$2.00/JANUARY 19 - 25, 2015
Proposed changes to Cleveland’s zoning code could be more efficient, plus add to creativity — P. 4 Browns are attempting to get it ‘right,’ but assistant coaches’ departures bring more turnover — P. 5
Automatic reach More small and midsized local companies are using marketing automation as a valuable tool By CHUCK SODER csoder@crain.com
NICK SHEPHERD
The marketing robots located Pete Robison about a year ago. They knew about the article he read online. They saw him download that white paper — and convinced him to type in his email address in the process. Then they started sending him subtle emails designed to lead him back to HubSpot.com. And Robison kept going back to the software company’s website to learn more about this marketing automation topic he’d been reading about. The robots spotted him each time. Eventually, they sensed that he was a hot lead and alerted a human in the sales department, who gave Robison a call. He was amazed. Sure, it was “a little Big Brother-ish,” but he didn’t mind. He was more interested in figuring out how his employer — Meyer Products, a Cleveland company best known for making yellow snow plows — could use some of the same techniques. Today, Meyer is one of many Northeast Ohio companies that are using marketing automation software to home in on people See AUTOMATIC, page 7
Survey echoes M&A pros’ optimistic view By JEREMY NOBILE jnobile@crain.com
03
2014 was a strong year for mergers and acquisitions. 2015 figures to be even better, experts say, and the best year since the economy tanked in 2007. A recent KPMG LLP report that surveyed 738 M&A professionals nationwide found that 82% anticipate their U.S. companies or clients will embark on at least one acquisition this year, up from 63% who predicted similar activity at the start of 2014. Of Greater Cleve-
geographic expansion and new market segments,” said Mark Saas, a partner with KPMG’s transactions and restructuring group. “This strategy would include investing into emerging markets to accomplish these pursuits.” Randall Myeroff, CEO of Cleveland accounting firm Cohen & Co., said optimism expressed in the survey dovetails with what he’s hearing for 2015. “When I talk amongst clients in a variety of industries, and private companies of different sizes and industries, I think all of them are con-
sidering some level of M&A activity,” Myeroff said. Last year was the most active year for M&A deals since the mid2000s, with total dollars in transactions around $3.5 trillion, according to figures tracked by Thomson Reuters and Bloomberg M&A league tables. Much of that was driven by megadeals, such as Comcast Corp.’s $70 billion acquisition of Time Warner Cable. “2014 was a phenomenal year, not just for us, but for the dealmaker business, it was just phenomenal,” said James Dougherty, admin-
istrative partner for the mergers and acquisitions practice at Jones Day, the most active dealmaker on the planet for 57 consecutive quarters in terms of number of deals completed, according to Thomson Reuters and Bloomberg. The momentum seen in 2014, he predicts, will persist through 2015 across industries. Sectors including health care, biomedical, technology, manufacturing/distribution and energy — all of which saw big deals last year — could see a slightly higher level of activity. See M&A, page 47
6
ALSO INSIDE: NEWSPAPER
74470 01032 0
landers in that group, 78% anticipate at least one deal this year. Respondents generally said they expect deal valuations to go up as well. A focus of those transactions increasingly will be in the expansive middle-market segment, with more deals sought between the $250 million to $1 billion range, according to KPMG. And 73% of all respondents said they expect the United States to be the most active M&A market across the globe. “Acquirers intend to pursue additional strategies to increase revenues moving forward, including
HEALTH CARE By branching out to Elyria and Parma, University Hospitals is accelerating growth ■ Pages 41-45 PLUS: EFFECTIVE PARTNERSHIP ■ NEW NEOMED ■ & MORE
Entire contents © 2015 by Crain Communications Inc. Vol. 36, No. 3
Small Business Matters i Want more information and resources on this week's topics, ideas and events? Go to www.cose.org/smallbizmatters.
PRESENTED BY
52 TIPS FOR YOUR BUSINESS
#3: Keep Track of Your Online Image Word of mouth traditionally has been a powerful marketing tool for small businesses and the explosion of social media has taken word of mouth marketing to the next level. More and more consumers are relying on online reviews to help make purchasing decisions and it’s important for small businesses to regularly monitor their online reputation. Consumers today want to know who they can trust before they visit a business or make a purchase and often rely on websites such as Yelp, Trip Advisor, and YellowPages that publish crowd-sourced reviews for local businesses for guidance. “Positive customer service reviews can set you apart from competitors and attract new customers, just as negative reviews about your business can have an adverse effect on sales,” says Karen Leonard, Vice President of Innovative Global Vision in
Macedonia. “You have to know what people are saying about your business and address any less than positive reviews quickly and sincerely,” says Leonard. “How many small businesses can afford to lose customers based on a single bad review?”
There are several free and lowcost ways to keep tabs on online reviews. Free services like Google Alerts check the web for mentions of your business and e-mail results directly to you. Subscriptionbased tools like reviewpush.com and reviewtrackers.com monitor reviews of your business on dozens of websites and alert you any time a review is posted. These services also offer resources that can generate positive reviews for your business through review requests to your customers. Many companies are now using push review requests as part of their sales strategy, with much success. Research shows that reviews definitively reinforce purchasing decisions. “Once a potential customer reads a review, it becomes authentic and they often make decisions based on that,” says Leonard. i
January 19
RNC 2016: All Hands on Deck For the first time since 1936, Cleveland will play host to the Republican National Convention in 2016, representing a unique opportunity for Northeast Ohioans to experience a political convention and help shine a national spotlight on our fine city. It will take volunteers of all types before, during and after the convention to ensure its success. Key volunteers will be needed in the areas of transportation, information services, hospitality, special events and more. It may be more than a year away, but an official website has already been developed for community members to indicate an interest in volunteering and sign up to receive ongoing information regarding convention planning. If you are interested in taking part in this once-in-a-lifetime opportunity, sign up at http://2016rnc.my-trs.com/.
BIG IDEAS
Biz Pitch Competition Offers Up $40K in Prizes
By The Numbers
TIP
$38M
The start-up scene in Northeast Ohio is growing at a rapid pace and now is a great time to take action if you dream of launching your own business or have a start-up business that needs additional capital to grow. The Council of Smaller Enterprises is kicking-off its fifth go-around of its popular Business Pitch Competition, offering participants invaluable feedback from small business experts and cash prizes totaling $40,000.* “The Business Pitch Competition is our way of surfacing great ideas and encouraging
Let COSE record your business pitch competition video submission. Sign up for a 15-minute time slot in the video studio at the COSE Offices on February 11 or 12. To register for a time slot, e-mail events@cose.org. someone to take the leap of creating something of their own and potentially creating jobs in
Northeast Ohio,” says Steve Millard, President and Executive Director of COSE. Entering the competition has never been easier. Just provide an Executive Summary of your start-up business or new business idea (two pages maximum) and then film a two-minute video pitch. All entries go through a series of judging that culminates with the final four plans advancing to the finals in May. Deadline for submissions is March 19, 2015. For more information or to submit an entry, logon to www.cose.org/pitch. i
UNMET NEED FOR LOANS UNDER $50K IN CUYAHOGA COUNTY. SOURCE: Friedman Associates, 2011
Connection Calendar
*To be considered, applicants must be in business fewer than two years and cannot exceed $250,000 gross annual revenue.
FROM BAR TO BOARDROOM: BUILDING A BRAND THAT STICKS Presented by JumpStart
First published in 2011, The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses continues to be the definitive guide for successful start-ups. Based on the “work smarter, not harder” adage, the lean philosophy pushes entrepreneurs to take small logical steps rather than creating elaborate business plans and spending years in research and development. “The lean philosophy embraces validated learning, an approach that encourages the entrepreneur to first build something the market wants, then validate, test, learn, and build upon that,” says Dar Caldwell, co-founder and Director of Entrepreneurship of The LaunchHouse, a Cleveland-based Accelerator that helps entrepreneurs build successful companies
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THE LEAN STARTUP: By Eric Ries through funding, mentoring, business basics and networking. “This book is kind of like Entrepreneurship 101,” says Caldwell, who cites the book as recommended reading for all budding start-ups. “While it isn’t a script that can be followed for guaranteed start-up success, it does offer a mind-set and methodology
that, if followed, will help you move in a better, smarter direction. It’s all about how to keep it lean and nimble and avoid risky assumptions at the end of the day,” says Caldwell. The book hit #2 on the New York Times Best Sellers list and has been ranked as one of Amazon’s Best Business Books and its popularity continues to grow. “The book’s broad appeal shows how applicable the Lean Startup method is to companies and innovators at all stages — not just start-ups. The approach has been welcomed by businesses of all sizes who are taking a page from the playbook of successful entrepreneurs to be more innovative and competitive in a rapidly changing marketplace,” says Caldwell. i
Ask The Expert Column: How will ACA affect my taxes this year? By James Harmon, President of Dawson Consulting Group. Read it at cose.org/smallbizmatters.
CONTENT PROVIDED AND PAID FOR BY THE COUNCIL OF SMALLER ENTERPRISES
TUESDAY, JANUARY 27 6-8 PM, Cost $5 Market Garden Brewery Register at www.jumpstartinc.org.
COSE WEBED SERIES: STARTING YOUR BUSINESS WEBINAR THURSDAY, JANUARY 29, 2015 11 AM- Noon Practical advice on starting a business. Register at www.cose.org/events.
SAVE THE DATE!
COSE ANNUAL MEETING A Celebration of Northeast Ohio’s Small Business Rule Breakers THURSDAY, FEBRUARY 26 4:30 PM Music Box Supper Club
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Changes could put city in a more creative zone
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Changes to Cleveland’s zoning code that promise to allow builders and developers more creativity, as well as a faster route from architectural rendering to groundbreaking, are making their way through Cleveland City Council. Council is looking at what’s called “form-based zoning,� and while it would not replace the existing zoning code citywide, Cleveland planners hope to use it in targeted areas. It would replace the existing zoning that designates properties, streets or neighborhoods by land use — commercial, industrial, single-family residential or multi-family residential — and pays little attention to what streets, sidewalks or individual buildings look like. City planning director Freddy Collier Jr. and his staff presented the new plan to council’s Development, Planning and Sustainability Committee last Tuesday, Jan. 13. The planners describe the current code, created in 1929, as outdated. Its foundation was a segregation of land uses — office buildings here and factories there. Houses — for families with children who wanted backyards and separate buildings behind their houses for the family car — were built some distance away. Even the grocery stores, bars and restaurants had their own districts, out of sight of the porches and grassy front lawns. Now, however, much of the new construction in Cleveland is townhomes and row houses, and it’s being sought by people who want to be able to walk or take a bus or a bicycle to work and want a coffee shop and restaurants close to home. The city’s planners hope these new zoning options, which they would apply selectively, will meet that demand. “We are trying to promote walkable communities, to create the type of density that people want,� Collier said. “It’s what most people want to see in the 21st century — more high-density, more mixeduse developments.� Form-based zoning can accommodate mixed-use areas and can include design guidelines that, the
“I have not found it cumbersome, but I think it’s mostly because I know what the expectation is. ... (But a streamlined process) would be encouraging for somebody like myself. Any time you can eliminate layers in the process and expedite a project, it would be manna from heaven.� – Michael DeCesare owner, Case Development LLC planners believe, make neighborhoods more lively and inviting. City planner Kyle Reisz described to council how a form-based code can require that developments include things like street trees and can better regulate the size and the look of parking lots. “Anything that contributes to walkable streets,� he said. Collier also said up-to-date zoning regulations also would speed up the approval process for developers, who now must seek a zoning variance for the new residential style.
Expectations game Developers, architects and real estate brokers are reluctant to air their frustrations with the code and the time it takes to get through the city process. They would rather swallow their tongues than complain about regulators they will need to work with in the future. Some, though, have learned how to work in the system. “I have not found it cumbersome, but I think it’s mostly because I know what the expectation is,� said Cleveland home builder Michael DeCesare of Case Development LLC. But, he said, a streamlined process “would be encouraging for somebody like myself. Any time you can eliminate layers in the process and expedite a project, it would be manna from heaven.� The approval process usually starts with a meeting with a neighborhood development corporation or even a block club to make sure they have a project that the neigh-
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borhood will support. Then it’s on to one of the city’s regional design review committees, which, because the current zoning code lacks design guidelines, have considerable discretion to approve or require modifications to new construction and renovation. They meet only once a month. Only then can a developer begin the paperwork for appeals for a variance to the zoning appeals board — each building or townhouse unit can require a separate paperwork filing, though the appeals board will consider them as a group. This process can take many months.
The right path Case ran the zoning gauntlet last year for Harborview, a seventownhome project overlooking Lake Erie in the Detroit-Shoreway neighborhood on the city’s West Side. The land is zoned for twoand-a-half story, two-family homes set back 20 feet from the street. But Haborview, like much of the new construction in DetroitShoreway, doesn’t meet those requirements. It’s made up of attached, three-story residences that appeal to singles or young couples, not the traditional family. So DeCesare filed for variances from the code for each home in the project. Those variances were approved July 7, 2014, and DeCesare said he’ll be able to have the homes ready for the prime February to April selling season. Another builder, though, complained privately to Crain’s Cleveland Business that delays in the process caused him to miss a construction start that threatens pushing completion beyond that selling window. The form-based code legislation was approved by the development committee and moves next, as early as Jan. 26, to the finance committee before a vote by the full council. “Council members have been struggling to control the built environment,� said Councilman Anthony Brancatelli, chairman of the development committee. “I think this puts us on a path that will help developers.�
CORRECTIONS â– Chris Hodgson is co-owner of Driftwood Restaurants and Catering. His title was misidentified in a story appearing on Page 13 of the Jan. 12 issue. â– Pamela Routte is the owner of Picky Pam Lice Removal. The business name was listed incorrectly in a story appearing on Page 14 of the Jan. 12 issue.
JANUARY 19 - 25, 2015
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LOOKING FOR ‘RIGHT’ MIX Shanahan’s departure means even more turnover for Browns By KEVIN KLEPS kkleps@crain.com
Changing coordinators has become an annual tradition for the Cleveland Browns — something that goes hand in hand with the losing seasons, disappointing Decembers and searches for the next quarterback. The exit of Kyle Shanahan — which the team made official on Jan. 13, two days after word broke of the parting of ways with the offensive coordinator — was different, though. For starters, the Browns, prior to reports of Shanahan being frustrated with the front office, had planned to bring the coordinator back for the 2015 season. They also let Shanahan out of his contract, which meant they were no longer obligated to pay the 35-year-old — a rarity for a franchise that has paid tens of millions to fired coaches the last 15 years. But what is all too similar is the turnover that Shanahan’s departure will bring. As of Jan. 15, two offensive coaches had already joined him in leaving the team, and more exits are expected. Shanahan’s replacement will be the Browns’ sixth offensive coordinator in as many years, and their 14th in 17 seasons. Since 1999, the franchise has had eight head coaches (counting Terry Robiskie, who served as the Browns’ interim coach after Butch Davis walked away in 2004) and 10 defensive coordinators. Browns president Alec Scheiner, whose responsibilities were increased following the firing of Joe Banner 11 months ago, didn’t want to discuss the reasons behind Shanahan leaving. “I want to stay in my lane here,” said Scheiner, who was hired by team owner Jimmy Haslam and Banner in December 2012, after eight years with the Dallas Cowboys. At two years, Scheiner has been with the franchise longer than general manager Ray Farmer and every member of the coaching staff, with the exception of special teams coordinator Chris Tabor and special teams assistant Shawn Mennenga. Scheiner was comfortable discussing another topic — the consistency that’s found in the vast majority of the NFL’s best organizations. “The most important thing is having the right people in the right spots,” the team president said. “If you think of why New England has been successful, you look at (Bill) Belichick and (Tom) Brady and (Robert) Kraft, right? Then the continuity makes sense. Why would you want to change from Tom Brady and Bill Belichick? I think the teams in our division have had the same thing. They’ve had really good coaches and really good quarterbacks and really good owners.”
Looking North Two of the Browns’ AFC North rivals — the Baltimore Ravens and Pittsburgh Steelers — have combined for 21 winning seasons, 19 postseason appearances, five trips to the Super Bowl and four championships since 1999. In that span, the Browns have had five more general managers (seven) than winning seasons (two). The Steelers, who are 160-95-1 (a .627 winning percentage) since 1999, have had two head coaches and five offensive coordinators in that time. They’ve had the same GM, Kevin Colbert, since 2000. The Ravens are 152-104 (.594) since the Browns re-entered the NFL See BROWNS, page 50
Knight Foundation betting on entrepreneurs By CHUCK SODER csoder@crain.com
The word “entrepreneur” pops up seven times in a news release that the Akron office of the John S. and James L. Knight Foundation put out on Jan. 5. That’s not a coincidence. The Knight Foundation is doing a lot more to promote grassroots-level entrepreneurship in Akron these days. Consider that news release. The foundation handed out 13 grants worth a total of $1.8 million. Five of them went to initiatives designed to promote entrepreneurship and help small businesses of all stripes. And the Knight Foundation helped inspire
the economic development group JumpStart to hire someone tasked with unifying Akron’s entrepreneurial community. Someone who will build alliances between local organizations that help small businesses — and round up entrepreneurs who could use that help. By contrast, if you scan through a list of older grants posted on the Knight Foundation’s website, sure, you’ll spot a few programs for Akron-area entrepreneurs. And one of them is particularly large: The Austen BioInnovation Institute in Akron has raised $24 million from the foundation since 2008. But now the Knight Foundation is picking up the pace. Just don’t expect more huge projects like the Austen BioInnovation Institute. Nowadays, the Akron office would rather
fund a larger number of smaller programs. Many of those initiatives will focus on helping entrepreneurs and small business owners — people who can have a big impact on a city’s economy and its neighborhoods, according to Kyle Kutuchief, interim program director for the Akron office. “Entrepreneurship is getting much more focus,” said Kutuchief, who took over for Josh McManus on Jan. 5.
The pee wee pipeline McManus helped spur the change when he was hired as program director last summer. Now he’s heading back to Detroit to work for Dan Gilbert’s family of companies. McManus
previously spent more than three years working on projects designed to improve the city. But Kutuchief said he’ll continue ahead with the plan established by McManus, a longtime nonprofit executive who has started a few companies of his own. The plan is to help all kinds of entrepreneurs — not just college students looking to launch the next big software company. For instance, one of the five new grants went to Asian Services in Action. That $100,000 grant will be used to fund microloans for entrepreneurs in the city’s Asian and Pacific Islander communities. Immigrant entrepreneurs already are doing great things in Akron, Kutuchief said, See KNIGHT, page 50
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Optical filters manufactured by Materion Corp. are used in astronomy, as well as the defense and commercial satellite, and medical and industrial sectors.
Growth is next on agenda Materion has high hopes following leadership transition By RACHEL ABBEY McCAFFERTY rmccafferty@crain.com
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Change has been a long time coming at Mayfield Heights-based Materion Corp., but leadership at the advanced materials company feels like that transitional stage is behind them. Now, it’s time to grow. “This place has more opportunities today on the table than it’s ever had,” said John D. Grampa, Materion’s senior vice president, administration. The company’s materials, which include specialty metals, alloys and coatings, can be found in products ranging from handheld devices to airplane parts, Grampa said. Materion’s components can help the products its customers make become lighter, stronger and more corrosion resistant. “We’ve built ourselves into that kind of company over time,” Grampa said. And that’s not the only transition the company has faced recently. Grampa, who had been the company’s senior vice president, finance, and chief financial officer, handed over the reins to the former vice president of finance, Joseph P. Kelley, on Jan. 1. Grampa had been the company’s CFO since 1999. The transition has been in the works for a while; Kelley was brought on from PolyOne Corp. in 2011 in anticipation of this change. Kelley, who now is vice president, finance, and CFO, had been given more responsibilities at the company over time as Grampa scaled back. The Materion of today is an advanced materials company, but when Grampa joined the company in 1998, it was still a small defense contractor, or what he called a “smoke-stack company.” Telecom and computer made up more than 40% of the company’s sales, Grampa said, but that had to change after the telecom crash near the start of the millennium. Today, one of the biggest markets it serves is consumer electronics, listed as 28% of the company’s sales for the third quarter of 2014 in the company’s November investor presentation. It also serves the industrial components and medical markets, at 14% and 13%, respectively,
with smaller shares serving the automotive electronics, energy, telecom, defense and commercial aerospace markets. Grampa is a strong strategic leader as well as a financial leader, said chairman, president and CEO Richard Hipple. That’s an important quality as Materion repositioned itself as a technology-focused company. He also built a strong financial team behind him, Hipple said. Kelley will be able to build off Grampa’s successes and continue to help the company grow. He has a wide-ranging background in everything a CFO needs to be successful, from finances to investor relations to international experience, Hipple said. Hipple said the company is looking forward to 2015, though the macroeconomic outlook isn’t perfect. But it’s important to “create your future” by innovating, he said. And that’s what the 84-year-old company, which employs about 2,600 people, has done in recent years.
Changing legacy Perhaps the most visible change was when the company changed its name from Brush Engineered Materials Inc. to Materion Corp. in 2011. The rebranding brought 11 disparate brands and companies together under one name, but it wasn’t the end of Materion’s challenges. The company had to do some restructuring after a number of acquisitions, as well as work to open a new plant, Kelley said. But now, the company is leveraging its assets and new product offerings. Some of the markets Materion supplies to have clear growth potential, like hybrid and electric vehicles, for which Materion makes battery system components. And some of the work the company has done for the defense industry in the past is commercializing rapidly, as the technology becomes adapted for use in handheld devices and laptops. Kelley said infrared coatings for defense are a good example, as the sensing technology has commercial applications for motion-based gaming products. Kelley noted that even the way
the company sells the performance alloys and composites in its legacy business has changed. In the past, the company sold its copper beryllium and beryllium-based products like a commodity. Now, it operates like a specialty materials business, focused on increasing quality and margins. Spokesman Patrick Carpenter said in an email that the company has always partnered closely with customers, but that it now offers more finishing services that would have been independently contracted in the past and more advanced engineering services to help customers further develop their products.
By the numbers While official results aren’t yet out for 2014 (the company is projecting sales to be relatively flat at about $1.1 billion), the company has some big financial goals for the next three to five years. In its investor guide, the company said it is looking for 5% to 10% annual sales growth, and it has an earnings per share target of more than $3 — about triple that of 2013 earnings of $1.10 per share. “What gives us confidence in those goals is the second half of 2014,” Kelley said. In the third quarter of 2014, sales and earnings per share at the company were up compared to both the previous quarter and the like period the previous year. Earnings per share for the third quarter were 60 cents, compared with 47 cents in the second quarter of 2014 and 24 cents in the third quarter of 2013. And it seems like analysts are noticing the changes. Both Jefferies and D.A. Davidson & Co. had “buy” ratings on the stock in their late October reports, the most recent available. “The quarter benefited from stronger sequential value-added sales to consumer electronics, medical, energy, industrial, science and telecom markets,” according to the Jefferies report. “The benefits of restructuring efforts undertaken in prior years is increasingly evident with value-added operating margins at 8.9%, the highest level since 2012, when MTRN began providing the more detailed breakdown.”
JANUARY 19 - 25, 2015
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AUTOMATIC continued from page 1
who are most likely to buy their products and give them the extra nudge that might make them pull the trigger. The technology isn’t new, but a few local marketing firms said a growing number of their clients want help implementing automation software and coming up with content for the many emails they need to send out. One of those marketing firms is thunder::tech. The Cleveland company issued a report ranking marketing automation as the top marketing trend for 2015. Why? For one, the industry is hot at the national level, according to thunder::tech president Jason Therrien. He mentioned a few big software companies that have made headlines lately: HubSpot went public this past fall, and Marketo did so in 2013. Two of their competitors, Pardot and Eloqua, have been scooped up by bigger companies over the past few years. Thunder::tech has seen the trend first hand, too. The company started helping some of its own clients get into marketing automation early last year, and now that work is becoming a bigger part of thunder::tech’s business. One of those early clients was Meyer Products. Though Robison was impressed by how HubSpot used its own software to identify him as a hot sales lead, he shopped around. Meyer ended up buying software from Pardot last spring.
