evaluate deals.

Because smart contracts can automate transactions once certain obligations are met, they can also reduce counterparty risks and enable dealmakers to enter into agreements with greater confidence, regardless of whether the parties have ever met or even Thompson trust one another.

For instance, a contract could be designed such that one party doesn’t get its dividend unless they meet certain funding obligations. This could prove beneficial for two types of deals: (1) partnerships and joint ventures, where the parties may benefit from one another’s capabilities but remain

independent and ultimately lack control of the other; and (2) cross-border deals, where investors often evaluate firms that are far away and follow different regulations and business cultures.

If investors could one day apply smart contracts to deals, it could potentially raise the price of certain incomeproducing assets by lowering the variability of their returns. Moreover, since blockchain technology offers investors alternative ways to secure financing, it could attract more buyers and, therefore, potentially drive higher valuations.

Democratize capital through tokenization Tokenization not only supports the digital transfer of physical assets from one owner to another, it also provides a way to fractionalize ownership, giving parties the ability to invest in parts of an asset versus the whole. This could evolve into a cost-effective way to finance projects that would be too cumbersome or cost prohibitive under traditional means.

Helping Private Equity firms uncover value...

Take for instance the film industry, where liquidity is limited. Through tokenization, filmmakers could potentially draw more investors and therefore democratize early-stage investing in a way that’s similar to crowdfunding today. This could be done by offering actors security tokens, which give holders a contractual right to cash or other financial assets in exchange for their work. The difference with tokenization is that investors could resell their tokens in the secondary and tertiary markets and therefore stimulate more liquidity where access to cash is limited.

This resale capability and the extra liquidity tokens could inject may also prove useful for corporations, particularly in cases where executives want to pursue a venture that existing shareholders might otherwise perceive as too risky, too ambitious or off strategy.

Through tokenization, a corporation can raise capital not just as a single entity, but rather a portfolio of individual projects housed under one

corporate umbrella that investors can opt in and out of. This means two shareholders may be invested in one corporation, but their returns would depend on which projects they’re invested in. Say, for instance, some investors bet that a company’s plans to expand product offerings across Asia-Pacific will be successful. Others may later change their positions and sell their tokens, which would create extra liquidity. By securitizing every project a company undertakes, firms can apply project finance to a wider net of investors than is possible today.

For this to work, however, companies would need to address the reporting and auditing challenges likely to arise. The compliance costs to carve up a business into several pieces would also need to be negligible, and investors would need to feel confident that regulations are in place to discourage fraud. But this is possible if we can imagine a world where blockchain and all ancillary and underlying technology has been adopted at scale. continued on next page

...at every stage of the investment life cycle.

As advisors, we understand that finding the right opportunity is critical to portfolio companies and private equity firms when expanding geographically, adding a product line or increasing market share. Clark Schaefer Hackett is skilled at maximizing the value and minimizing the risk of an acquisition through quality of earnings analysis, tax due diligence and tax structuring consultation. From the initial investment and growth of the portfolio through the divestiture of an investment, our experienced, full service private equity and transaction advisory services team is dedicated to serving the unique needs of middle market private equity funds.

Now with more dedicated resources to serve the Northeastern Ohio region Scott McRill, CPA Shareholder Transaction Advisory Services slmcrill@cshco.com 216.526.8125

Keri Boergert, JD Principal Tax & Transaction Advisory Services kboergert@cshco.com 440.213.1423

Visit cshco.com for more information.

Corporate Growth&M&A

S18 January 21, 2019

SPONSORED CONTENT

Stepping into mom and dad’s shoes

Succession planning for family-owned companies businesses take pride in establishing a legacy in their family’s name. Because having a family-owned business means so much to the family that established the business, it comes as no surprise that eventually the inevitable question on everyone’s mind becomes: “Who is going to take over?”

By CHRISTOPHER P. REUSCHER and LINDSIE A. EVERETT

C

losely-held, family-owned businesses have qualities and histories that are unique and can be attributed to the dynamics of each family. The owner(s) of these

It is no secret that these types of businesses are encouraged to think about succession planning early and often. Deciding on a succession plan for your family-owned business begins with identifying what the ownership structure will look like after the transition has taken place.

Commonly, the first considered option is a transfer within the family.

Company ownership can be transferred cleanly through a trust to children or other family members who would like to inherit the business. One consideration with this option is whether family members will have active or passive ownership, and whether the percentage of ownership interests should be equal.

The team that gets your deal done!

Whether a business is booming or underperforming, every deal involves complex issues.

Our highly accomplished M & A team has executed hundreds of acquisitions and divestitures from start to finish.

Talk to us about our extensive experience working with both successful and distressed companies.

Let us help you through every stage of the process to get your deal done.