Revealing messages It’s working well so far, according to Robison, vice president of marketing and digital integration for the company. For the past year, Meyer has been gathering information from people who visit the company’s website piece by piece, a technique called progressive profiling. Visitors are anonymous and can’t be contacted until they willingly give the company an email address or other information — a phone number, a job title, maybe the name of an employer. Companies can get that information by offering something of value. For instance, this past fall, a time of year when many people buy snow plows, Meyer offered a rebate coupon on its website. The company got a lot of good contact information from people who downloaded it, Robison said. Information is valuable. For instance, today, Meyer routes hot leads to its call center, but now it can often identify the region where those people live. So the company wants to start routing those leads to distributors who are located nearby. But Meyer is just getting started. The company is using Pardot to figure out which marketing messages led people to buy products and which ones didn’t, Robison said. “That’s going to reveal a lot,” he said. Bigger companies have used marketing automation tools for years. Now, however, more small and midsize companies are doing it, according to Andy Walton, senior account executive at Fathom, a digital marketing firm in Valley View. As companies have put more emphasis on marketing themselves via email and other digital channels, they’ve realized that they don’t have time to follow up on every lead, Walton said. Automation software helps them narrow down the list. It’s also popular among companies that sell to other businesses and have long sales cycles. The software
makes it easier to keep in touch with potential customers over a longer period of time, he said. “Once you’ve done all the leg work to get those leads, you don’t want to let them die,” he said. Those are some of the reasons why Nook Industries decided to implement Magento’s software, with Fathom’s help. But there have been other benefits, too, according to marketing manager Jeff Naymik. The system lets the Clevelandbased company — which makes specialized screws and linear motion control products — send different marketing messages to different people. So someone who wrote down their email address at a trade show might get a different email than someone who went to the com-
pany’s website. The hard part, in Naymik’s view? Coming up with stuff to put in all those emails.
Right place, right time That’s where many companies fail, according to several people who spoke with Crain’s. Actually, Joe Pulizzi says that most of his clients that use marketing automation software haven’t gotten much out of it. They often don’t have interesting content in their emails, so recipients just ignore them, according to Pulizzi. He’s founder of the Content Marketing Institute. Even that organization had trouble getting the most of the Act-On marketing automation software it’s been using for the past
two years. Only now is the organization starting to see benefits. “We’re the Content Marketing Institute, and we didn’t have enough content in the right places,” he said. Developing content that customers want is “the hardest part of any one of these campaigns,” according to Rick Neiman, global director of digital marketing for Avery Dennison’s label and packaging materials group in Mentor. But during the four years that he’s been using Act-On, he’s noticed that people are more likely to watch a how-to video than something that’s overtly promotional. Avery Dennison doesn’t just send electronic content, though. It also sends physical samples to people who qualify as hot leads. And they
better be pretty warm: Though some samples are only the size of a piece of paper, others come in the form of 500-foot-long rolls. “We don’t want to send a sample to anybody who goes to our website or opens an email,” he said. The software also helped the company pinpoint problems. For instance, Avery Dennison used to send lots of email to prospects in the Asia-Pacific region. But with the software, the company noticed that people in those regions usually ignored the emails. So now Avery Dennison focuses on getting phone numbers for people in that part of the world. Then the company can send them text messages. “It’s OK to get bad results because at least we know not to do it again,” he said.
8
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Nowacki Asset Management LLC
JANUARY 19 - 25, 2015
Shale is in ‘survival mode’ Drilling is being affected by tumbling oil and gas prices By DAN SHINGLER dshingler@crain.com
Period
Nowacki Asset Management (NET)
Growth of $1 Million
S&P 500 Total Return
Growth of $1 Million
May 2011 - Year End
-7.46%
$925,400
-6.37%
$936,300
2012
29.99%
$1,202,927
16.00%
$1,086,108
2013
51.76%
$1,825,563
32.39%
$1,437,898
10/31/2014
21.59%
$2,219,459
10.99%
$1,595,988
Note: Returns are shown in U.S. dollars after fees. Date of inception for Nowacki Asset Management is May 2nd, 2011. Nowacki Asset Management (NAM) is a registered investment advisory firm specializing in value-oriented investment management. All client assets are included in one composite and invested using a value-oriented strategy. NAM claims compliance with the Global Investment Performance Standards (GIPS®). The S&P 500 Total Return index is subject to volatility and the NAM composite may or may not be more volatile than the index. Past performance is not aguarantee of future performance. Investments carry risks and the potential for loss. Results as of 10/31/2014 are still subject to final verification by an independent third-party. NAM only uses short-term margin or leverage to buy securities after a client commits to deposit funds and the funds are in the process of being transferred, but the money has not yet completed the transfer process. To receive a list of composite descriptions of NAM and/or a presentation that complies with the GIPS standards, contact Michael T. Nowacki at (440) 488-6936 or write Nowacki Asset Management, 29525 Chagrin Blvd. Suite 301, Pepper Pike, Ohio 44122, or michael@nowackiassetmgmt.com.
The price of oil has dropped by more than 50% in about the last six months, to five-year lows of less than $50 per barrel. Natural gas has taken a similar tumble, dropping from nearly $5 per thousand cubic feet (mcf) last May, to less than $3 in recent days. It’s a situation many analysts are equating with the mid-1980s, which was the last time the price of oil, and the U.S. drilling industry, crashed. Except this time, Ohio is an oil and gas producer and has more to worry about than the cost of driving a car or heating a home. The low prices are likely to impact shale drilling, which many see as the state’s biggest economic success story in decades. “We, as an industry, are in survival mode. … It’s having a significant effect in terms of what we’re seeing in drilling programs and operational budgets for 2015,” said Shawn Bennett, who took over as front man and executive vice president of the Ohio Oil and Gas Association late last year. “This isn’t just in the Utica, it’s across the U.S.” So far, the state has not seen a measured slowdown in drilling activity. The number of drilling rigs operating in Ohio has continued to rise, even through December when there were 47 rigs operating at month’s end. There was one fewer rig here as of Jan. 15, according to the Ohio Department of Natural Resources, but the state has seen its count go down by one before on several occasions. There was a slowdown in the fourth quarter of 2014 in the number of drilling permit applications and those granted by the state, as well as in the number of wells completed. But there was a similar slowdown at the end of 2013, so it’s difficult to know if last year’s drop was due to regular seasonal factors, like the weather and holidays, or due to lower prices for oil and gas. But, whether it’s today or later this year, market conditions would seem to dictate that drillers will be less eager to sink their bits into Ohio’s shale this year than they were just a few months ago. “We’re actually looking at that right now,” said Andrew Thomas, a longtime oil and gas attorney who also researches the economics of drilling in Ohio for Cleveland State University. “It’s hard to tell, because it’s so early. But it’s hard to imagine how these low prices would not affect us.”
Not so uplifting Ups and downs, of course, are a natural part of the oil and gas industry — as folks in places like Texas and Oklahoma know from decades of experience. Ohio has even benefited from some of them in recent years. For instance, when natural gas prices tanked and refused to come up a couple of years ago, drilling in Ohio actually got a boost because the state’s gas is “wet” and contains other valuable commodities, such as ethane. Since then, prices for gas, oil and ethane have all dropped. Drillers have simply produced more of all three commodities than the market could process or use, creating rising stockpiles and falling prices.
Now that ethane prices are also down, it has no “uplift” effect for Ohio, even though the gas brought up here continues to be rich in ethane and other so-called “natural gas liquids” or NGLs, Bennett said. That’s, at least in part, because the price of ethane also has taken a hit over the last six months — the price of the stuff, which is a key raw material for plastics and specialty chemicals, has fallen even more than gas or oil. Ethane was trading at about $80 a metric ton at the beginning of 2014, but sells for only about $30 per metric ton today. “There is virtually no uplift at the moment,” said Bennett. “You had (last year) people leaving the dry gas regions to come into the Utica … now, with the price of NGLs being so low, the amount it costs you to process (the wet gas) equals what you would have gained before selling those products.” In some cases, the rich, wet gas of the Utica could even mean it costs more to drill here. That’s because, with ethane now selling for less than the gas itself, many drillers would prefer to leave it in the gas and sell it as fuel. Doing so actually increases the energy contained in the gas — but some pipelines won’t accept wet gas, so drillers attached to them have no choice but to pay to process their gas, increasing their expenses. “Then you have the double whammy — you can’t send it in the gas stream to sell it and you have to pay to have it taken out,” said Steve Downey, vice president of business development for Houston-based EnerVest, an active Utica driller. “Because prices of ethane are so low right now, we’re trying to leave as much of it in the gas stream as we possibly can,” Downey said. Some companies have already announced cuts in their 2015 drilling budgets. Enervest is not one of them, but it’s watching the situation closely. “We’ve not cut that budget yet, but it’s something we’ll be looking at,” Downey said. “We’re constantly having those discussions.” With lower prices, drillers will be more selective about where they
drill, observers say. They will be more cost conscious, so they’ll look for places where they can drill at lower costs, due to factors like geology, access to materials and workforce costs. They’ll also look to drill where they can make the most revenue, either because the wells are more productive, prices are higher or both. In that latter area, Ohio and the rest of Appalachia might be at a distinct disadvantage. There are fewer pipelines here to take natural gas and ethane to end markets, and markets like the Gulf Coast processing centers and the high-population areas of the northeastern U.S. are farther away or tougher to get to. Those factors mean that drillers here don’t get the prices most people see when they read about or look up the price of natural gas — not by a long shot. When natural gas is selling elsewhere for $3 per mcf, drillers in the Utica or even some parts of the Marcellus shale might only get half that. “Unfortunately, that’s not what we’re being paid in Appalachia right now,” Downey said of recent, already-low prices. “We can be anywhere from $1.20 to $1.40 (per mcf) less.” It all adds up to subtraction and just about everyone thinks there will be less drilling in Ohio this year than there was in 2014. “I’d have to believe we’ll see less wells drilled,” said Downey. OOGA’s Bennett agrees, and is more than a little concerned about the impact that drilling might have, not only on drillers but their supply chain and the economy of eastern Ohio generally. For now, drillers are still developing wells with money they budgeted last year, or bringing online wells that they were working on a month ago or even longer. Eventually, assuming oil and gas prices remain low, drilling will slow here though, he said. “I’m not going to say the drilling is going to stop tomorrow, that’s not going to happen. But you’re going to see a slow down. … Not a single company is going to be developing (new wells) in 2015 like they did in 2014,” Bennett predicts.
JANUARY 19 - 25, 2015
CRAIN’S CLEVELAND BUSINESS
WWW.CRAINSCLEVELAND.COM
9
GOING PLACES JOB CHANGES CONSULTING CHAPMAN AND CHAPMAN INC.: Aaron Fick to senior analyst.
EDUCATION KENT STATE UNIVERSITY: James L. Blank to dean, College of Arts and Sciences.
FINANCIAL SERVICE AXA ADVISORS: Frank Jones to vice president; Michael Soeder, Kyle Gajowski, Allen Dengler, Kyle Vaclav, Joseph Schindel, Paula Crosby and Joseph DiTommaso to financial professionals; Ralph Orr to financial consultant. COHEN & CO.: Hannah Prengler to partner-in-charge, state and local taxation; Justin Thomas and Phil Ryan to partners.
Karl Driggs to chief operating officer; Robert Ecker to chief financial officer. ROLL-KRAFT: Kevin McCartney to IT manager.
NONPROFIT ARTNEO: John Farina to executive director; Christopher Richards to curator and collection manager. CLEVELAND METROPOLITAN BAR ASSOCIATION AND CLEVELAND METROPOLITAN BAR FOUNDATION: Rebecca Ruppert McMahon to executive director.
RICHARD E. JACOBS GROUP: Doug Miller to president and CEO.
RETAIL BRAND CASTLE LLC: John Brandley to senior vice president, sales.
SERVICE
SEQUOIA FINANCIAL GROUP: T.J. Gliha to director; Don Laubacher to executive vice president; Jeff Rovnak to managing director.
TOSHIBA BUSINESS SOLUTIONS: Laurence D. Lucy-Evans to commercial business account executive.
HEALTH CARE
STAFFING
METROHEALTH SYSTEM: Alfred Connors, M.D., to chief quality officer.
HEIDRICK & STRUGGLES: Matthew Stencil to partner.
UNIVERSITY HOSPITALS CASE MEDICAL CENTER AND CASE WESTERN RESERVE UNIVERSITY SCHOOL OF MEDICINE: Rodney J. Folz, M.D., to chief, Division of Pulmonary/ Critical Care and Sleep Medicine.
TECHNOLOGY
KAMAN & CUSIMANO LLC: Jeffrey E. Kaman to partner. MANSOUR GAVIN: Charles T. Brown to senior attorney.
MANUFACTURING MAIN STREET GOURMET:
CONSERVANCY FOR CUYAHOGA VALLEY NATIONAL PARK: Thomas E. Green (Kastner Westman & Wilkins LLC) to chair; Ellen Perduyn to vice chair. GREATER CLEVELAND VOLUNTEERS: Tom Barnard (Ogletree Deakins) to president; Ann Zellmer to vice president; Rosemary Rehner to treasurer; Lisa Foley to secretary.
MCPC: Tim Gargalianos, Michael McNeeley and Samuel Silsbe to onsite desktop technicians; Mike O’Hanian to account manager; Amy Matotek to rotational desktop technician; David Tavolier to video production coordinator; Tom Duffy to production assistant; Elliott Campanalie to AR credit and collections specialist; Timothy McGinty to sales engineer; Susie Laurence to sales operations manager; Levi Wickham to procurement supervisor; Nicholas Handley to billing analyst; Bridget Kobus to project coordinator.
Blank
Gajowski
Dengler
Crosby
Orr
Prengler
Gliha
Kaman
Brown
McCartney
McMahon
Gargalianos
KIDNEY FOUNDATION OF OHIO: Gregory W. Klucher (Huntington Bank) to chairman; Stephen Roberts to treasurer.
REAL ESTATE
MCGLADREY LLP: Tracey Collins to wealth management director.
LEGAL
BOARDS
AWARDS AMERICAN EPILEPSY SOCIETY: Hans Luders, M.D., (University Hospitals and Case Western Reserve University School of Medicine) received the William G. Lennox Award.
RETIREMENTS RICHARD E. JACOBS GROUP: Jud Smith, chairman and CEO, after 30 years of service.
Send information for Going Places to dhillyer@crain.com
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HIGHER
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10
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PUBLISHER:
John Campanelli (jcampanelli@crain.com) EDITOR:
Elizabeth McIntyre (emcintyre@crain.com) MANAGING EDITOR:
Scott Suttell (ssuttell@crain.com)
OPINION
Plan needs work During his State of the Union address this week, President Barack Obama is expected to expand on the “America’s College Promise” plan he unveiled on Jan. 9. The plan would offer two years of tuition-free community college, as long as students attend school at least half-time, maintain a C+ average or higher, and make steady progress toward obtaining a degree in three years, regardless of their ability to pay. The colleges these students attend must offer academic credits that transfer to a four-year school or offer occupational programs preparing students for jobs in high-demand fields. The program is estimated to cost $60 billion over a decade, with the federal government covering threequarters and states picking up the rest of the tab. An interesting concept? Yes. A fully formed strategic idea? We have our doubts. The president’s proposal is a simplistic solution to a complex problem. Let’s consider: ■ The plan doesn’t explain where the federal funds come from. And it relies on states buying into the program. What happens if they don’t? ■ The three-year completion rate at community colleges, according to the National Center for Education Statistics, is 21%. Most students who attend community college are non-traditional students who are working a job while attending school, and can only take one or two classes per grading period, therefore making them ineligible for the president’s program. This seems to be a key demographic this program wants to address, but is missing. ■ The College Board in its most recent annual survey says the average cost at public community colleges is $3,300. Federal Pell grants cover up to $5,700 for lowincome students. That means the students most in need of benefitting from a free community college education already are getting it. ■ If students in the middle to upper classes who can afford to pay community college tuition don’t have to, who ultimately pays? Taxpayers. Still, the president floating this idea can do some good. It will, we hope, spark a national conversation on how to increase access to higher education and build a better workforce for today’s global economy. That is really what’s at the heart of the president’s proposal. Business owners and leaders in Northeast Ohio regularly share with us the challenges they face filling jobs in manufacturing, technology, science, health care, engineering and other areas. We need targeted approaches — from the private and public sectors — to address this skills gap. There is no denying that access to higher education and job training must be a priority. Before we start footing the tuition bill for those who already can afford it, though, let’s start talking on the local and state level about how to improve the programs we already have. And let’s make sure those who are truly in need have access to these programs, and that the education and skills they receive match with the workforce needs of businesses today.
FROM THE PUBLISHER
Trophy isn’t only thing raised by title It’s been a week since the city’s economy, image and Buckeyes — led by an untacktourism. le-able backup quarterback There is something more from Cleveland — shocked the important. sports world and raised the Look at Pittsburgh. Some of new college football champimy best friends are Steelers onship trophy. fans. While not an identical This is a title — improbable, twin to Cleveland, we share convincing, electrifying — that plenty of DNA. Yet, in generwe can savor for years. al, we have two completely As sweet as it is, it’s not a JOHN different sports psyches. Cleveland championship. We CAMPANELLI Here, it’s gloom, doom and have to share this one with all pessimism. It’s what’s going of Ohio — from East Liverpool to happen, who’s going to get to West Carrollton. The champagne is hurt or what will the refs do to screw up diluted. our chances? Of course, not everyone is a sports About 130 miles east, it’s confidence fan. And any major sports trophy has and an expectation of victory, to the levthe tarnish that comes with big-time el of arrogance. sports: money, athlete entitlement, inPittsburgh has 11 championships in juries, performance-enhancing drugs, the last 45 years. Ironically, the fans and off-field debauchery, etc. front offices are more patient as a result. You can also say that the students at Before winning the Super Bowl, Bill Ohio State woke up the morning after Cowher lost in the playoffs nine times. the game — or, more likely, the afterHe once missed the postseason three noon after — and still had the same straight seasons, going 22-26 in the problems, worries and challenges they stretch. The team stuck with him. did before kickoff. Fans of next month’s We ran Marty Schottenheimer out of Super Bowl winner are going to be no Cleveland after going 10-6, turned on better off the Monday afterward either. Bill Belichick for benching an aging But championships have real benequarterback (who never started anothfits, and I’m not just talking about the er game) and didn’t give Rob Chudzintangible (although small) bumps in a ski even a calendar year on the job.
The pressure of 50 years seems to weigh 50 tons on the shoulders of our front offices, coaches and players. No wonder LeBron’s back is sore. Has our “woe is us” sports psyche poisoned the overall outlook? How could it not? It’s no secret that Pittsburgh is ahead of us in its recovery, reinvention and renaissance. Did that city’s spirit, fueled by those 11 championships, help make it happen? I say it probably did, in some immeasurable way. Dr. Carl Rak, a psychoanalyst and professor emeritus at Cleveland State, calls winning sports teams a “cultural antidepressant.” He has a friend in Boston, also a psychoanalyst, who has noticed a marked decrease in patient visits after the city wins a championship. (Boston’s won 15 in the last 4½ decades.) Perhaps the amazing thing is that Cleveland is roaring back as a city and a region without the happy pill of a trophy. And when that night arrives — and it sure as hell will — when LeBron or Terry Francona or Mike Pettine raises a trophy in a shower of champagne, the switch in our psyche will be flipped. The pressure, along with the dark clouds, will lift. And then Cleveland itself will be untackle-able.
TALK ON THE WEB Re: 2015 Rock Hall inductees I’m completely serious when I ask myself the following: When is Al Yankovic being inducted? — R.J. Lupin
Re: New Great Lakes Brewing Co. logo Nice use of the hipster font, Brandon Gothic. — Steve
Re: Johnny Manziel’s future in Cleveland This team and this town need to take a deep breath and reflect on the progress of the Browns in 2014. Yes, there were better picks than Johnny Manziel and Justin Gilbert, but to give
up now is just silly. Johnny is a young man who is the subject of WAY too much media coverage. Get Alex Mack back in the lineup, use draft picks to build the O-line and let Johnny and Hoyer battle for the starting job. Kyle Shanahan leaving (as offensive coordinator) is disappointing. Stop the bleeding and start the development. — Walt Avdey This will go down as a terrible draft choice by the Browns. He does not have the physical attributes to play in the NFL but even worse than that is that if anyone on the team must lead by example it is the QB. He can spin the press as fools because
they covet a relationship with him, but the good Browns fans are not having any of his lies and garbage. Get this lowlife out of here. — Jim Danilof My opinion of Johnny is just like my #2 jersey I got for Christmas: They both have shrunk considerably after one debut. — Jerry Pae
Re: Armond Budish’s outreach Here’s an idea — HOW ABOUT MEETING WITH 100 CITIZENS INDIVIDUALLY? We serfs can’t do much in the fields in this weather, anyway. — StopBackRoomDeals
JANUARY 19 - 25, 2015
CRAIN’S CLEVELAND BUSINESS
WWW.CRAINSCLEVELAND.COM
11
PERSONAL VIEW
Get the county up to speed By LEV GONICK
New Cuyahoga County Executive Armond Budish should move as rapidly as possible to transition all county and county-delivered services, such as health care, sewage and social services, to the digital broadband platform. Metropolitan regions around the country, elected officials and their administrative operations are embracing the power of the Internet to develop self-services for residents and businesses. Take a look at Chicago, which built an open data program relying on automation to deliver updated data. While initially created to increase transparency and accountability for Chicago’s government, multiple departments and developers have leveraged that foundational platform and have begun launching programs that enrich the lives of Chicago’s residents. For example, developers created Rack It, an iOS app that lets people find bike racks throughout the city. The SweepAround.us app leverages street sweeping records to notify residents when to move their cars and avoid street cleaning tickets. The county’s digital service strategy should not be relegated to one of a long list of efficiency initiatives or internal process improvement efforts. Either open-data and digital service is strategic, or it’s not. Dozens of metropolitan authorities around the country are building services for citizens, businesses and visitors that are designed with upto-date digital systems. The goal of self-service solutions is both to provide a better “consumer experience” and to deliver services that are faster, better and cheaper than what paper-bound and legacy agencies supply. Not only will regional government as a service be better, it will be cheaper. The county should engage the region’s high-tech community and have them assist in the recruitment of a new chief data officer for the
Gonick is CEO and co-founder of OneCommunity, a nonprofit provider of ultra-high-speed broadband services and programs county. The county executive should direct a blue ribbon panel to identify the 10s of millions of dollars in savings achievable by 2020 through better use of technology. To obtain these savings, the county and its executive should create a data management authority that resembles what the Feds have in their military base closing commission. The county and its executive should agree that the authority’s recommendations will have the force of law unless the county passes, and the county executive signs, an order reversing them. Run by executives who have led such transformations in the private sector, the authority should make recommendations every six months, for the next five years. The commission should be able to reinvest at least some of the money it saves to expedite its transformation of county government. It also should allocate some of the savings to training county employees who will provide the new services. Some savings also should be dedicated to creating digital literacy programs for the public so users of county services can learn how to access them. The administration also should campaign against paper. Paper records are the enemy of performance improvement. Paper leads to huge costs in double entry, translating to digital forms, mistakes in translating, and difficulties in analyzing and responding to the data. The investment to encourage health care providers to move to electronic health records is already generating substantial savings from workflows and decision-making support systems in health care. The same logic should be applied to all county government activity. To provide better public services,
the county executive should create myproblemsolved.cuyahogacounty.us, a personalized government service that enables data to flow easily from government servers into innovative applications developed by both public and private sector application developers. With appropriate safe guards for privacy, a countywide commitment to open data is critical. Open data is a core value and a commitment to a transparent and ethical government.
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The event, located at Shaker LaunchHouse, raises funds to support entrepreneurial programming and educational initiatives for Cleveland-area students.
SAVE THE DATE January 31 @ 7pm
Accelerate bandwidth growth Network bandwidth and network-delivered services are complementary products — neither has much value without the other. To ensure it can deliver services adequately, the county needs to take a few steps. First, through policy and procurement, it should encourage competition in network markets so that individual organizations and providers can seek advantage by being early to deploy new bandwidth. Second, the county should create and deliver public services on the Net so as to create the assurance of volume that encourages investors in the region to upgrade network bandwidth. Third, the county should facilitate aggregate buying of bandwidth and other shared services. Finally, county agencies should make higher bandwidth connectivity a criterion in evaluating communities’ applications for certain grants or funding. Everyone is watching the new county executive. The first 100 days is more than just a turn of phrase. The efficacy and impact of the county’s highest priority policy areas are intimately and inextricably linked to having a “shovel ready” digital strategy. The lack of a digital strategy will necessarily mean suboptimal outcomes on all the things that matter to the citizens, our elected officials and to the county executive.
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Customized Solutions Superior Execution Unparalleled Results Select Transactions Completed in 2014
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CORPORATE GROWTH & M&A
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TABLE OF CONTENTS
4
FEELING BULLISH
VALUATIONS UP
2015 M&A activity expected to emulate 2014’s strong year.
Low interest rates and ample liquidity bolster the value of private companies, which present ideal sale opportunities for company owners.
8
19
HR MATTERS From talent assessment and layoffs to executive agreements, human resource issues are a key part of the due diligence process.
TRENDS Your deal gets done here
Aarkel Tool & Die, Inc. of Ontario
Sale of stock to Zynik Capital Corporation
ASW Pipeline, LLC
Acquisition of Geneva Pipeline pursuant to Bankruptcy Code § 363
Contech Castings, LLC
CellNetix Labs and Pathology
Acquisition of Highline Pathology Associates, Inc., P.S.
Sale of Dowagiac, Michigan facilities and operations to Premier Tool & Die Cast Corp.
Austrian & Associates, Inc.
Merger with G. Herschman Architects, Inc.
Cape and Islands Occupational Medicine, P.C.
Sale of assets
Cap Lab Pathologists
Sale of assets
Technology has vastly improved efficiencies in dealmaking, but its use does not supercede faceto-face client relations. Plus, a look at how billionaires create value and how to navigate the intricacies of LLC and SE tax. 4-7
BEST PRACTICES Eptec S.A. de C.V.
Sale of its non-damper business and assets to J.D. Norman de San Luis Potosi, S. de R.L. de C.V.
Futuramic Tool & Engineering, Inc.
Acquisition of assets of Hubert Global Systems, Inc. in an UCC Article 9 sale
Great Day Holdings, LLC Acquisition of Patio Enclosures
Successful dealmaking involves careful assessment of many factors. 8-14
M&A Great Lakes Steel Holdings Corporation Acquisition of assets of Fabpro Netwrap LLC and Fabpro Oriented Polymers LLC
Indiana Limestone Company
Great Lakes Steel Holdings Corporation
Great Lakes Steel Holdings Corporation
Acquisition of assets of Bridon Cordage LLC and Heritage Trading Company, LLC pursuant to Bankruptcy Code § 363
Equity Purchase of H.F. Webster
Light Beam Capital
Sale of assets pursuant to Bankruptcy Code § 363
Acquisition of DCI Design Communications LLC
Capital Partners
Ninth Street Capital Partners, LLC
Sale of StyleCraft Home Collection
Selman & Company, LLC
Acquisition of certain assets of MAI Services Corporation
Acquisition of Kitchen Cabinet Distributors
Wolverine Tube, Inc.
Sale of Netherlands subsidiary
Griffiths Furniture, LLC
Acquisition of assets of Griffiths Furniture
Horizons Window Fashions, Inc.
Sale of assets
LS Partners
Main Market Partners
Acquisition of chain of Gymboree Play and Music Centers
Acquisition of Ricerca Biosciences
Acquisition of assets of Billingsley Wholesale Floral, Inc.
Remington Products Company
Selman & Company, LLC
Mayesh Wholesale Florist, Inc.
ReCellular, Inc. (receiver)
Going concern sale of assets
Acquisition of assets of Arch Molds, LLC
Michael J. Meaney
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Acquisition of assets of Association & Society Insurance Corporation
Low tax rates and higher company valuations foster activity, but consider the small details. 14-21
SUCCESSION PLANNING Consider the role of charitable giving, and make sure your business is ready for succession planning. 22-24
GLOBAL TRANSACTIONS International activity reaches pre-recession levels, and some advice on raising the red flag in overseas deals. 24-25
Learn more here.
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mcdonaldhopkins.com
Calendar of events, board of directors, and Deal Maker Awards. 26-28
Carl J. Grassi, 1SFTJEFOU
Shawn M. Riley, Cleveland Managing Member $IBSMFT # ;FMMNFS $IBJS #VTJOFTT %FQBSUNFOU
$IJDBHP t $MFWFMBOE t $PMVNCVT t %FUSPJU t .JBNJ t 8FTU 1BMN #FBDI t 8BTIJOHUPO % $ * McDonald Hopkins Government Strategies LLC is owned by the law firm McDonald Hopkins LLC. McDonald Hopkins Government Strategies is not a law firm and does not provide legal services.
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PRESIDENT’S LETTER
City’s revitalization shapes ACG Cleveland’s growth, focus BY MURAD A. BEG As we ring in the New Year, I’d like to reflect upon ACG’s successes from 2014 and outline our exciting plans for 2015 and beyond. The Association for Corporate Growth (ACG), a global organization with 57 chapters and more than 14,500 members, provides a “community” for middle-market mergers and acquisitions and corporate growth professionals. The local chapter, ACG Cleveland, is nationally recognized for providing on-point, educational programming and networking BEG events that help its members build value in their organizations. In addition, our chapter is well regarded for its best-in-class programs and events, which provide unique opportunities to develop connections with diverse and influential business leaders throughout the region. Among these programs and events are the:
r Annual Deal Makers Awards, which draws nearly 1,000 financial and corporate professionals from across the country; r Monthly educational breakfast series featuring corporate and community leaders; r Spring and fall panel workshops, which facilitate the discussion of topical issues; and
r Specialized programs offered by our Women in Transactions, Young ACG and ACG Akron groups. Furthermore, this annual special section in Crain’s Cleveland Business offers ACG Cleveland members a unique opportunity to showcase their area of specialization while providing valuable content focused on M&A issues. ACG Cleveland is committed to meeting the needs of its members. Recognizing the importance of continuous growth and improvement, chapter leadership conducted a survey and market study in 2014 that aimed to better understand the needs of our current and
future members. Survey results revealed that ACG Cleveland is most sought after for its topnotch programming and events geared toward peer-to-peer networking. As a result, ACG Cleveland will further enhance programming and events that appeal to a broad range of constituents, such as corporate C-level executives, small business owners, investment bankers, attorneys, accountants, private equity professionals and capital providers. As we look ahead to 2015, we reflect on all of the great things happening in our region – Cleveland’s opportunity to host the 2016 Republican National Convention, the establishment of the Global Center for Health
Innovation, record residential downtown occupancy rates, and LeBron’s return to the Cleveland Cavaliers. This revitalized enthusiasm and optimism has impacted the development of our programming agenda, and we are assembling a calendar of events to promote a theme of “growth mindset.” Embedded in this overall theme are subthemes focused on business innovation, economic development and stewardship, to name a few. In November 2014, we kicked off this effort with a panel workshop featuring regional leaders in innovation, which was attended by nearly 200 people. We intend to capitalize on this momentum and offer differentiated thematic programming. To see the calendar of events, please visit www.acgcleveland.org. In closing, I want to thank our current members for their continued support and encourage prospective members to join the ACG Cleveland community, where the development and advancement of NEO businesses are facilitated by a network of like-minded individuals committed to the growth and vibrancy of our region. Best of luck in 2015 and beyond.
Murad A. Beg is president of ACG Cleveland and a partner with Linsalata Capital Partners. For more information on ACG Cleveland membership or upcoming events and programs, visit www.acgcleveland.org or contact Beg at 440-684-1400.
HOW CAN SOMEONE HAVE ALL YOUR ANSWERS BEFORE THEY ASK ANY QUESTIONS? Clairvoyance isn’t one of our skills. But curiosity is. It’s what leads us to listen to you. To think about what you’re telling us. And then ask thoughtful questions. It’s the only way to crack the puzzle. Because the answers don’t just jump out. You have to dig. Subordinated debentures, equity infusions and other solutions are all well and good, but when is the right time to use them? And why? Shouldn’t your bank want to find out? We do. Learn more at 53.com/BusinessIdeas We’re Fifth Third Bank.
The curious bank.®
Deposit and credit products provided through Fifth Third Bank. Member FDIC. Lending is subject to credit review and approval.
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TRENDS
Middle-market M&A momentum continues
the first nine months of 2014 as compared to the first nine months of 2013. The U.S. M&A market has made Deal volume in the middle market an incredible run in 2014, with values also increased at 5.3%, and transacand volume not seen since 2007. tions multiples rose to 7.5X, nearly a According to Thomson 6% increase over 2013. Reuters, U.S. deal value There continues to be a through September 2014 strong climate for middle was $1.25 trillion and has market M&A from both increased nearly 65% over sellers (as multiples rise) the same period in 2013. and from buyers (as groups Absent the fourth quarter, aggressively seek quality 2014 deal value was already acquisitions). According 21% ahead of year-end 2013. to a recent survey of M&A FLEAGLE With nearly 7,000 deals anprofessionals by KPMG, nounced through September, 40% believe they will deal volume had surpassed the first acquire more than one company in nine months of 2013 by 5.5%. 2015 and 10% plan on acquiring Much of the visible growth can be 10-plus companies. attributed to large corporate deals; The positive trends that resonated nevertheless, the middle market from 2014 will remain in 2015 as low (<$500 million in revenues) has also cost of capital is readily available. achieved a similar growth trajectory in Because of the low cost of capital and 2014. According to Thomson Reuters, low interest rates, which should the middle market experienced a remain steady before they egress later 29.5% increase in deal value through in 2015, many corporate buyers, as
BY MARC A. FLEAGLE
well as private equity groups, have lowered their expectations on ROIC or IRR, forcing multiples and values upward with increased equity in transactions. Acquisitive companies also continue to look for inorganic growth as cash sits on corporate balance sheets. According to S&P Capital IQ, 415 non-financial S&P 500 companies had over $1.3 trillion of cash on their balance sheets at the end of 2014. This, of course, does not include the tremendous amount of cash on other corporate balance sheets, or the significant amount of purchasing power available for private equity groups. According to Pitchbook, private equity purchasing power remains strong from post-recession fundraising, especially in 2013, and pre-recession overhang, as dry powder remains at approximately $500 billion with purchasing power over $1 trillion. The combined availability of capital for U.S. acquisitions continues to climb, and will be put to use in the near term within the middle market, as was evident in 2014.
Marc A. Fleagle is Vice President of MelCap Partners LLC. Contact him at marc@melcap.co.
A Balancing Act: technology and client service insight that cannot be simulated by software. There are rafts of investment There is tremendous potential and financial choices. A relafor new technologies to enable tionship manager can synthecompanies to better serve clients. size these choices into At the highest level, meaningful solutions. technology can be levered Service providers should to anticipate client needs be expected to not only and infuse customized supply the requested data, advice and views into but also share knowledge personal data. For some, and perspectives a client an online interface may may not realize he or she become the preferred needs. A relationship propoint of contact. Applicafessional should proactively tions provide convenient OLEJKO anticipate concerns and ways for clients to access potential opportunities. their accounts alongside While many decisions can be information and advice regarding mathematically reduced to a their investments, finances, finite set of choices, there are record-keeping and administratimes when empathy and undertive concerns. standing are more important to The trend in financial services the success of an outcome than toward technology and away from logic alone. human contact, however, should be Perhaps, one day, a series of met with tremendous care. There algorithms will synthesize data, are limitations of technology in an anticipate needs and provide the environment where personalized right degree of empathy. Until service and advice are integral to then, financial service providers the success of the client and promust continue to hire and develop vider alike. the highest caliber professionals While machines increasingly in tandem with our commitment perform tasks previously believed to advance our technology. With to require human oversight, the all initiatives, the goal should be highly complex yet subtle difto ensure the delivery of unparalficulties of managing a family’s leled client service. present and multi-generational needs require discretion. The Linda M. Olejko, CFP® is a Managing relationship team who communiDirector of Glenmede. Please contact cates with a client in person, over her at 216-514-7876 or Linda.Olejko the phone or by email is capable of infusing valuable forethought and @glenmede.com.
BY LINDA M. OLEJKO
Disclaimer
The articles in this section were prepared by the respective contributors for general information purposes only and are not intended as legal, tax, accounting or financial advice. Under no circumstances should any information contained in any of these articles be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon any such information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed in the articles are those of the respective contributor and are subject to change without notice due to market conditions and other factors.
We are proud to join ACG in recognizing our clients Blue Point Capital Partners Hyland Software and the other 2014 Deal Maker Award Finalists. We are honored to have been legal counsel to Hyland Software in its acquisition of AnyDoc Software and to Blue Point Capital Partners in its acquisition of Hilsinger Co. and its divestiture of JTM Foods. We have proudly been representing publicly held and private companies in complex M&A matters for nearly 100 years.
bakerlaw.com
© 2014
Crain’s Cleveland Business Custom Publishing
December 2014
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Unlock value KeyBanc Capital Markets® is a proven industry leader in providing strategic financial solutions to our private equity clients. Our comprehensive suite of products and services includes: • • • • •
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To learn more, contact: Paul Schneir, Managing Director and Group Head, Mergers & Acquisitions at 216-689-4005, or pschneir@key.com. Visit key.com/mergers KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp and its subsidiaries, KeyBanc Capital Markets Inc., Member NYSE/FINRA/SIPC, and KeyBank National Association (“KeyBank N.A.”), are marketed. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives, who may also be employees of KeyBank N.A. Banking products and services are offered by KeyBank N.A. Key.com is a federally registered service mark of KeyCorp. ©2015 KeyCorp ADL7638
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CORPORATE GROWTH & M&A
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TRENDS
HOW SELF-MADE BILLIONAIRES CREATE MASSIVE VALUE
Patient urgency
Empathetic imagination
PwC’s new book offers important insights for M&A
Producer Mindset
BY JOHN SVIOKLA AND MITCH COHEN Since 1987, self-made billionaire wealth grew more than three times faster than the world economy. Yet in that same period, business leaders have struggled to find and pursue opportunities that bring breakthrough value. While researching for our book, “The Self-Made Billionaire Effect,” we found that more than 80% of these entrepreneurs earned their wealth by disrupting highly competitive industries such as apparel, beverages and hospitality. Companies can apply the approach of self-made billionaires to create massive value, and M&A can be a key strategic weapon in that effort. In particular, self-made billion-
Producerperformer partnership SVIOKLA
COHEN
aires have five habits of mind that make them “Producers.” First, they exhibit “empathetic imagination,” a deep understanding of the future needs of the customer and the vision to develop a new product or service that will address those needs. Second, they display “patient urgency”: they develop their offerings waiting for the market to ripen, then seizing the opportunity. Third, they exem-
KELLY
Inventive execution
MATTESON
plify “inventive execution,” bringing their ideas to market in new, creative ways. Fourth, unlike most people, they have a relative view of risk, assessing risk on the basis of what they stand to gain rather than what they might lose. Finally, to bring their vision to life, they each work closely with a “Performer” partner with complementary skills who is good at optimizing already
Relative view of risk established functions or processes. These five habits of mind enable Producers to envision something new, bring together the resources to create it, and sell it to customers who did not know they needed it. Most companies encourage and promote their high-potential Performers to the exclusion of Producers. However, those skills are not adequate for companies that wish to disrupt their industries. To create massive new value, organizations need to attract, nurture, and retain more people with the Producer mindset. But it doesn’t mean that the CEO has to be a Producer. For some companies, it makes sense for that position to be filled by a Performer who will work closely with a Producer in another top position. These findings should spark some new thinking about M&A. Both private equity and corporate development executives need to be able to profile key talent of a target organization to identify the real Producers. They need to be thinking about talent during the integration. All too often, companies put newly acquired Producers in Performer positions, driving those Producers to leave once they
receive the promised payout. So it’s important to determine the roles that need to be created in order for Producer talent to stay and thrive in the newly merged organization. It’s also important to think about which Performers should be paired with those Producers. Acquiring the right team should be one of the top criteria of any M&A. There’s little doubt that the ability to profile key talent at a target organization with a view to the traits of self-made billionaires offers companies a powerful new weapon for their M&A arsenal — one with the potential to revolutionize the way M&A are done.
Dr. John Sviokla is head of global thought leadership at PwC (PricewaterhouseCoopers LLP), and Mitch Cohen is vice chairman. Contact them at billionaireeffect@us.pwc.com. Contact local PwC partners Brian Kelly at 216-875-3121 or brian.kelly@ us.pwc.com or Thorne Matteson at 216-875-3441 or thorne.matteson@ us.pwc.com. Learn more at www.pwc. com/billionaire.
DAILY NEWS ALERTS FROM CRAIN’S Register for free e-mail alerts and receive: The Morning Roundup: The day’s business news from Ohio’s daily papers Breaking news alerts Daily headlines: Crain’s-produced news and blog items Real Estate Report: A weekly guide to real estate news. Published Monday. Health Care Report: A weekly guide of changes in the health care industry. Published Tuesday. Manufacturing Report: A weekly guide to Northeast Ohio’s manufacturing sector. Published every other Wednesday. Small Business Report: A weekly guide to small business news. Published Thursday. Shale and Energy Report: A weekly guide to the energy industry. Published Friday.
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TRENDS
Navigating the intricacies of LLCs and SE tax paid for the performance of said services. For the years at issue, the Limited liability company (LLC) management company treated members have long faced confusion each member’s distributive share regarding whether their distribuof earnings as if they were limited tive shares of income are partners, arguing that subject to self-employsince the wages reprement (SE) tax. Prior to sented reasonable compenthe use of LLCs, partners sation for each member’s were either general partservices, such members ners subject to SE tax on should be considered limtheir distributive share ited partners for any profits or limited partners whose allocated to them. share was specifically IRC Section 1401 exempted from SE tax. imposes tax on the selfSPEYER On Sept. 5, 2014, the employment income (net IRS issued Chief Counsel earnings) of individuals. Advice (CCA) that clarified the Self-employment net earnings is issue. the gross income minus certain The subject matter in the CCA deductions plus their distributive is a management company (a LLC share of income or loss (whether or taxed as a partnership) that mannot actually distributed) described ages a large family of funds. The in IRC section 702(a)(8) from a management company generally trade or business carried on by has full authority and responsia partnership of which he is a bility to manage and control the member. funds. Its members and employees The CCA analysis discusses two provide this service in exchange cases, Renkemeyer, Campbell, and for quarterly fees. All LLC Weaver LLP. V. Commissioner, members receive W-2s for wages 136 T.C. 137 (2011) and Riether
BY PAUL SPEYER
v. United States, 919 F. Supp.2nd 1140 (D. N.M. 2012). Renkemeyer involved a LLP that operated a law firm organized in Kansas. The court distinguished between a limited partner and a general partner, noting that a limited partner lacks the power to manage the entity; is immune from liability for the partnership’s debts; and can lose limited liability protection if he is engaged in the partnership’s business operations. The court concluded that the interest of the limited partner reflected more closely an interest of a passive investor and would not be subject to the SE tax on his distributive share of partnership income. In Riether, the District Court examined whether a husband and wife were subject to SE tax on their distributive shares from an LLC taxed as a partnership. The couple argued that since the LLC issued W-2s and K-1s, they were considered employees and income from the LLC was unearned income not subject to SE tax. The court was not persuaded and cited IRS rules that state members are
not employees of the partnership for SE tax purposes. Rather, they are self-employed individuals and should not receive W-2s. The CCA concludes that members of an LLC who provide services are not limited partners within the meaning of IRC Section
1402(a)(13) and are subject to SE tax on their distributive share of LLC income.
Paul Speyer, JD, LLM, is a Principal at Maloney + Novotny. Contact him at pspeyer@maloneynovotny.com.
is proud to join ACG in recognizing our longstanding clients
and the other 2015 Deal Maker Award Winners We are honored to have been legal counsel to Fairmount Santrol and Hyland since the beginning of their successful stories and congratulate them on their achievements in corporate and community growth. Calfee’s Corporate/M&A Group: Helping deal makers get deals done for 111 years. Calfee, Halter & Griswold LLP The Calfee Building 1405 East Sixth Street Cleveland, Ohio 44114 216.622.8200
Cleveland | Columbus | Cincinnati | Calfee.com
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BEST PRACTICES
Sharpening the HR focus on due diligence BY NAN ZIELENIEC When it comes to acquisition due diligence in the small to midcap sector, a sharp focus on human resource (HR) matters is critical. Any deal can be replete with HR challenges, which become evident from the initial management presentation through closing and into integration. Transactions and operations teams, attorneys and brokers regularly deal with HR matters, but do the matters always get the attention they deserve and are they always approached in the most practical way possible from an HR perspective?
continued ownership/board HR matters span the due involvement of former diligence checklist. Items owners, negotiated earnsuch as talent assessment, outs, integration challenges corporate culture, talent acof an add-on, compliance quisition/retention, layoffs/ matters unique to stock or severance, compensation, asset deals and separation benefits, executive agreeissues unique to a corporate ments and non-competes, divestiture. In a corporate financial processes (includZIELENIEC carve-out, you have specific ing payroll), risk matters and critical HR challenges (including pending employthat should be addressed early in the ment litigation and workers comdrafting of the purchase agreement. pensation), and union agreements For instance, you may be acquiring are all examined in due diligence. a staff that is initially ill equipped There are also diligence items that to handle many of the functions may not be readily identified as HR formerly handled by the parent but should be examined from an HR company. Couple this with the fact perspective. These items include
that often there isn’t the technology within the new portfolio company to independently operate the general ledger, pay the employees or even send an email. It pays to devote early attention to whether or not you need a transition service agreement or an employee leasing arrangement. All of the above matters have a meaningful financial impact on the deal and present unique challenges in managing the company from the beginning of the new ownership and often through the first quarter and beyond, depending upon how quickly the portfolio company can detach itself from the prior owner. Sharpening the HR focus on due
diligence will elevate many of the above matters from a mere check-off to strategic matters requiring careful planning and forethought. Early identification of these strategic items during diligence will accelerate the attention these matters receive during the integration effort, hopefully laying groundwork for a smooth welcome to the new portfolio company.
Nan Zieleniec has partnered with Resilience Capital Partners as its Senior Vice President of HR and also operates Zieleniec Consulting, LLC, an HR consulting practice based in Cleveland. Contact her at nzieleniec@resiliencecapital.com.