Another option is to sell the business to one or more experienced and committed employees. Here, owners may choose to enter into a buy-sell agreement or employee stock ownership plan with the employee(s), where the employee(s) buy the company outright, or over time, after a predetermined date or Reuscher triggering event takes place.

A third option is selling the company to a private equity group.

With this option, family members could be relieved of the finan- Everett cial pressures of owning a company but still reap the benefits of maintaining management responsibilities or some ongoing ownership in the company postsale.

Finally, if there are no identifiable family members or employees who are willing or able to own and/or manage the company, the best option may be to sell the company outright. While this option may not be ideal for familyowned companies, it still provides family members with a liquidity benefit.

Christopher P. Reuscher is a shareholder at Roetzel. Contact him at 330-762-7994 or creuscher@ralaw. com. Lindsie A. Everett is an associate at Roetzel. Contact her at 330-8496611 or leverett@ralaw.com.

Patrick Berry, Co-Chair

Christal Contini, Co-Chair Todd Baumgartner

Richard Cooper

Maria Carr

Carl Grassi continued from previous page

A path toward wider adoption

Christopher Hawley

Michael Kaczka

Michael Meaney

Jason Klein

Scott Opincar

Lisa Lauer

Ilirjan Pipa

Morgan Mackovjak

Sean Malloy

Amy Wojnarwsky

Frank Wardega

mcdonaldhopkins.com Chicago

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Cleveland

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Columbus

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Detroit

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Miami

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West Palm Beach

Blockchain is still in its infancy, and it is evolving. It needs more players and stakeholders, including governments and businesses willing to coordinate and define how the platform is designed, verified, implemented and enforced.

Building trust in the ecosystem will be key. According to a PwC survey, the top barriers to blockchain adoption include regulatory uncertainty and lack of trust among users. In terms of regulatory uncertainty, regulators remain unsettled. Many are still familiarizing themselves with blockchain and developing rules around the technology.

Companies will need to develop rules and standards for blockchain; they can’t just leave it up to regulators.

Dealmakers have an opportunity to make investing easier, less costly and more profitable. This will challenge dealmakers to think of investing in new ways.

Brian Kelly is a deals partner at PwC. Contact him at 216-875-3121 or brian.kelly@pwc.com. Brad Thompson is an M&A tax partner at PwC. Contact him at 216-875-3062 or bradley.c.thompson@pwc.com.

Corporate Growth&M&A

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Northeast Ohio’s Leading Deal Makers to be honored ACG Cleveland, Northeast Ohio’s leading organization for merger and acquisition and corporate growth professionals, will recognize the winners of its 23rd Annual Deal Maker Awards at 5:30 p.m. Thursday, Jan. 24, at the Hilton Cleveland Downtown.

The Deal Maker Awards are a tribute to Northeast Ohio’s preeminent corporate deal makers for their accomplishments in using acquisitions, divestitures, financings and other transactions to fuel sustainable growth.

The 2019 winners are:

Timken

MediQuant

The Timken Co. is a global manufacturer of bearings and mechanical power transmission products. Between 2017 and 2018, the company completed six strategic acquisitions. Three of the companies are U.S.-based and the others are located in the Netherlands, India and Italy. These transactions expanded the company’s geographic reach, increased its share of products sold through industrial distribution channels and strengthened its position in attractive market sectors.

MediQuant is the recognized leader in data archiving for the healthcare industry. The company was founded in 2004 and has grown rapidly in sales and employees, making the Weatherhead 100 list. As founder and CEO Anthony Paparella approached retirement, he turned to his brother, Mike Paparella of Signet Capital Advisors, to explore liquidity options. After holding a limited auction process, Silversmith Capital Partners took a majority share in the business, injected capital to support MediQuant’s transformation growth strategy and has made a commitment to keep and grow the business in Northeast Ohio.

Corporate Public Category

Corporate Small Private Category

CPP / Selmet

Align Capital Partners

Consolidated Precision Products (CPP) is a global manufacturer of aerospace and defense products. As part of its growth strategy, Cleveland-based CPP acquired aerospace products manufacturer Selmet in August 2018 from Blue Point Capital Partners. The transaction vaulted CPP into one of the largest aerospace and defense manufacturers in the marketplace, positioned it as one of the few independent manufacturers in the world that can make a complete set of aerospace engine castings and enabled it to continue to gain market share.

Just five months after its founding in 2016, private equity firm Align Capital Partners (ACP) closed its first fund at its hard cap of $325 million, exceeding its initial target of $250 million. The firm invests in lowermiddle-market business services, specialty manufacturing and distribution companies.

Over the past two years, it has moved at a rapid pace, closing on six platform companies and 10 overall investments.