Understanding working capital impact on M&A deals BY MARK B. BOBER The way working capital is structured in any M&A deal can be an important consideration in the economics of the agreement. A typical deal is priced on a debt-free/cashfree basis, so that the seller retains cash and also pays off debt with the proceeds of the deal. This Net Working Capital (NWC) threshold or target is intended to protect the buyer and seller from manipulating working capital to the benefit or
operate the business. detriment of one party. Generally speaking, buyTypically, establishing an ers and sellers often begin NWC target is not outlined in by analyzing historical the Letter of Intent stage of working capital during a the deal. Rather, it is gener12- to 18-month period in ally addressed during the due order to establish a trend. diligence stage, once the buyer However, if the trend in has had a better opportunity to revenues reflects growth, analyze the appropriate level BOBER the expectation would be of working capital to be pegged that the required level of in the target. The spirit of the working capital would increase. And NWC target is for the buyer to receive if there are seasonal trends in reva business at a purchase price that enue, then the timing of the closing leaves adequate working capital to
could impact the NWC target. Another area to consider is the impact of debt-like liabilities on the NWC target. For example, if there is deferred revenue or customer deposits, this will need to be addressed, particularly given the typical deal is cash free (i.e. seller keeps cash). Therefore, the buyer has the obligation to deliver on the promised product or service but the seller retained the cash. This is one example of a consideration that needs to be analyzed with respect to NWC, and the extent to which if treated
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as debt-like, identifying whether it is at the full amount of the deferred revenue/deposit liability or only the cost to fulfill the obligation. Other obligations buyers and sellers must consider would include accrued bonuses, warranty claims and accrued/ deferred commissions, to name a few.
Mark B. Bober, CPA/ABV, CVA, CFF, is Partner and Practice Leader, Transaction Advisory Services for Bober Markey Fedorovich. Contact him at mbober @bmfcpa.com or 330-255-2425.
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McCarthy Lebit protects client interests in the purchase, sale, merger, consolidation and restructuring of businesses.
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Our sophisticated counsel allows clients to take advantage of opportunities while diminishing liability. Please call Michael Makofsky or Kenneth Liffman at 216.696.1422 to learn more.
Meaden & Moore’s Transaction Advisory Service professionals deliver quality, accuracy and speed in a complex mergers & acquisition market. Our Transaction Advisory Services include: Acquisitions & Divestitures | Due Diligence | Business Valuations Ownership Transition | Tax Consulting & Structuring
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Donâ&#x20AC;&#x2122;t overlook the importance of insurance review in M&A BY TOM KELSEY Due diligence during middlemarket acquisitions seldom involves a quantitative analysis of the target companyâ&#x20AC;&#x2122;s risks and exposures. Even a cursory review of insurance coverage is often an afterthought for well-seasoned dealmakers. But that afterthought carries a price. By precisely quantifying the KELSEY present value of future liabilities before closing, a good deal team can identify expenses that are routinely overlooked by the most ardent auditors. In some cases, they include deal breakers; and in most cases, pinpointing the precise value of future liabilities serves as additional leverage toward a more favorable purchase price.
A good deal team can identify expenses that are routinely overlooked by even the most ardent auditors. For insurance brokers that offer an insurance review, most limit their scope to property and casualty or employee benefits. An effective analysis must examine the complete picture, quantify the total cost through actuarial loss projections of future liabilities and then convert that total into a present-day value. The process begins with an extensive audit into policy issues such as coverages, provisions, terms and conditions, limits of liability, self-insured retentions, policy periods, retroactive dates, and exclusions. Items that frequently go unnoticed include unidentified product liabilities, distributor liabilities and vendor agreements, supplier contracts, and indemnifications â&#x20AC;&#x201D; not to mention potential litigation, environmental remediation and regulatory compliance. Middle market deals almost always include liability issues that require attention and need to be resolved or negotiated before closing. A more in-depth process gives buyers a greater sense for the target companyâ&#x20AC;&#x2122;s complete risk profile and helps the purchaser understand those future costs. Itâ&#x20AC;&#x2122;s an essential approach for any deal attorney, investment banker, middle market audit firm, private equity group or privately held middle market business. With a highly detailed report, these values play a very specific role at the negotiating table to resolve individual concerns, transfer risk and negotiate a final sale price. On the sell side, a good insur-
ance consultant can close exposure gaps, firm up contracts and package a companyâ&#x20AC;&#x2122;s liabilities in the same way that enables a firm to potentially realize a higher asking price. But again, the process needs to be thorough and quantifiable to the point that the values are indisputable at the negotiating table. Understanding the risks of
acquiring a company may seem basic, but unless the due diligence team takes a complete picture and places a precise value on those risks, the process may be of little value until itâ&#x20AC;&#x2122;s too late.
Tom Kelsey is Client Executive with Hylant. Contact him at Tom.kelsey @hylant.com or 216-674-2511.
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Ongoing Strategic Advisory
League Park served as financial advisor to Materion in connection with ongoing acquisition strategies
League Park served as financial advisor to Scott Fetzer in connection with ongoing acquisition strategies
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Identifying state and local tax exposures during an acquisition liability rules are often broader at the state and local levels. In addition, potenax due diligence often focuses on tial tax exposures for items such as sales the identification of tax and use tax can also be very high exposures at the federal since they are often calculated level. This is often approbased on a percentage of the proceeds priate due to the high federal tax as opposed to the income earned on rate imposed on underreported the transaction. income and the fact that major Tax due diligence should be contransactions are reported on the ducted for state and local taxes such WOOLLEY federal return. However, the as income, franchise, gross receipts, identification of tax exposures sales, use, property, payroll, and others. at the state and local levels can often be Some areas where tax due diligence is even more important since successor particularly important include: BY BOB WOOLLEY AND JULIE CORRIGAN
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Since our founding in 2001 we have maintained a consistent investment style that has gained national respect across various industries and business communities. Resilience Capital has invested in 41 companies under 23 platforms. It’s portfolio companies today employ more than 7,000 people in more than 20 states and collectively represent over $2 billion in revenues. Resilience manages in excess of $625 million for it’s global institutional investor base. We partner with organizations to help them achieve their full potential and embark on sustainable value creation.
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ENTITY TYPE Tax due diligence should be conducted to determine whether the entity is filing pursuant to its correct tax classification. For example, some entities are required to separately elect to be taxed as S corporations in a state. Some states impose entity level taxes on a pass-through entity even though the taxation of the entity passes through to its owners for federal tax purposes. The exposure for these entity level state taxes should be clearly identified since there is often successor liability for these taxes even in an asset transaction.
NEXUS One primary issue relates to whether the business or business owners have filed tax returns in every jurisdiction where they are required. The nexus issue is critical for tax due diligence since statutes of limitations often do not begin to expire until tax returns are filed. As a result, the tax exposure is often not limited to the target company’s most recent tax years. This question of nexus can be determined differently depending on the underlying tax involved. For example, the threshold to create nexus for sales and use tax purposes is often less than the threshold for creating a filing requirement for income taxes.
APPORTIONMENT METHODOLOGY Another issue often relates to whether a target company is apportioning its income appropriately between the states. Different states impose different apportionment rules depending on the nature of the underlying business. This can result in a company being taxed on more than or less than 100% of its total income.
SALES TAX
Another common area of concern that has the tendency to become a large exposure item is the non-collection of sales tax or the lack of proper documentation for exempt sales. Taxpayers should generally obtain exemption certificates from their customers to be relieved of the obligation to collect sales tax. When sales tax nexus exists, states require companies to collect and remit sales tax from their customers on the products (and sometimes services) they sell, unless
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an exemption exists. If a company fails to collect the sales tax from its customers, most states consider the tax to then be a liability of the seller.
TAX LIABILITIES When the assets of a business are sold, certain taxes may apply to the transaction itself and may become due within a short period of time following or even at the time of the transaction. A major component to transaction-based taxes is the sales tax on the transfer of assets. Generally, all sales of tangible personal property are subject to sales tax unless an exemption applies, such as the casual sale or resale exemptions. These exemptions should be investigated since they vary widely by state and usually have limitations for items such as titled assets. If a transfer tax applies, it is imperative to understand the different components within an asset transaction. Obtaining a valuation that itemizes the different assets included in the deal is often necessary in order to bifurcate the assets that may be subject to sales tax versus the assets that can clearly be excluded from a sales tax calculation. The buyer may be responsible for these transfer tax liabilities depending on the form of the transaction, contractual provisions, and the state involved. Performing tax due diligence for state and local taxes can assist the buyer in identifying the various exposures that may exist. Once an item of exposure is identified, it can be very challenging to quantify it, depending on the capability of the seller’s systems and processes. For example, the seller might not be able to extract the appropriate apportionment data if its systems have not been designed to capture this information at the point of sale. However, the buyer may be able to protect itself in negotiating the deal if the nature of the exposure is identified.
Bob Woolley is a Partner in the State & Local Tax Group for Plante Moran. Contact him at bob.woolley@plantemoran.com or 614-222-9160. Julie Corrigan is a Senior Manager in the State & local Tax Group. Contact her at Julie.corrigan@plantemoran. com or 216-274-6509.
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CORPORATE GROWTH & M&A
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M&A at the crossroads
derstand that a lawyer, accountant, or investment banker provides a critical skill set to every transaction setting. Much has been discussed Increasingly, however, being about the recent surge in the a “broker,” “scrivener,” or M&A market. The driv“bean counter” is not enough ers are easy: low interest either. Clients want someone rates, private equity, and who can solve their problems, slow organic growth. And drive the right outcome, and as a result, many M&A represent their best interests. professionals are swamped. This level of service requires a But the activity has been deep understanding of the eleuneven, and many other pro- DORSEY ments of a deal and your role. fessionals find themselves Ultimately, a client wants to underutilized and looking for close the deal, but not at any cost. solutions. Here are a few ideas. Pay your dues. Reputations in Get specialized. Finding an M&A M&A are built over time. Closed professional is as easy as performing deals lead to more deals. As they say, a Google search. Clients want to know “tombstones beget tombstones.” The who handled the last deal in their problem is that M&A is a cyclical industry, the key drivers of the deal, business and even the best M&A proand your knowledge of the key parties fessional struggles in the down times. in the deal. The most efficient way And in the good times, you have to to provide the right answers to these take full advantage of the opportuniquestions is to focus on an industry or ties presented, which means working a specialized service in M&A, like restructuring or ESOPs. Your specializa- long hours and handling tight deadlines. So, over time, only the people tion combined with your deal history that love the deal business stay in just might be the perfect fit when the the deal business. And those are the client calls. And clients and referral ones who are the most successful in sources will find you. good times and bad. Be a professional. Not everyone can be an industry expert, and not every Sean Dorsey is the founder and CEO client believes industry knowledge of League Park Advisors. Contact him is the only, and certainly not the dispositive, criteria for selecting an at sdorsey@leaguepark.com or M&A professional. Most clients un216-455-9990.
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www.glenmede.com Glenmede’s services are best suited for those with $5 million or more to invest. To learn more, please contact Linda Olejko at 216-514-7876 or linda.olejko@glenmede.com CLEVELAND • MORRISTOWN • NEW YORK PHILADELPHIA • PRINCETON • WASHINGTON, DC • WILMINGTON
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Is EBITDA the same as cash flow? BY JOHN NICKLAS
EBITDA is often used and confused as an approximation of operating cash flow. Business professionals and business owners should understand the differences between EBITDA and cash flow from operations within a business. Earnings Before Interest, Taxes, Depreciation, Amortization (EBITDA) is calculated by adding interest expense, income tax expense, depreciation and amortization expense back to net income. Operating Cash Flow (OCF) is a measure of the amount of cash generated by a companyâ&#x20AC;&#x2122;s busi-
A few comments about EBITDA before we continue:
The term EBITDA is used throughout the business community from valuation multiples to covenants in credit agreements. It is the standard metric in the business world when we want to discuss the performance of a business.
ness operations. Operating cash flow is important because it indicates whether a company is able to generate sufficient cash flow to maintain or grow its operations or whether the company may require external financing. OCF is calculated by adjusting net income for depreciation and amortization expense, changes to accounts receivable, changes in inventory and other working capital items.
The strength of EBITDA as a financial measurement is that it allows you to compare the profitability of different companies by canceling the effects of their capital or financing structure and tax entity structure. But keep in mind the EBITDA does not equal cash flow. Cash is still king (Sorry, LeBron)! A
{Elevate your view.} Sometimes the best solutions are revealed when you change your perspective. Working with our transaction advisory services team will lift you above the fray to gain the perspective you need to quickly evaluate and close deals. Building your best portfolio with advisors who understand your goal is
a higher return on experience.
Joe Adams, CPA, Partner 216.274.6503 | joseph.adams@plantemoran.com plantemoran.com
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business cannot survive without cash. In my opinion, the most obvious shortfalls of EBITDA as a measure of cash flow is that EBITDA does not NICKLAS (1) consider the increase (or decreases) in working capital accounts that may fluctuate when a business grows or shrinks and (2) it does not subtract capital expenditures that are needed to support production, especially in a manufacturing environment. Both EBITDA and OCF have their shortfalls as the perfect financial metric. EBITDA is, and will probably always be, the dominating business metric for evaluating the performance of a business. But keep in mind the EBITDA is not cash flow and that many other factors should be considered.
John Nicklas, CPA, is a Vice President in the Assurance Service Group at Meaden & Moore. He has more than 20 years of experience serving the accounting and business advisory needs of middle-market companies. Contact him at jnicklas @meadenmoore.com or 216-928-5373.
S-14 JANUARY 19-25, 2015
CORPORATE GROWTH & M&A
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Shareholder activism engagement
Contingent purchase price considerations: a few truths BY JOHN J. MCGUIRE AND PAUL F. HAFFNER
BY CHRISTOPHER HEWITT Like almost every panel that has tackled shareholder activism, the panelists at a recent seminar I attended scoped out the market trends, discussed analyzing a company’s defensive profile, suggested forming a defense team of lawyers, investor relations experts, and management, and otherwise discussed the classic defensive maneuvers that companies have used for years. Any discussion of engaging with the shareholder centered on negotiating with them to avoid losing more seats than would happen in a contested election. There is no question that there are some unscrupulous activist private equity and hedge fund investors out there. It’s probably even fair to say that the vast majority of activist funds operating in the first decade of this millennium were deservedly considered bad actors. Even those who were not patently bad actors were self-described, event-based funds with a clear agenda to have someHEWITT thing happen, and not just listen to management and agree that management was doing everything correctly. Thus, it is not surprising that most companies, when initially confronted with a shareholder accumulating a large position, are suspicious of the shareholder and its motivations. But times have changed. Today, many activists are investing vast sums of time and money to understand
the companies they invest in, are finding independent directors to serve alongside nominees that work for the funds — not just proposing the same slate for every company — and are suggesting creative strategic options to companies — not just the standard platform of distribute cash, buy back stock, divest assets or sell the company. It is now time for companies and their advisers to set aside their preconceived notions of the motivations driving activist private equity and hedge funds and to engage in meaningful dialogue with their investors. In this regard, the Morgan’s Foods and Fidelity National Financial situations present instructive vignettes about constructive company/shareholder dialogue. Of course, engagement between every company and activist investor is not guaranteed to produce similar results. In many cases, it may be that the strategic direction envisioned by the board is simply different from, or even diametrically opposed to, the views of the shareholder. In the first instance, however, both companies and activist investors need to engage with an open mind and a willingness to sincerely listen to the other before engaging in destructive, open warfare.
Christopher Hewitt is a Partner with Tucker Ellis LLP. Contact him at 216-696-2691 or Christopher.hewitt@tuckerellis.com.
DEAL MAKERS NOT DEAL BREAKERS
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Financing Transactions & Loan Workout
There have been thousands of pages written about “earn-outs” and other contingent payments of purchase price over the past year. Our goal is to outline a few simple truths, slanted slightly in favor of the seller. Truth #1: Earn-outs help get deals done. The popularity of earn-outs will ebb and flow, but the concept will remain a critical consideration in transactions in which the parties’ confidence in the target’s projections diverge (particularly when the “hockey stick” for sale is of relatively recent vintage). A recent study of private transactions identified earn-outs in 25% of all deals in 2012, compared with 38% in 2010, a decline apparently due to increased market confidence in projecting target’s revenues. The same study noted a reduced duration of earn-outs and enhanced leverage of buyers in their essential terms and conditions. Regardless of the trends, the concept will endure and a seller should be prepared for the discussion. Truth #2: Earn-outs can be copouts. Hindsight helps identify deals in which earn-outs were used to defer tough discussions about projected revenue and other seller expectations. Too often buyers and sellers agree to some basic feel-good contingent payment terms for a two- to four-year period post closing. Then comes the hard part. Once the language is tested in the following months and years, many sellers (and sometimes buyers) feel they have been slighted or abused in the deal. Insufficient negotiation, a willingness to trust the other side, and a belief that they can somehow control inherently uncontrollable things such as general economic forces and market conditions leave many sellers disgruntled and confused. This can, of course, lead to litigation or the use of dispute resolution provisions. According to one study, litigation ensues in more than 50% of cases in which an earn-out target is missed. Truth #3: Judges rarely impose their own interpretation of fairness. Courts are generally loathe to impose an obligation of good faith and fair dealing when the parties discussed and debated, but chose not to address, a factor driving the contingent payment. Both parties, particularly sellers, will benefit from tediously establishing clearly written procedures for all contingent payments and addressing any variables reasonably likely to come into play. Truth #4: Ground rules are good. Earn-outs bring new variables into the purchase price picture, most notably the impact of time on business operations. Make sure the formulas for contingent payments are clearly measurable and defined. Understand how generally applicable costs and expenses of the buyer such as SG&A are (or are not) to be allocated to the target business. Consider including
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MCGUIRE
HAFFNER
sample calculations — this is not a sign of drafting weakness. Establish a process for review/debate of the calculations and dispute resolution before litigation. Ensure separate books and records are maintained for the target business, and secure a right to audit them. If possible, establish a formal business plan for the duration of the earn-out. Agree up front on how the business will be conducted to reduce the almost-certain angst each party will feel as time moves forward and the second-guessing begins. Truth #5: Human beings will act in their own self-interest. With apologies to all of the saints out there, it does us good to remember we are battling human nature in this game. We like to play nice, but once it is postclosing and serious dollars are on the line, people will invariably be tempted to act in ways that suit their self-interest, especially if the language (as later interpreted by a new set of lawyers) gives them a defensible position from which to fire. The challenge is to remove the temptation of our fellow man to do evil by negotiating and drafting with counsel clear, measurable contingent payment formulas and ground rules in the definitive agreement. Truth #6: Assume the earn-out will come to nothing. A seller is well advised to close a transaction that only makes sense (financially and/ or otherwise) if the earn-out does not pay out a dollar. The ability of a self-interested buyer to manipulate results, the cost of auditing results and pursuing remedies, and general market risk create headwinds against which a seller must fight to achieve full realization of an earn-out. While an earn-out can break a tie between competing bidders, a seller should be mindful that his or her own irrational exuberance regarding the prospects may inappropriately elevate a secondtier bid over an all-cash offer. We suggest these truths to help guide transaction parties, and sellers in particular, as they navigate the minefields that can develop with earn-outs, particularly long after the closing. Earn-outs can creatively get deals done that otherwise would have cratered, but an ounce of prevention (or, more likely, several ounces) is most assuredly worth a pound of cure.
John J. McGuire is a partner in the Corporate practice group at Calfee, Halter & Griswold LLP. Contact him at 216-6228892 or jmcguire@calfee.com. Paul F. Haffner is a Senior Counsel in Calfee’s Cincinnati office. Contact him at 513-6934884 or phaffner@calfee.com.
WAITING ON THEIR PHOTOS
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CORPORATE GROWTH & M&A
JANUARY 19-25, 2015
S-15
M&A TRANSACTIONS
Early planning yields best results when selling a business BY JAKE DERENTHAL Planning is critical when considering the sale of a business if you want to maximize price and minimize risk and stress.
Assemble Team of Advisers
Business owners should engage outside advisers well in advance of any sale. Your team may include accountants, attorneys, investment bankers and estate planners. It’s helpful to start with people who know your business, but each should have experi-
ence facilitating transactions in your industry. Advisers who regularly counsel clients in M&A deals efficiently prepare and analyze documentation and provide owners insight into market terms.
Conduct internal analysis
numbers in hand, management should consider its reasons for selling and whether data shows such sale will achieve desired results.
DERENTHAL
After assembling your team, it’s time to evaluate the true value of your business. This process involves the review of financial performance, competitive strengths/weaknesses, and market conditions. With unbiased
It’s all in the details – how ‘small’ matters can greatly affect your transaction BY MICHAEL D. MAKOFSKY AND JACK M. KEGELMEYER When a business is sold, the owners typically realize a significant increase in wealth. However, many details must be addressed to achieve this result. Some issues are not always considered essential to operation, so the owner may neglect them. Yet, these seemingly small details can interfere with this important event in the business owner’s career. The following are a few examples to consider:
LIENS
It is crucial to not only identify liens on the company’s assets, but to establish a clear process for their release, including who will sign. For example, if a company has shareholder debt secured by real estate, but the mortgages are in the name of a deceased former owner and have never been properly assigned, then no one would be able to sign a release of the mortgages, which would delay the closing.
THIRD PARTY CONSENTS /CHANGE IN CONTROL PROVISIONS
Many contracts require counterparty consent prior to assignment or contain provisions allowing them to terminate if there is a change in control of the other party. Business owners don’t want to disclose the existence of a transaction too soon in case it does not close and it alters the relationship with a vendor or customer. However, the counterparty could demand concessions if asked too late. Therefore, the process of obtaining consent for the change in control needs to be managed carefully.
Organize due diligence
Most sellers are unprepared for the volume of files to be reviewed in a disposition. Start creating a data room early where documents are stored prior to outside disclosure. Materials to review include corporate, financial, tax, IP, material contracts, employee, benefit, and litigation records. With enough lead time, diligence can be collected without risking interruption caused when employees get wind of rumored transactions.
Tell your company’s story
“pitch book” that may be a formal presentation or simple summary with attached financial statements. In addition to highlighting positives, your book presents an opportunity to diffuse concerns that might raise buyer eyebrows. Before disclosing information to bidders, be sure they sign confidentiality agreements. While the non-disclosure agreement provides protection, savvy owners will disclose information in stages to protect trade secrets.
Select a buyer
Identifying the right buyer requires evaluation beyond purchase price. Sellers should investigate buyer background and performance, business synergies, sources and timing of consideration, tax implications, deal structure, and exposure to liabilities and indemnification.
Your next move is crafting a
Negotiate letter of intent
Once you settle on a buyer, key terms are documented in a letter of intent. Your letter of intent generally contains non-binding descriptions of structure and price with binding obligations regarding exclusivity and serves as the parties’ roadmap for negotiating definitive transaction agreements. Following these common sense steps will allow you to effectively navigate purchase agreement negotiation, transaction diligence and closing the deal to reap rewards from years of growing your business.
Jake Derenthal is a Partner in the business practice group of Cleveland-based Walter | Haverfield LLP, where he counsels clients on merger, acquisition, and financing transactions. Contact him at 216-9282933 or jderenthal@walterhav.com.
There’s no place like home MAKOFSKY
KEGELMEYER
INTELLECTUAL PROPERTY RIGHTS
That’s why we’ve called Cleveland home for over two decades
To learn more about Riverside’s strategies to grow companies with $1 million - $30 million in EBITDA, contact Cheryl Strom, Origination, at +1 216 535 2238 or cstrom@riversidecompany.com.
Does the company own its intellectual property? Large enterprises routinely require employees to sign invention, confidentiality and noncompete agreements that assign ownership of intellectual property created by the employee to the company and ensure that employees cannot “set up shop” down the street. It is important to know whether or not the business has these agreements in place before a prospective buyer has identified the issue because a lack of existing agreements creates intellectual property risks for a prospective purchaser. This can result in delays and additional costs, but most notably, the employee or buyer could have considerable leverage over the negotiations. In order to avoid these types of situations that can disrupt a large transaction, an attorney can help you perform a pre-sale due diligence to identify issues like these in enough time to rectify the situation and facilitate a smooth closing.
Michael D. Makofsky is Principal with McCarthy, Lebit, Crystal & Liffman Co., L.P.A. Contact him at mdm@mccarthylebit.com or 216-696-1422. Jack M. Kegelmeyer is Of Counsel with McCarthy, Lebit, Crystal & Liffman Co., L.P.A. Contact him at 216-6961422 or jmk@mccarthylebit.com.
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Te r m i n a l To w e r, C l e v e l a n d , O H 4 4 1 1 3
S-16 JANUARY 19-25, 2015
CORPORATE GROWTH & M&A
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Winning wisdom garnered from the Cavs for corporate buyers opportunities others are chasing, but also those less popular with hidden potential. Taking the path less traveled can lead to the greatest victory in the end.
BY JAYNE E. JUVAN AND ILIRJAN PIPA The hottest deal in Ohio last year occurred when Dan Gilbert signed LeBron James, the most sought after free agent in the NBA, to the Cleveland Cavaliers. Similar to the NBA, in today’s marketplace, the competition is intense for the best corporate deals. The availability of cash, low interest rates and overall positive economic conditions have contributed to the return of numerous bidders. What, then, can corporate buyers learn from the deal Gilbert and James struck that will help them close on an enviable transaction that everyone will be talking about for years to come?
CONSIDER CONTRARIAN APPROACHES Gilbert and James were both
JUVAN
DON’T LET THE PAST DERAIL THE FUTURE
PIPA
buyers — Gilbert added James to his roster, and James bought into the team and Cleveland. James took a contrarian approach, knowing that the path to a championship could be more difficult with the Cavs. But winning in Cleveland, a city with a 40-year drought, could cause James to be recognized as an all-time great who helped turn a city around. Similar to James, when looking at targets, buyers should review the whole range of options — the obvious
After James announced his “Decision,” Gilbert expressed bitter disappointment in an open letter. The two could have allowed their egos and emotions to get in the way of a new deal, but they put the past behind them. Corporate negotiations can also become heated, but parties should avoid letting insignificant disputes get in the way of a major breakthrough.
MAXIMIZE ECONOMIC VALUE
James struck a two-year deal
because a future television contract could increase the maximum value of players’ contracts. Similarly, buyers should consider pricing structures that mitigate risk and maximize benefit. For example, when parties do not agree on economics, buyers can negotiate earn-outs (contingent postclosing payments). With an earn-out, sellers could capture additional purchase price post-closing, but buyers only pay if the target achieves agreed-upon financial goals.
CRAFT A MEMORABLE DEAL ANNOUNCEMENT James used his “I’m Coming Home” announcement not only to inform the public of his decision, but as an opportunity to tell a compelling story to win hearts and minds. Corporate buyers should likewise use announcements to communicate their vision for the target and gain buy-in from the marketplace.
When you talk to a tax professional about a potential deal, we typically have a standard set of
opening questions: Are you buying assets or stock of the target company? Is the target a C corporation, an S corporation, or an LLC taxed as a partnership? What is the target’s
Getting to closing is difficult, but ensuring post-closing performance
footprint, i.e. where does the target have operations? These questions are critical for tax because they drive our planning for the transaction, both risk assessment and planning for the future.
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is aligned with expectations can be even harder. Cleveland hyped the first game with James, but the Cavs lost and experienced a four-game losing streak not long thereafter. Similarly, integrating corporate cultures can be difficult. Buyers should expect a few bumps in the road and begin planning to deal with them right away.
BEFORE THE INK DRIES, Jayne E. Juvan is a partner with FOCUS ON THE TEAM’S Roetzel. Contact her at 216-615-4837 DYNAMICS or jjuvan@ralaw.com. Ilirjan Pipa is an
Creating value through tax diligence BY RUSS DANIEL AND NICK FANOUS
CHRIS GRAYTHEN/GETTY IMAGES
DANIEL
FANOUS
Due diligence In a stock purchase, all of the target’s historic tax liabilities are part of the deal — you can’t leave them behind. On the other hand, in an asset purchase, certain tax liabilities may be “carved out” and left with the seller. An exception in this area is sales tax, which often attaches to the business regardless of the form of the transaction. If the target is a passthrough entity, such as an S corporation or an LLC, the income tax liabilities may be isolated to the sellers, but all of the non-income tax liabilities of the entity come with the target, so full due diligence is necessary. Two important items to note if the target is a C corporation or an LLC taxed as a C corporation: First, an asset purchase may not be negotiable, since it would trigger two layers of tax for the sellers. The buyer may have to purchase stock in order to make the deal economics work. Second, the target’s historic income tax liabilities are coming along in the deal, so a thorough due diligence plan is critical to identify historical risks and exposures. Even if the target has historically lost money, there are a number of unexpected ways in which the company might end up owing taxes.
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associate with Roetzel. Contact him at 216-820-4251 or ipipa@ralaw.com.
Understanding the target’s footprint helps to focus state and international tax diligence. Every jurisdiction is different, and while one state may exempt sales of certain products or services from sales tax, another may not. The complexity grows exponentially when you leave the U.S. shores. Many countries have tax regimes that are inconsistent with the U.S. Tax Code — and some countries view U.S. companies as fertile ground for audits.
Planning opportunities There are also planning opportunities to consider. If the target is a passthrough entity, you should try to secure a tax basis stepup, which will allow the buyer to shield future income with depreciation and amortization deductions. This is often a tricky negotiation, but in the right circumstances, it can create significant value for the buyer at minimal cost to the seller. For a larger deal there may be other structuring alternatives, including tax-free transactions and leveraged buy outs where the debt is placed in a favorable jurisdiction. Managing the tax exposures on a deal is complex, but with the right advisors and good information, you may create unexpected incremental value.
The complexity grows exponentially when you leave the U.S. shores. Many countries have tax regimes that are inconsistent with the U.S. tax code.
Russ Daniel is Managing Director — M&A Tax Services for Grant Thornton LLP. Contact him at 704-632-6809 or russ. daniel@us.gt.com. Nick Fanous is a Manager in the firm’s M&A Tax Services in Cleveland. Contact him at 216-858-3545 or nick.fanous@us.gt.com.
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JANUARY 19-25, 2015
S-17
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The importance of sell-side due diligence BY ANDY JENKINS
KEY BENEFITS
The value proposition and broader With a strong seller’s market, the role of acceptance of sell-side due diligence involves sell-side due diligence has never been more understanding sellers’ motivations and critical. Sell-side due diligence is adopting a buyer’s perspective to becoming more prevalent and more maximize investment value: widely accepted by the marketplace as a standard process to streamline deals. This process helps the seller to r Improves accuracy of the historiavoid surprises, maintain control of cal and projected financial information the process and minimize disruptions included in the marketing materials — preserving value and increasing the r Identifies adjustments that posiprobability of a successful transaction. tively impact EBITDA (i.e., potential The value of sell-side due diliacquirers only notify the seller of gence is optimized when working in JENKINS negative EBITDA adjustments) conjunction with investment bankers. There are distinct roles in the transacr Minimizes surprises and maximizes tion process, and when they are properly transaction value by adding credibility and defined and filled, the seller is much more objectivity to the process, including situalikely to fully understand the investment tions where a financial audit has not been thesis and maximize the investment value. completed
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The value of sell-side due diligence is optimized when working in conjunction with investment bankers. r Accelerates the buyer’s due diligence and the timing of the transaction, thus, reducing the risk of retrading r Assists with developing and positioning financial information for the carved-out portion of the business r Maximizes after-tax proceeds by addressing risks and using an optimal deal structure r Increases competition between buyers and reduces buyer negotiations post LOI Companies often think they can perform the necessary due diligence requirements in-house prior to a potential sale. However, companies with limited internal accounting and tax resources may want to engage outside specialists for an initial assessment to grade how well
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they are prepared for the transaction process. Having an independent sell-side due diligence report that is fair and balanced certainly brings more credibility to the transaction process. A comprehensive sell-side due diligence process helps a seller anticipate buyer concerns and satisfy expectations. It is a valuable tool to help ensure that the seller retains value, saves a significant amount of time in the transaction process and retains enough control of the process to ensure that a resulting transaction is advantageous for both parties, not just the buyer.
Nick Gruidl and Andy Jenkins are Partners with McGladrey LLP. Vipul Barbhaya is Director for McGladrey LLP. Contact Jenkins at 614-456-2801 or Andy.Jenkins@mcgladrey.com.
September 2014
A Signet Enterprises Company has acquired
Spectrum Orthopaedics Medical Center
Signet will develop and own the University of Florida Infinity Hall, a five-story, 97,000 square foot living learning center containing a 92-unit, 308-bed student residence hall and educational center for the Entrepreneurship Living Learning Community.
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S-18 JANUARY 19-25, 2015
CORPORATE GROWTH & M&A
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Many growth paths open to businesses Today’s low rate environment has created countless options for middle-market businesses looking to grow. Whether they want to access cheap debt or take advantage of the frothy M&A market, it JONES is an ideal time to focus on growing your business. The low rates won’t be around forever, so if you want to acquire a competitor, expand geographically, boost sales, improve production or otherwise invest in the growth of your company, you need to act quickly. Rates are expected to rise in 2015, and today’s favorable financing environment will soon be history. Companies that cannot access debt through traditional channels or that want greater access to capi-
tal and operating resources might consider finding a private equity partner. Private equity offers flexibility because a company can sell any portion of itself to access growth capital. Whether seeking a minority partner, majority owner or a total sale, there is likely to be a PE partner right for your company. The right private equity investor brings much more to the table beyond quick access to capital. Look for a partner that has the experience and expertise to add meaningful value to your business. Before agreeing to work with a firm, think about specific goals for your company and determine if this partner can help achieve them. For example, if you’re looking to build
a new production facility, acquire a competitor, or expand internationally, can the firm demonstrate effectiveness in these key areas? Once you’ve found a few candidates, judiciously vet them. Talk to people who have worked with the firms. Study their track record in your company’s industry and with similar growth strategies. Evaluate their scope and capabilities, and ensure you see a good fit from a personal perspective. If it all checks out, chances are good that your partnership will lead to growth for your middle-market company that might have been impossible to achieve without the private equity firm’s involvement. By carefully shopping around as you seek a partner, you’ll help ensure the right fit and a successful next chapter for your business. We may never see a better time to grow middle market businesses, so explore your options and don’t let the opportunity to cash in slip away.
Chris Jones is a Partner with The Riverside Co. Contact him at 216-344-1040 and cjones@riversidecompany.com.
Don’t forget the human side of human capital department”). The consultants failed to understand the debilitating impact the process would have Having worked on the human on the culture and morale of those capital side of hundreds of M&A who remained. transactions over the past 30 Once completed, the consulyears, I’ve learned it’s essential tants were just as quickly gone to have a clear understanding of (presumably to be unleashed onto employment and employee benefit a new transaction). Left in their obligations and liabilities wake was a workforce associated with the compaunable or unwilling to nies involved. This requires move forward. Needless careful due diligence and to say, the post-merger negotiations, and thoughtcompany continued to ful planning for the lose valuable employees integration and transition and underperformed. It steps necessary to ensure a took years to repair the successful transaction. Let’s damage caused by the face it, you will not have cost-cutting exercise. WIRTSHAFTER a happy and productive In retrospect, several workforce if your leaders lessons can be learned are not engaged and your benefit from their failure. plans are not smoothly functioning r You can’t always determine following the closing. But, there the value of your employees from is more to ensuring a successful a spreadsheet. Not enough attentransaction than simply managing tion was paid to understanding plans, reducing risk and ensuring who the real leaders and influenclegal compliance. ers were that drove the success A number of years ago, I of the companies prior to the worked on a transaction where transaction. two similarly sized multinational r Use surgical strikes rather than companies were being “merged.” carpet bombings. Employees know The employee and benefits issues who is not “pulling their weight” and involved were significant. No generally can move on when those question, redundancies existed employees are eliminated. between the two organizations. r Where possible, communicate The economies of scale created by directly and honestly; both with merging operations represented the employees being terminated a significant opportunity for cost and the ones being retained. savings and profit improvement. r Be fair. With this in mind, high-priced r Focus on creating/retainconsultants were engaged to ing the kind of company culture identify the cost-saving opportunineeded for success. ties. A horde of young consultants r Implement effective incentive descended on the companies and plans that focus key employees on reviewed every major function of moving forward. the operations. After considerable I relate this story not to pick on study, a report was produced with consultants but to remind those ina series of boxes showing where volved in mergers and acquisitions cost savings could be attained. The to never forget the human side of bigger the box, the more people human capital. that would be severed and the more savings attained. Surely, John Wirtshafter is an attorney in much thought went into who the Cleveland office of McDonald would be retained and who would Hopkins LLC and a Member of the be terminated. However, in some Executive Compensation and cases, the decisions were political Governance Practice. Contact him at compromises rather than strategic jwirtshafter@mcdonaldhopkins.com or (e.g. “If you let us keep our legal staff, you can keep your payroll 216-348-5833.
BY JOHN WIRTSHAFTER
Reason says: M&A is the right growth strategy.
twitter.com/grantthorntonus linkd.in/grantthorntonus youtube.com/grantthorntonus
Instinct says: buying smart is the right path to growth. At Grant Thornton we specialize in helping dynamic organizations execute transactions successfully. We bring a real, competitive advantage of a broad perspective, senior staff attention and short decision-making chains that our clients truly value. To help unlock your potential, visit grantthornton.com/deals “Grant Thornton” refers to Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. Services are delivered by the member firms. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another’s acts or omissions. Please see grantthornton.com for further details.
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JANUARY 19-25, 2015
M&A TRANSACTIONS
Private company valuations are heading higher BY ROBERT BRUML AND ANDREW GELFAND Private company owners frequently question, “When is the right time to sell a business?” Today’s low interest rates and ample liquidity have generally increased the value of private companies and this environment presents attractive sale opportunities for company owners. With the supply of capital flowing into the coffers of private equity firms and other financing sources exceeding the availability of opportunities, the supply/demand imbalance favors the business owner. Moreover, private equity has flowed well beyond the core industries in Northeast Ohio to include BRUML almost all areas of the economy, including health care, business services, media and technology. If you think your company is too small, it may complement an GELFAND existing platform company owned by a private equity firm. If you are reluctant to sell the entire business, you may consider a “minority recapitalization” with private equity or an alternative lender that can provide liquidity without a change of control. Strategic buyers also have aggressively reentered the acquisition market to complement organic growth. Today’s economic environment is conducive to meeting your financial goals. With low interest rates and robust financing markets in place, company owners should examine strategies to enhance the value of their companies. Some of the value drivers and strategies to consider for both a sale or recapitalization include:
The present timing, however, offers a unique opportunity for private owners to achieve liquidity at favorable values. Having a proactive and experienced M&A advisory firm should be part of your “value added” planning if you are considering a sale or financing.
Solutions Realized Whether your business has plans to grow from within, make acquisitions, or recapitalize, one thing is clear: It’s critical to have a knowledgeable banking partner in your corner. That’s why businesses depend on FirstMerit Bank’s expertise in Business Credit and Sponsor Finance to help turn their plans into success. As a preferred capital provider for private equity groups, we’re here to listen, to learn, and to understand your business and your goals. Let us show you why these great companies chose FirstMerit Bank.
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A portfolio company of:
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r Present financial results that
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Robert Bruml is President of Bruml Capital Corp. Contact him at 216771-6660 or bob@brumlcapital.com. Andrew Gelfand is Senior Vice President of Bruml Capital Corp. Contact him at 216-771-6660 or andy@brumlcapital.com.
Ap ortf ort tfol folilio io company compan com p y of: pan of: f: portfolio
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Joe Kwasny, Senior Vice President, Business Credit, at 330-849-8736 or joe.kwasny@firstmerit.com. Jacqueline Hopkins, Managing Director, Sponsor Finance Group, at 312-429-3618 or jacqueline.hopkins@firstmerit.com.
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Eventually interest rates will rise and there will be a pullback.
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CORPORATE GROWTH & M&A
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Expertise Pays Off For more than 80 years, we have helped middle THYRL[ JVTWHUPLZ HJOPL]L ÄUHUJPHS Z\JJLZZ -PUHUJPHS [H_ 0; HUK VYNHUPaH[PVUHS K\L KPSPNLUJL 7\YJOHZL HJJV\U[PUN JVUZ\S[H[PVU ;H_ Z[Y\J[\YPUN + Risk assessment/risk mitigation (\KP[ [H_ HUK HK]PZVY` ZLY]PJLZ 3L[ V\Y RUV^SLKNL L_WLYPLUJL HUK L_WLY[PZL IL HU HZZL[ [V `V\Y JVTWHU`»Z VWLYH[PVUZ THUHNLTLU[ HUK ZOHYLOVSKLYZ
As deals rev up, be aware of risks BY JIM HILL As deal activity picks up significantly, auction processes become much more costly as it relates to enterprise value. Given the abundance of funds with both strategic and financial buyers, and the lack of expense of debt with unregulated lenders willing to loan as much as six times EBITDA for an acquisition, buyers and sellers face many risks:
BUYER RISKS
1
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If engaged in an auction process, you must show significant expenditures on diligence, industry knowledge, etc. or you will never advance to the second round.
2
If you have a financing contingency, you need to produce significant commitment letters for the equity (if you are not a committed fund) and mezzanine and senior debt.
3
Perform background checks on all managers and owners.
4
During diligence, attack highest risks (regulatory and legislative) first.
5
Spend as much time as you can with management and get to know their reputation in the industry.
6
If you have a “proprietary deal,” make sure someone is pushing to get the seller to sell. Without an ibanker pushing, it is risky.
SELLER RISKS
1
Do your own quality of earnings check (preferably an audited one) so your financials and EBITDA do not get picked apart.
TMA Ohio Chapter announces 2014 award winners!
We congratulate Lee D. Powar, partner at Hahn Loeser & Parks LLP, winner of the 2014 Lifetime Achievement Award.
We congratulate the winners of the 2014 Turnaround of the Year Award (from left to right) Scott Opincar (Outgoing Chapter President), Sally Barton (Incoming TMA Chapter President), Terry Humphrey, Bob Cohen and Jerry Norton.
We thank Lee for his leadership and the contributions that he has made both in the turnaround industry and in our community.
We are proud of the achievements of these members and celebrate their specific accomplishments with this year’s awards. Thank you for your contributions to the Turnaround Management Association.
Crain’s Cleveland Business Custom Publishing
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CORPORATE GROWTH & M&A
JANUARY 19-25, 2015
M&A TRANSACTIONS
2
You must have a strong managerial infrastructure. One-man bands get very low valuations unless selling to a strategic buyer.
3
If you are not going with an ibanker (not a great move) then make sure you arenâ&#x20AC;&#x2122;t pre-empted by a bidder that will drag you through the mud and chop your enterprise value.
4
Know key growth benchmarks in your industry â&#x20AC;&#x201D; percentage of EBITDA to revenue â&#x20AC;&#x201D; so you know how your company compares.
5
Have your ibanker check the bidders for â&#x20AC;&#x153;retraders,â&#x20AC;? provide a draft of the purchase agreement and find out which bidders historically overleverage a business. If you remain a manager/owner post-close that will have a big impact on how you run the business.
6
If you roll over equity, remember you donâ&#x20AC;&#x2122;t get to put it back into the company if you are no longer with the business.
7
Make sure the buyer knows your industry, is spending significant diligence money and that you are more or less guaranteed â&#x20AC;&#x153;certainty of close.â&#x20AC;? Deals take longer to close since prices are higher, thus making risks higher. And, now we are seeing lenders bring in their own diligence teams on regulated industries. It has become a very fast and arduous track.
Jim Hill is partner and executive chairman of Benesch and chair of the firmâ&#x20AC;&#x2122;s Private Equity Group. Contact him at jhill@beneschlaw.com or 216-363-4444.
Given the abundance of funds with both strategic and financial buyers ... buyers and sellers face many risks.
Crain
20 1 5
F oc u s
on:
THE MIDDLE MARKET Middle market companies face a different set of challenges once they hit a certain level. These six sections, along with Crainâ&#x20AC;&#x2122;s Middle Market Report e-newsletter, will focus on this stage of business growth. Issue date: 2/9 Ad close: 1/29
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Crain's Middle Market Report is a free e-newsletter delivered on the second Tuesday of each month.
Register today at CrainsCleveland.com/Email For advertising information, contact Nicole Mastrangelo at 216-771-5158 or nmastrangelo@crain.com.
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SUCCESSION PLANNING
The Power of Charity in Succession Planning smart and meaningful ways. Many owners find the DAF enables them the opportunity to ensure the same In the discussions that sense of enduring signifiowners of closely-held busicance as a private foundaness have with their trusted tion but without the labor advisors, two important and and oversight that private interrelated questions about foundations require. Furbusiness succession planthermore, they can offer a ning are primary: “What level of privacy that is not is the best strategy for my available in the public tax exiting the business?” and filings of a private founda“How can I get the most tion. MALONE financial and tax benefits from that exit?” Business owner benefits In more enlightened discussions, business owners and their advisors Because DAFs are sponsored go beyond the personal self-interest by public charities, gifts of closely of taxes and net proceeds and held stock, real estate, or other astouch upon the owner’s sense of sets qualify for the highest benefits significance: “How can I take a available, including: portion of these proceeds to make r Immediate and maximum my world a little better? How can income deduction I ensure that my life’s efforts have r No capital gains on gifts of made a difference? How can I be long-term appreciated stock or certain that my success won’t alter other property my children’s values?” r No estate taxes A donor advised fund (DAF) is r Reduced alternative minimum that point of intersection where tax or possible avoidance of net the owner’s personal and social investment income tax interests intersect in simple, taxr Tax free growth
BY LAURA MALONE
Different hats. Same heads. SS&G Transaction Advisory Services is proud to join BDO The TAS team is thrilled to add the resources of one of the world’s elite accounting and consulting organizations to the deep personal attention we provide our clients here in Ohio and throughout the country. More than ever, we stand ready to serve all your transaction needs – across industries, and in more than 150 countries around the world.
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Accountants and Consultants www.bdo.com © 2015 BDO USA, LLP. All rights reserved.
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SUCCESSION PLANNING Maintaining control Savvy business owners understand the difference between ownership and control of a business. When the owner elects to gift non-voting shares or a minority interest in the business, the owner maintains majority control.
Impact on the deal In most cases, gifting the shares to the DAF and the subsequent transition of those shares to the buyer can take place without slowing the transaction process. Because the gift must be made before any formal, legally binding agreement to sell or merge the company, most buyers hardly notice the DAF charity’s involvement in the transaction. Professional legal/tax advice is necessary to avoid IRS challenge of these favorable tax benefits. However, thanks to the simplicity and cost-effectiveness of DAFs, owners now have a meaningful way to ensure that they will be remembered over successive generations.
Laura J. Malone, CAP, CEPA, is director of gift planning at the American Endowment Foundation. Contact her at 877-599-8903 or email lauramalone@aefonline.org.