Corporate Large Private Category

Private Equity Category

2019 ACG Events Calendar

Anne Pombier, Nordson Women in Transactions Award

Throughout her career, Anne Pombier has served in some of Northeast Ohio’s most successful and acquisitive companies. She has participated in more than 100 M&A transactions, ranging in size from $500,000 to over $1 billion, with a focus in the U.S., Europe and Asia-Pacific, and resulting in more than 40 completed deals. She was recently named vice president of corporate development at Nordson, after a seven-year stint as its director of corporate development.

In 2017, Pombier played a leading role in four acquisitions that added nearly $200 million to Nordson’s top line, strong EBITDA margins and nearly 1,000 employees.

Robert McCreary

Lifetime Achievement Award Robert McCreary possesses more than 40 years of dealmaking experience as an attorney, investment banker, entrepreneur and private equity fund manager. He has devoted his career to building successful entrepreneurial organizations — those he advised, started and acquired. He began his career in 1976 at Calfee, Halter & Griswold and moved on to Prescott Ball and Turben to broaden his dealmaking skills. In 1993, he co-founded Carleton, McCreary, Holmes & Co., where he served as president and specialized in M&A strategies. The firm was sold to KeyCorp in 1996. McCreary continued as president of the successor firm, Key Capital Corp., until 1999, when he founded private equity firm CapitalWorks, which has invested five successful funds. During his career, he has created jobs, guided careers and generated significant returns for his investors.

To register to attend the Deal Maker Awards, visit www.ACGcleveland.org.

For more information and to register, visit www.ACGcleveland.org

DATE EVENT TIME LOCATION Jan. 24

23rd Annual Deal Maker Awards

5:30 p.m.

Hilton Cleveland Downtown

Jan. 31

Young ACG: Kimberly Kirkendall, International Resource Development

5:30 p.m.

Saucy Brew Works

Feb. 7

Being Successful in Changing Times: Victoria Marquard, Managing Director, OxyGo

5:30 p.m.

Lakewood Country Club

Feb. 19

Joint Event with Financial Executives International

4:00 p.m.

Union Club

Feb. 25

New Initiatives Through Four Generations: Nick DiGeronimo, Vice President of Business Development, Independence Excavating

5:30 p.m.

LockKeepers

March 7

Public Policy & PE Regulatory Update: Gretchen Perkins, Partner, Business Development, Huron Capital Partners

11:45 a.m.

Union Club

March 14

Young ACG Joint Event with FPA NextGen: Panel Discussion, Your Career Voyage

5:30 p.m.

Union Club

April 9

Accelerated Growth in Three Dimensions: Chris Adams, President & CEO, Park Place Technologies

7:30 a.m.

Union Club

May 9

Akron ACG Panel Event: How the Talent Crisis Impacts M&A

7:30 a.m.

Buckingham Doolittle

May 14

Young ACG: Wine Tasting and Leadership Lessons with Sandy Cutler

6:30 p.m.

Cru Uncorked

May 16

Accelerating Innovation in Northeast Ohio: Panel Discussion

4:00 p.m.

Ritz Carlton

June 11

Spring Social

5:30 p.m.

Shoreby Club

Sep. 23

15th Annual Golf Outing

11:30 p.m.

Firestone Country Club

January 21, 2019 S19

ACG Cleveland 2018-19 Officers and Board of Directors EXECUTIVE OFFICERS President – Dale Vernon, Bernstein President Elect – John Grabner, Hylant Group Innovation Executive Chair – Rebecca White, Kenan Advantage Marquee Events Executive Chair – Thomas Welsh, Calfee Programming Executive Chair – Jeffrey Fickes, Vorys Brand Executive Chair – Brad Kostka, Roop & Co. Governance Executive Chair – Peter Shelton, Benesch Secretary – M. Joan McCarthy, MJM Services Immediate Past President – Brian Kelly, PwC

BOARD OF DIRECTORS Charles Aquino, Western Reserve Partners/Citizens Kevin Bader, MCM Capital Partners Tricia Balser, CIBC Mark Brandt, Northern Trust Michael Ferkovic, BDO USA Bryan Fialkowski, JP Morgan Chase Sarah Gregg, Partners Environmental Consulting Beth Haas, Cyprium Investment Partners Chris Hogan, KeyBanc Capital Markets Megan Horvath, INSIGHT2PROFIT Jonathan Ives, SCG Partners John Kramer, RPM International Inc. Brian Leonard, Edgewater Capital Partners Tom Libeg, Grant Thornton Martin McCormick, Huntington Mezzanine Finance Group Jay Moroscak, Aon Risk Solutions Kevin Murphy, Deloitte Wes Perry, ADP Jim Rice, Ernst & Young Matthew Roberts, MelCap Partners Jeff Schwab, Oswald Cos. Cheryl Strom, The Riverside Co. Theodore Wagner, Bober Markey Fedorovich William Watkins, Harris Williams & Co.