Is your family business ready for what comes next? helpful way to guide succession planning discussion. The board can be made up of family members and trusted advisers — but be aware that situaAs a family business owner, you are dedicated to tions where boards are completely internal seldom planning for the success and growth of your busiwork well, as too often no one is comfortable speakness. But ironically, one of the most important steps ing up. Bring in bankers, lawyers, or other people you need to take is to prepare for a time when you with expertise and experience in your no longer sit at the head of the table. industry. Although an advisory board Succession planning should start with doesn’t have true decision-making authorcommunication — and not just about ity, they are able to provide valuable input the business. Members of a family busiand suggestions for the direction your ness need to discuss life goals and what family business can and should take. they want to achieve both professionally A trusted friend can also help serve and personally. Whether your plan is to as an adviser —– and can sometimes be create a legacy by donating to a univerjust the person needed to remind you sity or to pass leadership and ownership that your decisions and actions impact MCRILL along to the next generation, knowing not only the business, but your famwhat you want to do with the rest of ily as well. Too often family business your life and how much it will cost gives you an owners pour 100% of themselves into their idea of the direction your family business needs business and ignore the family aspect; this can to take. And communicating that direction with be a tragic mistake should a sudden crisis hit everyone involved is vital. with no succession plan in place. It is important Sometimes it helps to have someone coordinate to consider your spouse and next of kin and the the often difficult succession planning conversaburden they would have to shoulder in the case tions that need to take place between family of a debilitating injury or sudden death. The members. Having a trusted family business quaroptions your family may have with the business terback who can take the lead and be an honest, and with the wealth you’ve accumulated are fair moderator can alleviate a lot of stress and limited if there is no plan in place. tension. A trusted lawyer, banker, or accountant When it comes to the actual succession plan, can not only provide impartial judgment but also there is a laundry list of options to consider. An suggestions for qualified experts or advisers who obvious choice is to keep the business private can help guide the business to where it needs to and in the family by passing ownership and be for successful succession to occur. leadership to the next generation. This involves More formal than just having a family business evaluating the experience, skill sets and the quarterback, an advisory board is sometimes a desire to own and operate a business to identify
BY SCOTT MCRILL
Crain’s Cleveland Business Custom Publishing
who in your family might be ready to take over. Another option is to bring in employees from outside the family to fill key roles (CEO, CFO, etc.) to run the business. You could also consider selling the company to a third party. The most common option, however, is to seek out an investor. Partnering with a financial investor — whether private equity, individual, or family office — can ease the transition as you take your family business to the next level. If the decision is ever made to sell your family business outright, it is important to surround yourself with a quality team of advisers who can help you understand what your business is realistically worth. It is also important to understand what you need to sell for to achieve your life goals, not what you want to sell for due to the common emotional attachment to the business, while keeping in mind the difference between the gross sales price and net cash takeaway. That way you won’t miss out on an opportunity by holding out for a price that is unrealistic. Some owners are surprised when they realize they don’t need quite as much as they thought to achieve their goals, while others might realize they have more planning to do before they sell. The facts and circumstances all circle back to having a plan of what your life goals are and where you want the business to go. If you plan properly and surround yourself with good advisers, you will know what your business is worth all along.
Scott McRill, CPA, is a Partner in Transaction Advisory Services for BDO USA. Contact him at 216-325-1700 or smcrill@bdo.com.
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SUCCESSION PLANNING
Critical pre-sale considerations: Are you the well-planned event or shotgun wedding type? BY DAVID DUNSTAN
STAND OUT FROM THE COMPETITION. We match your objective with our expertise. Through strategy and research, content creation and multimedia distribution, Crain Content Studio will help you deepen relationships with your target audience.
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The sale of a business often ranks among the most significant decisions someone will ever make. Getting married, having children and other family matters usually sit at the top of the list, but the decision to sell one’s business isn’t far behind. Rightfully so, these lifeDUNSTAN changing events often garner significant thought and preparation before commencement. However, we have found that business owners too often initiate a sale or merger transaction without any such planning or preparation, which usually and unfortunately results in a less than optimal outcome. Adhering to the following recommendations will ensure you put your best foot forward when contemplating a sale or recapitalization of your business:
r Align shareholder and management interests because this process is far too demanding to have dissenting voices
r Develop a strong management team fully capable of running all aspects of the business r Consider implementing an advisory board and establish the discipline of reporting quarterly results r Develop a sophisticated finan-
cial reporting capability, including audited financials, timely monthly closing processes, three-year forecasts (revised annually) and regular tracking of budget to actual results
r Identify and track financial add-backs (non-recurring/unusual or one-time events) in a detailed manner and keep documentation readily available r Regularly develop and monitor a business plan, competitive landscape and industry trends r Consider best potential buyers, including an understanding of the issues and strategic fit if you decide to approach corporate strategic buyers r Consider spinning-off unattractive or non-core assets
r Hire a reputable law firm with significant M&A and tax expertise r Obtain proper contracts with employees, customers and vendors and register all intellectual property r Resolve any material outstanding litigation r Evaluate personal financial matters with a sophisticated wealth advisor to maximize proceeds post-transaction r Engage an investment bank with significant M&A experience and deep industry knowledge relative to your business Though no guarantee of success, incorporating these considerations into your planning process positions you to achieve the best possible outcome. For those of you who prefer the shotgun wedding at a roadside chapel in Vegas, disregard the advice above, roll the dice and good luck.
David Dunstan is a Managing Director for Western Reserve Partners LLC. Contact him at 216-589-9530 or ddunstan@wesrespartners.com.
GLOBAL TRANSACTIONS
Don’t buy an FCPA problem in an overseas deal
FOCUSED ON WHAT MATTERS TO YOU
BY JUSTIN ROBERTS AND SEAN PURCELL
In a sea of complicated legal issues, it’s easy to lose perspective. Clients ask us to help them see the big picture and handle the details. Our knowledgeable and accomplished team offers solid advice and innovative solutions to your most complex problems, allowing you to focus on building your business.
1375 East Ninth Street One Cleveland Center, 9th Floor Cleveland, OH 44114 216.623.0150 CHICAGO · WASHINGTON, D.C. · CLEVELAND · TOLEDO · AKRON COLUMBUS · CINCINNATI · ORLANDO · FORT MYERS · NAPLES FORT LAUDERDALE · TALLAHASSEE · NEW YORK
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American companies contemplating the acquisition of an overseas entity can reduce their subsequent risk of becoming the subject of a Foreign Corrupt Practices Act (FCPA) investigation by conducting the appropriate amount of due diligence before completing the transaction. The scope of due diligence will be based on factors such as the size of the enterprise, the risks associated with the acquisition target’s industry and the countries with and in which it does business. Efforts should be tailored to the identified risks and it is critically important that the acquiring company does not just employ a “check the box” approach to its due diligence. The old saying goes that the best defense is a good offense. If a company has the misfortune to be ensnared with an FCPA issue related to the pre-acquisition conduct of the target entity, it can point to the fact that it took all appropriate steps that could be reasonably expected. The Resource Guide to the U.S. Foreign Corrupt Practices Act, released by the Department of Justice and SEC in late 2012, notes that the government may decline a post-acquisition FCPA enforcement action if the ac-
ROBERTS PURCELL quiring company (assuming it wants to continue with the transaction) can demonstrate that it:
r Conducted appropriately tailored due diligence r Trained the relevant personnel at the newly acquired entity on FCPA issues r Ensured that the acquiring company’s compliance program and internal anti-corruption controls were applied to the newly acquired company, and r Perhaps most importantly, identified and disclosed to the government any corrupt conduct identified during the pre-acquisition review For this reason, among others, any due diligence plan must be put in writing and all the findings should be documented for future use. The due diligence plan should include: r A request for documents
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r A review of accounting records r Appropriately tailored ques-
tionnaires completed by relevant employees r A review of the target company’s anti-bribery training or compliance plans r Interviews of the target’s company’s compliance staff and accounting department, and r Interviews of sales staff regarding sales that are identified as having a higher risk for corruption
Risk factors to look for include historic corruption in the country or region where the target company conducts business, government contracts the target company may have and its use of third parties such as sales agents and intermediaries. If there is not enough time to review every payment or sale, the due diligence should include a well-documented testing of sample transactions that have been identified as having higher levels of risk. While no due diligence plan can guarantee that a post-acquisition FCPA issue may not arise, dedicating the resources to conduct tailored due diligence on the front end of the transaction can decrease the risks of buying a much more costly FCPA problem after the transaction has closed.
Justin Roberts is a Partner in the Vorys Cleveland office and a former assistant U.S. attorney. Contact him at jjroberts@ vorys.com. Sean Purcell is a Partner in the Vorys Washington, D.C., office. Contact him at mspurcell@vorys.com.
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GLOBAL TRANSACTIONS
GLOBAL M&A ACTIVITY RETURNING TO PRE-RECESSION LEVELS BY ANDREW K. PETRYK Globalization is a leading driver of M&A activity in what is rapidly becoming a borderless world. Buyers are aggressively pursuing international acquisitions to fasttrack entry to new geographies, stay close to customers, and gain better domestic market access in those regions. Renewed interest PETRYK is filtering down to the middle market, where niche companies that can bring technology and capability expansion to advance innovation are in high demand. Cross-border transaction volumes have reached levels not seen since before the financial crisis. Global middle market deal activity (defined as enterprise values between $25 million and $500 million, Capital IQ) in 2014 increased 14% over prior year levels in both deal volume and value. Leading industries included Financial
Services (40% of deal volume), Consumer Products (15%), Industrials (9%), and IT (8%). The most active countries by target companies acquired included the United States (30% of deal volume), China (16%), and the United Kingdom (9%). Valuation multiples are rising with the median EBITDA multiple ticking up to 9.9x, the highest level since 2008. Foreign investors are setting sights on the United States, which remains attractive for acquisitions given its relative economic position, low energy costs, and reshoring movement, which are fueling a renaissance in the manufacturing sector: r The Institute for Supply Management projects higher growth for both the U.S. manufacturing and non-manufacturing sectors in 2015. r U.S. middle market companies have experienced a healthy rebound in the economic recovery and have proven their staying power, with revenue growth outperforming the broader market according to survey findings from the National Center for the Middle Market. Sixty-four percent of middle market companies (annual revenue between $10 million and $1 billion) expect revenue to increase in the next 12 months.
middle market business. By enlisting a trusted advisor with the capabilities and resources to manage a global sale process, the end goal will be to maximize the value for your business.
r Higher levels of uncertainty in other global markets will also drive investment capital to the United States. We anticipate a healthy level of crossborder activity continuing into 2015. According to findings from a Baker & McKenzie survey released this June, more than a third of the 350 companies interviewed reported planning to pursue another cross-border deal in the next two years. Eighty-six percent of the respondents deemed their recent crossborder M&A transaction a success. Depending on specific company and industry dynamics, an international buyer may represent the best alternative to fully exploit the growth opportunities available to a
Andrew K. Petryk is Managing Director and Principal of Brown Gibbons Lang & Co. LLC (BGL) and member of Global M&A Partners (GMA), where he co-heads the Industrials practice. Contact him at apetryk@bglco.com or 216-241-2800.
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For more than 28 years, we’ve helped hundreds of business owners
conceive, initiate, structure, and close M&A and financing transactions. Call BCC for expert sell-side advisory, buy-side advisory, and valuation services.
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Suite 1620 Cleveland, OH 44114 Phone (216) 771- 6660 Fax (216) 771- 6673 Robert W. Bruml Andrew S. Gelfand James R. Deitzer Crain’s Cleveland Business Custom Publishing
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Mark B. Bober, CPA/ABV, CFF, CVA Partner, Practice Leader, Transaction Advisory Services bmfcpa.com • 330.255.2425
DATE EVENT
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19th Annual Deal Maker Awards
Cleveland Convention Center
FEB. 10
Philip Fracassa EVP & CFO Timken joint event with FEI Young ACG Lunch & Learn Breakfast meeting (Speaker TBA)
Union Club
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InterGrowth Waldorf Bonnet Creek, Orlando Richey Piiparinen, The Rustbelt Union Club Roars Back, Cleveland State University
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Calfee, Halter & Griswold
MY BENESCH “Benesch 100% understands the commercial side of business and what it takes to put a deal together. It can’t be all one-sided; it has to be fair and equitable for both parties and ‘at market.’ Benesch does enough deals in enough different industries that they understand what ‘at market’ means. They never drag their feet on anything.” J.J. GROW, CEO Verdesian Life Sciences
Power comes from being understood.® When you trust the advice you’re getting, you know your next move is the right move. That’s what you can expect from McGladrey—a partner with the in-depth experience to help private equity firms and strategic buyers optimize their investments. And one that can bring your organization global capabilities with a local touch. That’s the power of being understood. To learn more, contact Mark Brandt at 216.522.1124 or visit www.mcgladrey.com.
MY TEAM
Verdesian Life Sciences is an agribusiness focused on healthy growth—but it’s also a from-the-ground-up venture in its own right. With counsel, encouragement and critical connections from Benesch’s corporate team, and in collaboration with Paine & Partners, a private equity firm focused on agribusiness, J.J. was able to conceive and start up the business via acquisition and is continuing to build its portfolio and international footprint. From identifying opportunities and closing deals to protecting intellectual property and handling employment and other day-to-day business matters, Benesch is helping Verdesian reach new heights. To learn more about our relationship with Verdesian Life Sciences, visit beneschlaw.com/myteam Cleveland • Columbus • Indianapolis • Philadelphia • Shanghai White Plains • Wilmington • www.beneschlaw.com
© 2015 McGladrey LLP. All Rights Reserved.
Featured team (left to right): LESLIE A. DROCKTON, KEVIN D. MARGOLIS, TAMAR GONTOVNIK, LISA M. KIMMEL, LINDSEY ROTHROCK, RICHARD F. TRACANNA, T. TED MOTHERAL, JAMES M. HILL, PETER K. SHELTON, JOSEPH N. GROSS, MAYNARD A. BUCK © 2014 Benesch Friedlander Coplan & Aronoff LLP
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ACG CLEVELAND | 2014-15 OFFICERS AND BOARD OF DIRECTORS
Board of Directors Officers PRESIDENT Murad A. Beg Linsalata Capital Partners PRESIDENT ELECT David D. Dunstan Western Reserve Partners
Kevin W. Bader M & A Professional Rudolf Bentlage JP Morgan Chase Denise Carkhuff Jones Day Elizabeth Evans Republic Steel Guy C. Fabe Parker-Hannifin Corp. James M. Hill Benesch, Friedlander, Coplan & Aronoff LLP (Trustee Emeritus) Brian Kelly PricewaterhouseCoopers Raymond Lampner BCG & Co. Brian Leonard BKD CPAs & Advisors
Randolph D. Markey Global X James P. Marra Blue Point Capital Partners Sean P. McCauley RBS Citizens Albert Melchiorre MelCap Partners LLC Trent Meteer TriState Capital Bank Wendy S. Neal Brown Gibbons Lang & Co. Peter Shelton Benesch, Friedlander, Coplan & Aronoff LLP
Bertrand Smyers New Heights Research Dale Vernon Bernstein Global Wealth Management Theodore Wagner Bober Markey Fedorovich Rebecca White Western Reserve Partners Douglas K. Winget FirstMerit Bank Thomas Zucker EdgePoint Capital Advisors
EXECUTIVE VICE PRESIDENT, BRAND Brad Kostka Roop & Co. Strategic Integrated Communication
Award Program Nomination Deadlines
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Visit CrainsCleveland.com/Nominations or contact Kim Hill at kehill@crain.com
EXECUTIVE VICE PRESIDENT, RESOURCES Joseph F. Maslowski Roetzel & Andress LPA
Who to Watch in Nonprofits
Forty Under 40
Crain’s Cleveland Business continues its series of “Who to Watch” sections in 2015.
A tribute to the next generation of young rising stars who have taken a leading role in our business community.
Issue Date: February 16, 2015
Event Date: November 23, 2015
DEADLINE: JANUARY 12, 2015 (12PM)
DEADLINE: JUNE 1, 2015
TREASURER Joseph C. Adams Plante Moran
CIO of the Year Awards Event Date: April 14, 2015
Crain’s 52 Fastest-Growing Companies
SECRETARY M. Joan McCarthy MJM Services
Crain’s honors the standout chief information officers who lead the technology strategies and vision of Northeast Ohio’s businesses, institutions and non profits.
Find out which companies are on the fast track when Crain’s ranks the 52 fastest-growing privatelyheld companies in Northeast Ohio.
IMMEDIATE PAST PRESIDENT Karen L. Tuleta Morgenthaler Private Equity
DEADLINE: FEBRUARY 2, 2015
DEADLINE: JUNE 22, 2015
Health Care Heroes heroes Event Date: Week of May 11, 2015
CFO of the Year Awards
Health Care
Event Date: Week of October 19, 2015
Renowned the world over for ground-breaking medical research and treatment, Northeast Ohio’s distinguished health care and wellness professionals are honored by their peers and business community.
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 from law, accounting, investment banking and other firms that provide advisory services. Founded in 1954, ACG is a global organization with 57 chapters. Learn more at www.acg.org. ACG Cleveland serves professionals in Northeast Ohio and has nearly 500 members. For more information, please visit www.ACGcleveland.org
Event Date: Week of November 2, 2015
A salute to the region’s top fiscal officers whose strategic leadership helps shape their organization’s financial success. NE Ohio’s only program dedicated to honoring the contributions and accomplishments of CFOs.
DEADLINE: FEBRUARY 27, 2015
women of
Note
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Women of Note
General & In House Counsel Awards
Event Date: Week of July 20, 2015 Crain’s honors the dedication and achievements of Northeast Ohio’s top female business leaders who enrich our region with their professional talents and unique perspectives.
Event Date: Early December 2015 GENERAL AND IN-HOUSE COUNSEL
SEMINAR & AWARDS
DEADLINE: MARCH 30, 2015
Archer Awards Achievements in Human Resources
Event Date: Week of August 10, 2015 A tribute to Northeast Ohio’s leading human resources professionals who consistently “hit the mark” by building companies with the best people, talent, development and culture.
Awards are presented to the best legal minds in Northeast Ohio’s public, private, nonprofit and government organizations.
DEADLINE: AUGUST 21, 2015
Who to Watch in Manufacturing Issue Date: September 28, 2015
Crain’s Cleveland Business continues its series of “Who to Watch” sections in 2015.
DEADLINE: AUGUST 24, 2015 (12PM)
DEADLINE: MAY 1, 2015
Who to Watch in Technology Issue Date: June 22, 2015
Crain’s Cleveland Business continues its series of “Who to Watch” sections in 2015.
DEADLINE: MAY 18, 2015 (12PM)
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Who to Watch in Marketing / Creativity Issue Date: November 30, 2015
Crain’s Cleveland Business continues its series of “Who to Watch” sections in 2015.
DEADLINE: OCTOBER 26, 2015 (12PM)
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DEALMAKER AWARDS
Top deal makers to be honored at ACG Clevelandâ&#x20AC;&#x2122;s 19th annual Deal Maker Awards ACG Cleveland, Northeast Ohioâ&#x20AC;&#x2122;s preeminent organization for merger and acquisition and corporate growth professionals, will recognize the winners of its 19th Annual ACG Cleveland Deal Maker Awards at 5:30 p.m. Thursday, January 22, at the Cleveland Convention Center. The Deal Maker Awards honor Northeast Ohioâ&#x20AC;&#x2122;s top corporate deal makers for demonstrated success in using acquisitions, divestitures, financings and other transactions to fuel sustainable growth. The 2015 Deal Maker Awards winners are:
SIGNET JEWELERS LIMITED On May 29, 2014, Signet (NYSE: SIG), the largest specialty retail jeweler in the United States and United Kingdom, acquired Zale Corp., a leading specialty retailer of fine jewelry in North America, for $21 per share in cash and a total consideration of $1.46 billion. The combined
entity has more than 3,600 locations operating under brands that include Kay Jewelers, Jared The Galleria of Jewelry, Zales, Peoples and Piercing Pagoda. Management expects to achieve between $150 million and $175 million in operating profit over three years as a result of the transaction. The combined entity had trailing 12-month pro-forma revenue of $6.2 billion and EBITDA of $745 million.
HYLAND, CREATOR OF ONBASE Hyland is the creator of OnBase, an enterprise content management solution that combines document imaging, workflow and business process management functionality. Since 2008, Hyland has acquired nine companies, with four of those acquisitions occurring during the last three years, including SIRE Technologies, a leading provider of document management, agenda and minutes automation software; Enterprise Consulting Partners, providing electronic document management and line of business integration; Calyx, a
small Australian international customer base acquisition; and AnyDoc Software, a market leader in data capture and classification applications. The company reported 2013 revenue of $275 million and has 1,800 employees. It is listed on the Inc. 5000 as one of the fastest-growing private companies in the United States.
FAIRMOUNT SANTROL
THEREâ&#x20AC;&#x2122;S NO BUSINESS LIKE YOUR BUSINESS.
Fairmount Santrol is one of the worldâ&#x20AC;&#x2122;s largest providers of sandbased proppant solutions. In August 2010, American Securities acquired a majority interest in the company and provided liquidity for structural efficiencies, technical innovation and acquisitions. In 2013, Fairmont made nearly $500 million in acquisitions, including Sibelcoâ&#x20AC;&#x2122;s resin coatings operations; Self-Suspending Proppant LLC; Great Plains Sand LLC; and FTS International, Inc.â&#x20AC;&#x2122;s sand mining operations, resin coating plants and distribution terminals. In October 2014, Fairmont completed an initial public offering that raised $400 million of proceeds and began trading on the New York Stock Exchange under the symbol FMSA.
Vorys, Sater, Seymour and Pease is a full-service corporate law Ă&#x20AC;UP WKDW ZRUNV ZLWK DOO NLQGV RI EXVLQHVVHV WR KHOS WKHP JURZ :H UHFRJQL]H WKDW \RXU EXVLQHVV LV XQOLNH DQ\ RWKHU $QG ZKDW D FRLQFLGHQFH Âł EHFDXVH RXU ODZ Ă&#x20AC;UP LV XQOLNH DQ\ RWKHU WRR
BLUE POINT CAPITAL PARTNERS Blue Point Capital Partners is a private equity firm managing more than $800 million in committed capital. The firm invests in manufacturing, distribution and service businesses generating $20 million to $200 million in revenue. Since June 2013, Blue Point completed acquisitions of four new platforms and two add-ons, including The Hilsinger Company, Ortholite, Trademark Global, Inc., Shnier-Gesco LP, S&S and Onamac. Over the past few months, the firm divested Cook & Boardman, JTM Foods and Callison, which resulted in an average return in those deals of 4.7x invested capital. Plus, in November 2014, the Blue Point Capital III fund was closed at the hard cap of $425 million with significant excess demand due to the fundâ&#x20AC;&#x2122;s recent performance.
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CRAIN’S CLEVELAND BUSINESS
JANUARY 19 - 25, 2015
HEALTH CARE
In one year, UH has branched out regionally with Elyria and Parma, while planting seeds of growth By TIMOTHY MAGAW tmagaw@crain.com
At 62 years old, Don Sheldon admits he could have kept EMH Healthcare in Elyria treading water for a few more years until he retired. The 387-bed community hospital system wasn’t exactly bleeding money, but it wasn’t necessarily growing either. “That wouldn’t have been responsible,” said Sheldon, the hospital’s leader for the last five years. “If you aren’t growing, then you’ve got to look for a partner.” The partner it found was University Hospitals, which, in addition to EMH, officially brought Parma Community General — a 332-bed community hospital — into its enterprise a year ago this month. With the integration of these two hospitals, UH
now boasts $3.5 billion in revenue and 25,000 employees, making it the second-largest employer in the region behind its chief rival, the roughly $6 billion operation of the Cleveland Clinic. The acquisitions also gave UH — a traditionally East Side-centric system — immediate roots on the West Side. As often is the case with these sorts of moves, there was some concern the larger system might go into the struggling hospitals, cut until there was nothing left to cut and convert these proud community assets into nothing more than a feeder for the system’s main campus east of downtown Cleveland. However, over the last year, UH has shown it plans to do just the opposite. While the system wouldn’t disclose exact figures, UH said it made “sizable investments” in the institutions now known as UH Parma Medical
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Institutions joined by mission, purpose St. Vincent Charity opens medical office at Saint Ignatius High School By AMY ANN STOESSEL astoessel@crain.com
ABOVE: Dr. David F. Perse (left), St. Vincent’s president and CEO, and the Rev. William J. Murphy, president of Saint Ignatius, have been working together on forming a partnership between their two organizations. LEFT: The St. Vincent Charity Medical Office at Saint Ignatius High School opened this month on Lorain Avenue in Ohio City. TOP: AMY ANN STOESSEL; LEFT: SUE KRIZMAN CREATIVE SERVICES
You might say it was a match made in heaven. There’s nothing flip, however, about a developing partnership between two long-standing Catholic institutions in Cleveland — St. Vincent Charity Medical Center and Saint Ignatius High School. “We were both looking to solve the same problems from two different angles,” said the Rev. William J. Murphy, president of Saint Ignatius. Situated only 50 blocks from one another — Saint Ignatius in Ohio City, and St. Vincent on East 22nd Street — it wasn’t until roughly two years ago that Murphy and Dr. David F. Perse, St. Vincent’s president and CEO, met at a fundraiser and started to talk. “We found that our vision was really very similar,” Perse said. “The mission aspect is so aligned.” The connection and similarities resulted in the birth of “an evolving, collaborative partnership,” according to Murphy, and more tangibly, the opening this month of the St. Vincent Charity Medical Office at Saint Ignatius High School. Situated on Lorain Avenue across from Saint Ignatius, the new medical offices are in a building owned by Saint Ignatius and leased by St. Vincent. Murphy said the school had been trying for years to purchase the building, which had housed offices but fallen into disrepair. It finally gained control of the 3,600-squarefoot space about two years ago. “We could have done a million different things with it,” Murphy said. But, the goal was to find the “highest and best use.” The fully renovated building is now home to eight exam rooms, a laboratory and three offices. It is staffed by Dr. Joy Marshall, a family
Q
practice physician, and will eventually house specialists in cardiology, podiatry and sports medicine, serving patients of all ages. Marshall, who anticipates seeing 20 to 25 patients a day from the new office, had been serving the community from a site on Franklin Avenue at 38th Street. She said the new offices are in stark contrast to her previous location, which took up space on the first floor of a nursing home and was not very visible. “Pretty counts,” said Marshall, noting that eight new patients had been seen in the first three days. “You sit a little taller in your chair when you have a nice facility.” Perse said the new offices also help St. Vincent span a geographic gap and better serve the Hispanic community. The St. Vincent leader said that despite a growing sentiment that Cleveland is “over-bedded” in terms of health care, there’s little appetite for pursuing urban, Medicaid and Medicare populations. “But we’re here,” he said. The office space renovation was funded in part through a $1 million grant from the John P. Murphy Foundation, with additional assistance from the Sisters of the Precious Blood, a Dayton-based order. In addition to the new offices, another result of the partnership is that Saint Ignatius students have been working at St. Vincent in completing their sophomore service project. And, Perse and Murphy said other collaborations are possible, such as having St. Vincent physicians take part in the weekly Saint Ignatius homeless outreach. As for the growing partnership, physician Marshall said, it is a perfect fit — albeit delayed. “It’s a natural, but it never happened,” she said.
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Center and UH Elyria Medical Center. Those investments include more docs, new equipment, stronger information technology and expanded service lines. UH’s Seidman Cancer Center and neurological institute already have taken root at Parma, and there are plans to add its Rainbow Babies & Children’s pediatric emergency services in 2015. At Elyria, UH already has installed its pediatric emergency services at three of the hospital’s outposts with other service expansions
in the pipeline. Also, the Elyria hospital will be a major beneficiary of UH’s new rehab hospital in Avon, a joint venture with Centerre, a forprofit group recently acquired by another giant, Kindred Healthcare. And while they’ve only been part of the family for a year, both hospitals are in the black and boasting stronger patient volumes. “Was there any risk? No, not really,” said Richard Hanson, president of UH’s community hospitals and ambulatory network. “From our standpoint, we thought this was
Q & A | WALTER JONES Senior vice president of campus transformation, The MetroHealth System In October, the MetroHealth System announced it had hired Walter Jones, an experienced health care administrator who most recently worked in Texas, to oversee the health system’s ambitious plans to overhaul its aging main campus on West 25th Street in Cleveland. Jones recently answered a few questions from Crain’s regarding his role and hopes for the project. As senior vice president of campus transformation, what exactly are your duties? What’s a typical day like? My role is to provide the leadership and oversight … for the facility planning, development, design, construction and implementation needed to support MetroHealth’s transformation. That effort not only includes the work to develop a new campus for MetroHealth, but includes the work needed to maintain, service and operate the existing physical plant, and (to) oversee the facility design and construction activities for existing and new off-campus facilities in the MetroHealth System. A typical day usually begins with a good, large cup of coffee to prepare for any number of collaborations in meetings with my directors, in-house stakeholders, consultants, executive leaders and/or community groups. These are the valuable sessions that help to guide the direction for the transformation, and for me, the facility needs required. You most recently served as senior vice president of facilities development at the Dallas County Hospital District’s Parkland Health and Hospital System in Dallas, where you managed the planning, design, development and programming of Parkland’s $1.3 billion, 865-bed hospital and medical campus project. What are some of the similarities and differences between that project and the one planned for MetroHealth? There are more similarities than differences among the projects. Both projects are for medical organizations that are mission-driven, essential institutions and Level 1 trauma centers. Both projects stem from similar needs: to replace a facility and infrastructure that is operating beyond its useful life, is functionally inefficient for modern health care delivery and has become obsolete in its ability to effectively accommodate new and upcoming medical technologies. Both projects remain in their current locations, and in doing so, provide a commitment to support the communities they serve into the future. What are some of your top goals and priorities — both in how the MetroHealth project proceeds and in the end results? MetroHealth has emphasized that the facility transformation proceed with a high degree of community engagement, inclusion and diversity. This involves a range of efforts to best utilize our com-
mitted investment in the local community to its ongoing growth and improvement. A project of this size also has the potential of creating a significant number of local jobs and the direct economic impact as a result. We are also committed to establishing and promoting local involvement and diversity through the contracts we create with consultants, contractors and vendors for the project effort. The other project goals and priorities to be explored are: Creating a healing environment that supports a positive patient and family experience. Creating a sustainable facility both environmentally, and in fiscal terms by being more efficient to operate. Creating a flexible facility that can continue to adapt to the changing health care environment. Creating a health care environment capable of accommodating current and future technological advances. Dr. Akram Boutrous, MetroHealth’s CEO, said in May that, “We want to be known as a health care system that is designed by the people, for the people.” How will that be accomplished and why is that important? We have already held several forums with local community groups and business and civic organizations to listen to and collect input about what our transformation could be, and what the needs of the community are. We will continue our outreach efforts as we progress through the process with these groups, as well as patient and family advisers, internal stakeholders, government, the philanthropic community and others. MetroHealth’s mission is community based and focused, and therefore community driven. What are some of the first noticeable changes that will be seen on the campus? This year, the demolition of the Northcoast Behavioral (Healthcare) Facility will take place. This was built in 1922 and has been vacant of operations since 2011. Demolition will begin in March and is expected to be completed in August. Once complete, 3.88 acres will be available for MetroHealth to use in its main campus transformation. Also, later this year, construction will begin on the twostory vertical expansion of our Critical Care Pavilion. The addition is set to house 88 new intensive care and critical care beds.
just a great partnership from the beginning.” The integration of the hospitals into the UH system, of course, is far from over. Hospital and system officials stress that it takes time, for instance, to meld cultures and get IT systems talking with each other. Still, UH officials stress the intent has never been and won’t be to erase the individual identities these hospitals have developed over the years. It’s a slightly different strategy than that of the Clinic, for example, which acquired several community hospitals in the 1990s and 2000s and quickly overhauled the organizations in its image. “It’s not like we want to turn Parma into a mini UH,” said Nancy Tinsley, a 12-year veteran of UH who was installed as Parma’s new president in August. The hospitals in Parma and Elyria had remained two of the few regional holdouts that hadn’t attached themselves to a larger system. The Parma hospital, in particular, had rebuffed rumors for years that it would be acquired by the Clinic and instead touted its desire to remain independent. But as inpatient volumes dwindled and the federal health care overhaul presented new challenges, the tenor changed. “When the hospital approached me indicating they wanted to go out
CRAIN’S CLEVELAND BUSINESS and find a partner, my initial reaction was that I was surprised it hadn’t happened already because of the changing landscape of health care,” Parma Mayor Timothy DeGeeter said. Although UH plans to maintain that community hospital feel, the benefits of being attached to a nationally recognized medical center are already evident. UH even doled out $300,000 in grants to the Parma hospital’s six founding communities — Parma, Parma Heights, North Royalton, Seven Hills, Brooklyn and Brooklyn Heights — to support wellness initiatives. Also, Parma recently recruited 13 physicians, including specialists in bariatric, cardiothoracic surgery and neurology — something it may not have been able to do if it weren’t flying UH’s flag. Elyria Medical Center, meanwhile, brought in 35 new physicians, including specialists in cardiothoracic surgery, orthopaedics, breast surgery, sleep medicine and pediatric pulmonology “They know the UH reputation, so physician recruitment has been more successful under the UH brand,” Tinsley said. “The physicians know they’re being recruited into an institute or large clinical team that’s driving best practices.” Also, the Lake Erie College of Osteopathic Medicine in Erie, Pa.,
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plans to launch a residency program at Parma. The three-year training program is expected to serve up to 10 internal medicine and 10 family practice residents in its first session, which begins July 1. A graduate residency program also is in the works for Elyria Medical Center.
Bolstered bottom lines As is typical with independent hospitals today, both the Parma and Elyria hospitals had struggled to turn profits in recent years. Part of that was being unable to enjoy the efficiencies and bargaining power — with insurance companies or medical supplies companies, for example — of a larger hospital system. Parma already has renegotiated some of its managed care contracts, which resulted in better payouts for the hospital and an improved bottom line, Tinsley said. As with any merger, there have been some staffing changes as the health system consolidates some back-end operations, but for the most part, the overall staffing levels have remained steady as UH invests in other areas of the hospitals. “We went with a partner that was committed to sustaining us and actually growing us,” Elyria’s Sheldon said. “But the reality of coming together is that you want to create some efficiencies.”
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NEW Center leads NEOMED transformation The transformation of Northeast Ohio Medical University over the last few years under president Dr. Jay Gershen’s watch has been dramatic. Not only does the Rootstownbased medical school have a new name — it was formerly known as Northeastern Ohio Universities Colleges of Medicine and Pharmacy, or NEOUCOM — but the campus has undergone a dramatic overhaul. The centerpiece of the $160 million makeover is an $84 million, 177,000-square-foot education and wellness facility at the front of the university’s campus off state Route 44. The massive facility — known officially as the NEOMED Education and Wellness (NEW) Center — also includes a 25,000-square-foot fitness center known as Sequoia Wellness. The wellness center is run by Integrated Wellness Partners, a wellness company operated by Akron-based developer Signet Enterprises. Summa Health System also plans to offer medical care in the building. The facility includes a large lecture hall, and the third floor is dedicated to Bio-Med Science Academy — a public STEM+M (science, technology, education, math and medicine) high school, which now enrolls 243 students in three grades. Also, in the heart of campus in a renovated building, NEOMED has opened a business incubator dubbed the Research, Entrepreneurship, Discovery and Innovation Zone, or REDIzone for short. So, is NEOMED done putting its shovel to earth? Not quite. Future plans call for a medical office building, retail space and perhaps more research facilities. — Timothy Magaw
TIMOTHY MAGAW
The NEOMED Education and Wellness Center (top) is home to the Bio-Med Science Academy, a public STEM+M (science, technology, education, math and medicine) high school (bottom left), and a 25,000-square-foot fitness center (bottom right).
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Hospitals begin to address LGBT population needs Focus is on sensitivities surrounding sexual orientation, gender identity
LEADING THE CHARGE
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Northeast Ohio’s leaders in LGBT health care equality, as determined by the Human Rights Campaign Foundation, the educational arm of the country’s largest LGBT civil rights group:
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Cleveland Clinic main campus MetroHealth Medical Center
By TIMOTHY MAGAW tmagaw@crain.com
Meena Thatikunta always figured lessons in how to compassionately care for the lesbian, gay, bisexual and transgender population would be embedded in her medical school curriculum at Northeast Ohio Medical University. She thought wrong. NEOMED, of course, wasn’t unusual in this regard, as Thatikunta found that U.S. medical schools dedicate on average five hours of curricular time of varying quality to teaching future docs about health concerns specific to the LGBT population. In fact, a third of medical schools don’t dedicate any time to these issues. It’s not standard practice, for instance, to teach medical students about the sensitivities surrounding sexual orientation and gender identity or how to compassionately communicate with LGBT patients. As such, she and her fellow students worked with NEOMED’s faculty to introduce nine hours of LGBT health-related curriculum. Now, she’s taking her efforts to a national level and working with a group of experts from premier universities around the country on a new textbook, “The Equal Curriculum: Student and Educator Guide to LGBT Health,” which is slated for publication in early 2016. “For us to systematically as a health care system ignore a population that large is tragic and an injustice,” said Thatikunta, a 24-year-old, fourth-year medical student from Cincinnati. “It’s inexcusable for a system that purports to help people to be doing that. That’s terrible to me. I’ve always felt a personal duty to help in any way I can.” Hospitals, much like the medical schools that feed them their docs, haven’t always been the most progressive when it comes to LGBT issues, but it appears they too are catching up. For one, it’s a good business move as the LGBT community is a group viewed as being incredibly loyal to “ally” providers. But for many, it’s simply the right thing to do. “Health care has been late to the game on diversity and inclusion in a lot of ways despite being on the cutting edge of patient care,” said Heidi Gartland, University Hospitals’ vice president of community and government relations. “From my perspective, this is just part of the things you have to do to be a high-quality health care provider.”
Local hospitals have stepped up on this front by introducing patient and employee non-discrimination policies that specifically outline sexual orientation and gender identity, guaranteeing equal visitation for same-sex partners and parents and offering LGBT health education for staff. Those are the pillars used by the Human Rights Campaign Foundation, the educational arm of the country’s largest LGBT civil rights group, in identifying leaders in LGBT health care equality in an annual survey. In the most recent survey released last fall, 26 organizations in Ohio were named leaders — 12 of which are UH facilities. The only states with more recognized institutions are California with 65 and New York with 47. Florida tied Ohio with 26. Nationwide, 426 of the survey’s 507 respondents were named leaders in LGBT health care equality — a 100% increase over last year’s numbers. Last year’s survey was the first time the Cleveland Clinic’s main campus was designated as a leader in the area. In particular, the Clinic said it needed to devote more attention to educating individuals at various levels of the enterprise, particularly at its main campus, to build stronger cultural competencies around caring for LGBT patients. This year, the Clinic plans more education outreach at its various hospitals and health centers in the region. “There was a strong feeling within the group that we needed to be on this survey,” said Dr. James Hekman, a Cleveland Clinic physician who co-chairs the system’s Gay & Lesbian Employee Resource Group. MetroHealth too has been pegged as a leader in health care equality. Dr. Henry Ng co-founded and serves as the clinical director of MetroHealth’s Pride Clinic, the region’s first medical home devoted to serving the health needs of the LGBT community. The Clinic, which was founded in 2007, is open to all, but promises an open and honest environment that respects the unique health care needs of the LGBT population. “There’s so much we’ve accomplished, but frankly so much more to do,” said Ng, who’s also president of the Washington, D.C.-based Gay and Lesbian Medical Association, which among its many efforts offers a database of providers who’ve designated themselves as LGBT friendly. “I have to say I’m so proud of this organization because of resources behind me.”
Summa Health System UH Ahuja Medical Center UH Bedford Medical Center UH Case Medical Center UH Conneaut Medical Center UH Elyria Medical Center UH Geauga Medical Center UH Geneva Medical Center UH MacDonald Women’s Hospital UH Parma Medical Center UH Rainbow Babies and Children’s Hospital UH Richmond Medical Center UH Seidman Cancer Center Louis Stokes Cleveland VA Medical Center
“MEETING THE CHALLENGES OF 21ST CENTURY EDUCATION AND HEALTH” Panelists: Delos M. “Toby” Cosgrove, M.D., President & CEO, Cleveland Clinic Thomas F. Zenty III, CEO, University Hospitals Akram Boutros, M.D., President & CEO, The MetroHealth System Moderator: Ronald M. Berkman, Ph.D., President, Cleveland State University
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Numbers back up Cohen & Co.’s motto Cleveland firm says its investment in people is part of reason for its post-recession success By JEREMY NOBILE jnobile@crain.com
The Great Recession forced many accounting firms, like companies in most industries, to scale back operations and spend resources conservatively as the economy soured. But Cohen & Co. was among those that saw opportunity in a tumultuous environment. Rather than slash positions and operating costs, the firm invested in new talent at a time when demand for CPAs slowed and many firms put hiring on hold or even laid staff off. That consistent investment in people, said Cohen CEO Randall Myeroff, is largely why one of the largest accounting firms in Northeast Ohio is enjoying its strongest revenue growth since the recession began. He’s committed to the idea in a short phrase — “never miss an opportunity” — that was the guiding philosophy of Ron Cohen, who
Myeroff
MacKinlay
founded the firm in 1977. “There are certain things that have never changed since the ’70s,” Myeroff said. “We’re still client centered and have a crazy thirst to be smarter than everybody else — it’s a competitive objective. We’re thriving now, but we’re not nearly
satisfied. We are as hungry or hungrier and more competitive than probably we have ever been.” Cohen & Co.’s affiliates comprise Cohen Fund Audit Services, Cohen Capital Advisors and financial planners Sequoia Financial Group. Without making sweeping changes
Bellamy to costs or fee structures, earnings are trending up steadily across the board and have been since 2009, when the company was a roughly $30 million enterprise. Cohen saw revenue of about $43 million in 2014, its best numbers since the recession and an increase of more than 10% from its 2013 revenue of $39 million. The company says it’s on pace to hit $50 million this year. In terms of staff, Cohen now employs 300, compared with about 275 in 2013 and 230 in 2009.
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For the groups under the Cohen banner, rebounding from the recession began with setting a foundation for growth years ago. For Sequoia, which joined Cohen in 2000, that meant pursuing a growth plan that slowed in the recession, but then picked up sharply as the economy stabilized. Much of that postrecession growth was driven by recession-era hires. Leaders say bulking up staff as business slowed enabled the firm to capitalize on new business as work started lining back up when the economy began to stabilize. “Our goal was to attract the best talent, tech expertise and a team of professionals to serve clients and deliver our non-proprietary platform to a broad range,” said Sequoia president and founder Thomas Haught. “The recession made that more difficult to do and continue building, but it also created new opportunities to differentiate what we were doing. … It all helped us grow faster coming out of the recession.” Robert MacKinlay, president of Private Company Services at Cohen, says a positive corporate culture — treating employees and customers “the right way” — helped land some major hires. MacKinlay’s group drew in a couple partners from the world’s top four biggest accounting firms at the time. He said the Cohen culture made the biggest difference in attracting those people — particularly in the accounting realm, where veteran CPAs infrequently leave the corporations they excelled at and often stay with for large portions, if not
Haught the entirety, of their careers. Cohen itself has many “lifers,” Myeroff said, with 25 to 30 years of experience there. Another swath of people has at least 10 to 15 years of experience per person. Beyond a high retention rate of staff, Cohen also prides itself in hiring new, young talent. Myeroff said the firm is pushing to hire dozens of new people a year, many right out of school, and nearly as many interns. The goals: keep people, hire people and attract people from outside firms. “We’re committed to hiring out of school, keeping intern classes big,” said Chris Bellamy, Cohen Fund Audit Services partner. “In 2008-09, some (firms) snubbed their internship programs. We made those investments at the bottom level, and those people today are becoming the next leaders of the firm.”
All clear The recession offered a unique learning experience for Cohen, Myeroff said. The way the company handled its own operations during the downturn became a microcosm of operating strategies the company advises other businesses on. What may have seemed like a gamble at the time — investing in an uncertain economic climate — has proved to be a profitable approach. “When do you invest? How much do you invest? How much do you store away for unknowns? That all comes much clearer now post-recession,” Myeroff said. “Those who stored too much cash didn’t succeed. Those who invested too heavily failed as well. There’s got to be balance. As financial advisers, we ought to be a model of how to balance investment.” The adage suggests spending money to make money — and in this case, for Cohen, it worked. “We feel different about stability so much we would contemplate making less money,” he said. “We’re very confident about investing heavily in people and in new lines of business.”
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ORG Holdings is expanding in Solon By STAN BULLARD sbullard@crain.com
In another sign the Northeast Ohio industrial property development market is heating up, Beachwood-based ORG Holdings LLC plans to build a 200,000-squarefoot warehouse in Solon. “We’re bullish about the industrial market in Cleveland and Solon,” said Edward Schwartz, an ORG principal. “We have an 11-acre site under contract and plan to build a state of the art distribution center with a clear (ceiling) height of 32 or 36 feet.” Warehouse and distribution center operators prize spaces with ceilings taller than 30 feet because they allow tenants to store more inventory in them than older buildings with 20- or 25-foot ceilings. Schwartz said he and business partner Jonathan Berns plan to purchase the site on Cochran Road and start building as soon as they win approvals from the suburb to build. Plans call for having space available by the end of this year. The site that an ORG affiliate plans to build on is at 6801 Cochran
Road. St. Gobain Crystals, part of the French-based St. Gobain of North America building materials firm, has the acreage listed for sale with Newmark Grubb Knight Frank with an asking price of $995,000. Terry Coyne, a Newmark Grubb executive managing director, confirmed the property is under contract. Coyne said the property owner demolished an empty factory to offer the property as a development-ready site. “There was no market for land a few years ago,” Coyne said. “Now you have it being bought to construct a speculative building.” The development market for multitenant industrial buildings leased to tenants had been dormant during the Great Recession. The last such huge industrial building for rental purposes was finished in 2008. That changed last year as Scannell Properties of Indianapolis started building a speculative warehouse at Cornerstone Business Park in Twinsburg, which is on the site of the former Chrysler stamping plant. The market is such that Industrial Realty Group of Los Angeles is de-
molishing the former Randall Park Mall in North Randall to create sites for future industrial buildings. Coyne estimates there is a vacancy rate of just 3% for top-tier, or Class A, warehouse distribution space, and the overall industrial vacancy rate is just 8%, the lowest of any property types in the region. Schwartz declined to put a development cost on the project, which will put a building the size of four football fields under a single roof. He said the property will be designed to seek LEED certification. The project is ORG’s second in Solon in as many months. Last month, it bought an older industrial building on Harper Road in Solon to renovate it for use as creative office space. ORG cut its teeth in the industrial market in 1998 with Highland Business Park, an office/warehouse complex in Warrensville Heights, and it has since built or bought other properties throughout the region. ORG also operates ORG Portfolio Management, which advises pension funds and institutional investors on real estate investment strategies.
M&A continued from page 1
“Interest rates remain great, confidence is returning, and companies have tons of cash, so there’s going to be tremendous opportunities for M&A,” Dougherty said.
Putting capital to work The pulse around the Midwest closely follows national projections. An M&A report from Citizens Commercial Banking, which surveyed 469 Northeast and Midwest middle-market business executives, defined as those with revenues between $5 million to $2 billion, found 60% of those surveyed are either in the midst of a deal (25%), actively seeking one (11%) or are at least receptive to one (24%). The other 40% said they aren’t considering a deal in the next 12 months. “It’s clear to us from a statistical standpoint these people are saying either I’m in or I’m out,” said Bob Rubino, executive vice president of corporate finance and capital markets for Citizens. While dollars in deals may not be as high as they were in 2014 because of the year’s multiple massive transactions, Rubino said, the frequency could go up, especially as executives sense more urgency to complete deals now. Fierce competition is resulting in higher valuations, meaning top-performing companies that were on the fence about selling the last couple years may seize an opportunity now to draw a premium price for their business. The survey also shows a small uptick in American companies considering M&A deals overseas. Several factors are driving deals now, from investors’ and banks’ motivations to invest to generally improving bottom lines to a generation of aging Baby Boomers planning retirements and their companies’ futures. In private equity and venture capital, it involves what Andy Jenkins, a partner in Cleveland-based accounting firm McGladrey’s transaction advisory service group, calls
a backup of “undeployed capital.” Private equity firms are competing with other strategic investors to find a home for their dollars, especially as funds opened prior to the recession are being closed as they hit maturities today, he said. The slow economy post recession resulted in some investors awaiting better market conditions. On the flip side, while confidence in the market seems generally stronger now, Jenkins said pent-up cash in private equity is creating more demand than supply and an M&A market favoring sellers. More due diligence is being done by investors before they commit to an acquisition with higher valuation multiples. “Because we’re seeing a lot of people eager to spend money, prices have been going up, so those deals are more expensive,” Jenkins said. Ryan Brannon, director of McGladrey’s transaction advisory services in Cleveland, said he expects more add-on acquisitions as a result of that push by private equity firms to bolster existing platform investments. Older business leaders in the Baby Boomer generation may see today’s economic climate as a chance to retire, selling their business and turning over ownership on their way out. Many who were considering selling around or before the recession were waiting out the downturn to maximize a deal before cashing out. That supports the notion that financial and professional services firms, many of which are ran by older executives, could see a swath of deal activity in the near future, said Mark Bober, partner and practice leader of transaction advisory services at Fairlawn-based accounting and business advisory firm Bober Markey Fedorovich.
The ‘fifth inning’ Also driving deals on the buyside is what Jones Day’s Dougherty calls an activist movement by
hedge fund managers and investment advisers who are pushing the groups and companies they have stakes in to make revenue generating moves, like spinning off a business. Several big funds, he said, have quadrupled their capital over the last five to seven years. “That activism, I think, is going to push a lot more activity over the next several years,” Dougherty said. “M&A has been pretty robust the last couple years, and I don’t see that trend slowing down in 2015. And I don’t think there are any reasons why 2015 could not be better (than last year).” Awaiting higher pricing is a strategy of many groups that haven’t closed a transaction the past couple years, even if they were entertaining offers. Meanwhile, other businesses finding their footing waiting out the wake of the recession’s ripple strove to improve revenue lines to earn higher multiple pricing when the economy improved. “That’s why there’s pent-up (buyer) demand,” Bober said. “You had all these companies that would’ve gone to the market to sell, but they ended up deferring sales decisions until they felt like their business performance rebounded.” That “midstream” of the economic recovery appears to be now, said Jim Geuther, president of commercial banking for JPMorgan Chase & Co.’s Cleveland/Akron region. “After coming through maybe five years of very conservative decision making, companies are optimistic now,” he said. “There’s that pent-up supply of companies that want to sell but have been waiting for the right time to get the full value for their business.” But with such robust activity expected, are we nearing a cycle’s peak? And if so, where’s the valley? “It’s hard to say when the cycle comes in,” Geuther said. “Who could’ve predicted when 2007 hit? But if we look at this in terms of innings of a baseball game, consistent with market strategies, I’d say we’re in the fifth inning of expansion strategies.”
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CRAIN’S CLEVELAND BUSINESS
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Delivering a custom message, and sales Cleveland Honda dealers are blazing new trails with clever regional advertising tactics kets. The budget is not dominated by the large metropolitan stores, as can be the case with Tier 2 ad spending in large markets, such as New York, he said. “It’s about knowing the market,” Waikem said.
By DAVID BARKHOLZ Automotive News
When American Honda Motor Co. decided 18 months ago to fund marketing for regional dealer associations, members of the Northern Ohio Honda Dealers wanted to do more than echo the manufacturer’s advertising. That traditional regional, or Tier 2, role of repeating the mass-media buys of the factory wasn’t going to help Honda dealerships 60 miles away from Cleveland in towns such as Wooster, or high school footballcrazy Massillon, said Mark Lyon, general manager of Jay Honda in suburban Cleveland and a trustee of the dealer association. So the Northern Ohio Honda Dealers set upon a new course. Rather than just buy TV and radio advertising in metropolitan Cleveland, the group has gotten heavily involved in charitable, sports and other local events, sometimes with its own advertising. For example, the association, which includes 20 dealerships, sponsored a 5K race along with Fox 8 in Cleveland last summer and received $260,000 worth of on-air mentions during three months of race promotion for just $45,000 in paid advertising, Lyon said.
Smaller towns, too While most dealer associations use predominantly factory creative work for their ads, the Northern Ohio Honda Dealers made their own spots in late summer to take advantage of the triumphant return to Cleveland of LeBron James. And the Cleveland dealers are advertising heavily on cable TV and radio in the smaller towns where members sell vehicles. For instance, they sponsor high school football and basketball games from Cleveland to Akron and southeast to Youngstown, said David Waikem, co-owner of the Waikem Auto Family and president of the dealer association. “That’s why all the dealers have bought into the concept — the association is willing to spend money in the community,” said Waikem, who owns seven stores, including a Honda dealership in Massillon. Honda dealers got a marketing windfall from the factory about 18 months ago when Honda instituted a Tier 2 advertising program after going for years without one. Honda dealer groups receive about $250 million in Tier 2 advertising money generated annually. They receive 1% of the sticker of vehicles sold by participating dealers in their respective regions. For the Northern Ohio Honda Dealers, the amount is $5 million. That lets the Honda dealers compete well with dealers of other manufacturers active with Tier 2 marketing, particularly Hyundai, Kia and Toyota, Lyon said. Lyon said Honda gave dealers the ability to select their own agencies to handle Tier 2 marketing and supported some experimental approaches to marketing. The smaller agency that Cleveland Honda dealers selected, Tier 10 Marketing, has creatively pursued charitable promotions and digital advertising, which have helped the
Using LeBron’s move
DAVID BARKHOLZ
Mark Lyon, general manager of Jay Honda, is a trustee of the Northern Ohio Honda Dealers. regional group increase vehicle sales faster than most other Honda associations, Lyon said. For example, the 20 Honda dealerships in the Northern Ohio Honda Dealers increased new-vehicle sales by 6% in 2014, while sales nationally grew 1%, Lyon said. Lyon said the group benefited greatly with media exposure and customer goodwill from involvement in several charitable events. The Fox Trot that Cleveland Honda dealers sponsored with Fox 8 in two years has become the second most-attended foot race in metropolitan Cleveland behind the Cleveland Marathon, said Dana Nagel, an ex-TV sales manager in Cleveland and Tier 10’s representative to the dealer association. The race drew more than 6,500 runners in August and raised money for the Wounded Warrior Project, which aids wounded veterans. Cleveland Honda dealers benefited as well. Fox 8 promoted the race every day for nearly three months, Lyon said, stretching the association’s $45,000 in paid advertising into $260,000 worth of TV exposure. The dealers ran 100 spots, while the station ran more than 700 spots
promoting the race, Lyon said. The association also sponsored Fox 8’s annual Operation Giving Tree before Thanksgiving to collect toys for needy kids in the Cleveland area, Lyon said. He estimates that the dealerships, which featured event banners in their showrooms, received about $160,000 in media exposure for the drive while buying about $36,500 in ad time. Lyon said the association asked for and received factory approval to participate in the events. While associations can’t make direct charitable donations with their marketing funds, the sponsorship included ads that were deemed permissible, he said. In all, the association in 2014 spent about $200,000 on charitableevent advertising and received about $1.3 million in TV time in return, Lyon said. Moreover, the promotions allowed association dealers to get on TV 49 weeks in 2014 vs. the typical 26 weeks when Honda is running seasonal campaigns to clear inventory or coax buyers into showrooms during the holidays, he said. Waikem said about half the deal-
erships in the association are outside metropolitan Cleveland around Akron, Canton, Youngstown and Wooster. His dealership’s advertising mix is heavily newspaper and cable TV, while the overall association mix is about 35% broadcast advertising, 24% radio, 15% digital, including video pre-roll and search engine marketing, and 9% direct mail. Video pre-roll consists of short ads before a YouTube video or on other sites. Waikem said the association is flexible enough with ad spending that dealers outside Cleveland can get money for high school football and basketball games in their mar-
It’s also about knowing what’s topical, Lyon said. James of the Cleveland Cavaliers is famous for throwing resin or chalk in the air as he enters the court before games. Taking a cue from that signature move, the association made Honda commercials with fans throwing Honda-blue chalk up at their desks to celebrate his return to Cleveland for the 2014-15 season. Because the factory didn’t make the spots, the production and cost of the ads was 100% funded by the association, Lyon said. But the commercials are so tightly tailored to the Cleveland market that dealers were willing to forgo factory money to be associated with the topic. Similarly, the association made Honda Accord spots last year and ran them regionally rather than Civic spots that the factory was promoting, Lyon said. The reason: He said local dealers found they had too many Accords on their lots and wanted to move them despite again missing out on supplemental payments that Honda made to associations that ran the Civic ads. Barkholz is a reporter with Automotive News, a sister publication of Crain’s Cleveland Business.
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in 1999. During that stretch, they’ve had one GM (Browns legend Ozzie Newsome), two head coaches and six offensive coordinators. Even the Bengals, who from 19992002 had five fewer wins than the Browns, have found consistency under head coach Marvin Lewis. During Lewis’ 12-year tenure, the Bengals have had three offensive coordinators. (Owner Mike Brown has served as the GM since purchasing the team prior to the 1991 season.) The three teams have had a total of 14 offensive coordinators in the last 16 seasons, and four of the changes were the result of one of the coordinators getting a head coaching job. “To me, continuity is very important, but getting it right is important, too,” Scheiner said. “I think that’s why you see so much change in the NFL. Not because people don’t understand the continuity, because continuity is valuable. It’s because they think, ‘You know what, maybe we can’t have the continuity we want with this group.’ “In every offseason of the NFL, there are tons of changes,” Scheiner added. “You just always have to balance continuity with getting it right. And then once you get it right, the continuity actually becomes the easy part.” In the NFL, a longtime front office-head coach partnership is as rare a commodity as a franchise quarterback. (The two most often seem to go together.) Mike Pettine, who in 2014 became the Browns’ fourth head coach in five seasons, is one of 14 NFL coaches who has one or zero seasons of tenure with his current club. Assuming no other changes are made, when the season kicks off in September, 18 of the 32 coaches will be in their first, second or third year.
describing how they’re opening stores and filling vacant buildings in the city’s North Hill neighborhood. Future Mark Zuckerbergs won’t be left out. For instance, the foundation gave a $25,000 grant to help fund early planning work related to the Bits and Atoms Innovation Center. The center — which would be run by the Akron Global Business Accelerator — is intended to serve as a place where tech entrepreneurs could work side-by-side, somewhere in downtown Akron. But the Knight Foundation isn’t obsessed with finding the next Facebook. It wants to place small bets on lots of entrepreneurs instead of making big bets on just a few, because it’s too hard to tell which ones will succeed on a large scale, McManus said. He gave an analogy: You need a lot of pee wee league baseball players if you’re ever going to produce a major league player. Akron doesn’t have enough pee wee players, in his view. “We need thousands of new startups. We have to increase our ambition,” he said.
Elusive ‘path’ to success The year-after-year turmoil is why many Browns fans were relieved when Haslam announced after the
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Offensive coordinator Kyle Shanahan left the Browns after one season. season that Pettine and Farmer, who was elevated to GM when Mike Lombardi and Banner were shown the door, would return in 2015. There was some concern that wouldn’t be the case after the Browns closed 2014 with five consecutive losses and scored 13 points or fewer in all but one of the games. “I think we all just need to be careful,” Scheiner said. “On one hand, yes, we were better than the previous year. On the other hand, we’re not at the level we demand of ourselves.” That standing, Scheiner stressed, is year-after-year success for a franchise that hasn’t advanced to the postseason since 2002. “I think Jimmy has said it the most: We want to create sustained winning,” the team president said. “So in that sense, that’s the path we have to get on no matter what. I think there were some positives. I think you could see our progress in some areas this year. But our job here is to learn from everything and get to that point where we have sustained success like a lot of teams in our division have had. We just have
to look in our division and see Pittsburgh, Baltimore and even Cincinnati. And in terms of what we want to accomplish, the model’s right there.” The Browns’ version has been the opposite — turnover, often combined with controversy. The latest involved a Cleveland.com story that reported Shanahan and some members of the coaching staff were upset that a high-ranking member of the front office had sent text messages about play calls during games. The NFL is investigating the report, and the Browns will only say they are reviewing the matter and cooperating with the league. Asked about a group that, for the most part, has only been together for a year, Scheiner said the Browns “always have things to work on.” “We’re going to be our own toughest critics, and we’ve got really smart, hard-working people in this building,” he continued. “And I would answer that question the same way if we were 16-0. Really.” That would be change for which everyone was on board.
Getting connected They’re working on it. For instance, the Knight Foundation gave $250,000 to the Economic and Community Development Institute, which will give entrepreneurs loans and technical assistance. And it’s even giving money to the local library: With $190,000 from the foundation, the AkronSummit County Public Library plans to build a space for entrepreneurs and so-called “makers” — people who like to build things. The space, located on the first floor of the main library on South High Street, will include a laser engraver, a vinyl cutter, audio-visual equipment and furniture on
wheels. JumpStart plans to cast a wide net, too. For years, the Cleveland-based nonprofit focused almost all its energy on helping high-tech startups in Northeast Ohio. Lately, however, JumpStart and many other local economic development groups have come to believe that tech companies alone probably can’t create enough jobs to reverse the region’s economic fortunes. As a result, JumpStart has started to broaden its focus: It recently started working with Magnet, a Cleveland-based nonprofit that works with manufacturers, to help other small businesses that appear to have growth potential, even if they’ve been around for years. Thus, the new JumpStart employee will try to connect all kinds of Akron-area entrepreneurs with investors, advisers and anyone else who might be able to help them. “If this was just high-tech startups in Akron, we probably wouldn’t have done it,” Leach said. That employee also will be tasked with figuring out how Akron-area organizations can work together to help local entrepreneurs. Today, they’re “not as connected as they could be,” Leach said. The position is funded by the Fund for Our Economic Future, with help from the Knight Foundation and the many other philanthropic groups that contribute to the fund. Though McManus is heading back to Detroit, he hopes all the entrepreneurial programs being funded by the Knight Foundation help Akron develop a more entrepreneurial culture. He’d love to see it become a place where starting a company is more fashionable and more people get the courage to do it. It’s already happening in Detroit, he said. “You can’t make a turn in Detroit right now where you don’t find an entrepreneur,” he said.
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THE WEEK JANUARY 12 - 18 The big story:
Cleveland Clinic will shutter Lakewood Hospital once its opens a new hospital in Avon in 2016, though the health system said it would build a $34 million, 62,000-square-foot family health center with an emergency department in its place. The 233-bed hospital, which is owned by the city and operated by the Clinic, has lost money from its operations since 2005. The Clinic said jobs would be available within the Clinic system or one of its partner organizations for the 1,018 hospital employees affected by the transition. About four acres on the hospital site would be freed up for development. Lakewood will transfer about 2.5 acres to the Clinic for the new health center.
It’s a date: The Republican National Committee selected July 18-21 for the 2016 Republican National Convention in Cleveland. RNC chairman Reince Priebus said the convention “will be held significantly earlier than previous election cycles, allowing access to crucial general election funds earlier than ever before to give our nominee a strong advantage heading into Election Day.” The next official step in the convention process will be the formation of the RNC’s Committee on Arrangements. Until the committee’s launch, Priebus said, “the focus will be continued fundraising and logistical efforts for the convention.” Home stretch: The Cleveland Browns believe the first phase of renovations at FirstEnergy Stadium improved the team’s home-field advantage. Now begins Round 2, which should, among other things, enhance fans’ appetites. The second phase of the $120 million makeover of the 15-year-old stadium will include upgraded lighting and signage in the concourses, the addition of high-definition graphics that will depict current players, Browns legends and the Dawg Pound, and upgraded concession offerings. The work is expected to be completed in time for the 2015 season.
Bank on it: Huntington Bank named Renee Csuhran its interim president of the Cleveland region to replace president Daniel Walsh Jr., who has left the bank to launch a new real estate private investment company that will be headquartered in Cleveland. Csuhran, a longtime Cleveland banking executive, was an executive vice president at Huntington and managing director of commercial real estate for the company. Walsh, a Cleveland native, joined Huntington in April 2010 from KeyBank’s national real estate capital markets business. Time of transition: Kohrman Jackson & Krantz named a new managing partner to lead the Cleveland law firm in the wake of the death last month of former managing partner Marc C. Krantz. Corporate lawyer and business litigator Jon J. Pinney, 39, is the new managing partner. Krantz, the firm’s managing partner since 1999, died as the result of a ski accident in Jackson Hole, Wyo., on Dec. 28. He was 54. Kohrman Jackson also announced that Brett S. Krantz, the brother of Marc Krantz and son of a founding partner, Byron S. Krantz, will assume Marc Krantz’s seat on the firm’s Executive Committee. Up to the challenge: Akron has seven of the 126 finalists in the Knight Cities Challenge, a program the John S. and James L. Knight Foundation describes as “a national call for new ideas” to bolster the 26 communities where the foundation invests. The challenge received more than 7,000 submissions. Detroit, with 25, and Philadelphia, with 20, had the highest number of finalists among the communities. Winners, who will receive a share of $5 million, will be announced this spring. See related story, Page 5.
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Another reason to trade gray skies for sunshine Cloudy days and stock trades always get investors down. At least that’s the lesson of a new study compiled by a Case Western Reserve University professor and three others from Yale University, University of Miami and University of Michigan-Dearborn. The research, published in The Review of Financial Studies, suggests that weather changes may affect how institutional investors decide on stock plays. The findings report that sunny skies put professional investors more in the mood to buy, while cloudy skies tend to discourage stock purchases. The study focused on institutional investors — those that represent large organizations, such as banks, mutual funds, labor union funds and finance or insurance companies — because they play a key role in how stock prices are formed in the markets. That’s why the results were so surprising given that those investors are well regarded for their financial sophistication, according to Dasol Kim, an assistant professor of banking and finance at Case Western Reserve’s Weatherhead School of Management who worked on the study. Previous studies have shown that retail investors are susceptible to psychological biases in their investment decisions. The researchers reached their conclusion by linking a survey of investors from the Yale Investor Behavior Project, which was compiled by Nobel Prize-winning economist Robert Shiller, with institutional stock trade data and historical weather data from the National Oceanic and Atmospheric Administration. — Timothy Magaw
This land is their land Trustees of the city-owned Lakewood Hospital stressed they had explored the possibility of bringing in another health system to run the money-losing hospital, which has been operated by the Cleveland Clinic since 1997. But now that they’ve decided it’s time to shut the hospital and let the Clinic build a new health center on the property, don’t count on any other health systems to make a play in the dense West Side suburb — at least near where the Clinic is plotting its $34 million, 62,000-square-foot facility. Under terms of the deal reached last week, no other health care system would be permitted to operate or manage a facility on the land currently leased from the city to the Lakewood Hospital Association while the Clinic owns and operates the family health center. The Lakewood Hospital Association is the nonprofit governing body that oversees the hospital’s operations. In the past, MetroHealth, Cuyahoga County’s public hospital, has expressed interest in bulking up its operations in Lakewood. The health system currently operates a modest health center on Detroit Avenue not far from where Lakewood Hospital stands. — Timothy Magaw
Game for the challenge of athletic club building The languishing Cleveland Athletic Club building, 1118 Euclid Ave., may yet find new life, but it will take some time. Willoughby-based apartment owner K&D Group surfaced as the potential stalking
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BEST OF THE BLOGS Excerpts from recent blog entries on CrainsCleveland.com.
On the move
COMPANY: The Ruhlin Co., Sharon Center OCCASION: Its 100th anniversary The full-service construction firm was founded in 1915 by German/Swiss immigrant and entrepreneur John G. Ruhlin and his brothers as Ruhlin Brothers Construction Co., a bricklaying company outside Akron. Today, Ruhlin has an average of 100 full-time employees, 275 trade workers and annual construction volume of $200 million. It provides a range of general contracting, construction management and design/build services for the health care, education, government, commercial, energy, environmental, transportation, industrial and structural steel markets. “The Ruhlin Co. has joined an elite group of companies that have withstood the test of time to celebrate 100 years of business, but we’re only here because of our hardworking employees who do what’s right, not just what’s expedient,” said Jim Ruhlin Sr., the company’s president and CEO. The company established an Employee Stock Ownership Plan (ESOP) in 1977. The company has launched a microsite — www.Ruhlin.com/100 — that will be updated with historic milestones and facts about the company’s projects. The Ruhlin project pictured above is American Municipal Power’s Willow Island Hydroelectric Powerhouse, currently in progress in St. Marys, W.Va. The $139.5 million construction project is slated for completion in May. It consists of 82,000 cubic yards of cast-in-place concrete, 9.5 million pounds of reinforcing steel and 200,000 pounds of other embedded metals.
horse bidder for CAC, according to filings in the U.S. Bankruptcy Court of Northern Ohio. It stood to gain the property for $5.5 million if a proposed Chapter 11 reorganization for CAC Buildings Properties LLC had proceeded and no other bidders beat its offer. However, that plan was derailed last Thursday, Jan. 15. U.S. Judge Pat Morgenstern-Carren sided with the mortgage holder on the property, Waring Investments of Clifton, N.J., that it stood to recoup more if it were able to exercise its legal right to satisfy its mortgage through a potential Cuyahoga County sheriff’s sale. Waring is owed more than $6 million under its mortgage. The county has been seeking the sheriff’s auction to recoup more than $1 million in unpaid property taxes on the building. Scott Fink, Waring’s attorney, objected to the bankruptcy sale. He said the decision means the county will auction the 15-story building at a yet-to-be scheduled date, perhaps as early as February. If bids are insufficient to cover Waring’s mortgage, the lender stands to get the property. The bankruptcy proceeding was launched Oct. 20 by CAC Buildings, a development group led by Eli Mann of Cleveland Heights that bought CAC in 2007 with a loan from Waring. Unable to renovate it, Mann’s group had sold the property in late 2013 to Cleveland-Euclid Hotel Associates, a group led by local developer Ned Weingart. However, Mann’s group got the building back Oct. 6 to satisfy a note it held from the 2013 sale of the property to Cleveland-Euclid Hotel Associates. Doug Price, K&D CEO, said he intends to “do what it takes” to win CAC, even at sheriff’s auction. — Stan Bullard
Joe Heider, who in 2010 merged his Dawson Wealth Management firm in Rocky River with Rehmann Financial of Michigan, is getting a fresh start. Heider, who was a principal at Rehmann, told Reuters that he left the firm to start Cirrus Wealth Management this month. He aims to grow the firm “by acquiring the business of older advisers who generate $1 million or more in annual fees and revenues for their business who are planning for retirement,” according to the Reuters story. Succession planning “is a hot trend in the wealth management industry where the average financial adviser is in his or her late 50s,” the news service reported. “As a tsunami of advisers approach retirement, partners like Heider are offering to take over their businesses.” Heider, along with former Rehmann colleagues Mark Bonhard and Laura Sternheimer, “said he is in talks with three advisory groups who generate $5.5 million in combined fees and commissions in the Cleveland area,” Reuters said.
Work to do Cleveland improved a bit in the latest rankings of the best-performing U.S. cities from The Milken Institute, but it’s far from an economic juggernaut. The index ranks U.S. metropolitan areas “by how well they are creating and sustaining jobs and economic growth. The components include job, wage and salary, and technology growth,” the institute said. In most years, according to Milken, “these give a good indication of the underlying structural performance of regional economics.” Of 200 cities, Cleveland is ranked 133rd. That is an improvement, though, from the 2013 rankings, when Cleveland was 147th.
In looking at the data, CityLab.com noted that the top six metros are all tech hubs. Many Rust Belt metros “continue to underperform,” CityLab.com said. “Detroit is 193rd in the ranking, down 26 spots from last year, Akron is 152, Toledo is 151 and Cleveland is 133,” according to the story. “Fortunately, there are some exceptions to this rule, but these are more post-industrial economies like Indianapolis (26) and Columbus, Ohio (41), or college towns like Madison, Wisconsin (30), and Ann Arbor, Michigan (59).”
Stay in Looking to drop a few pounds in 2015? One way to do it is to eat more meals at home, according to a MarketWatch.com story that included comments from Kristin Kirkpatrick, manager of wellness nutrition services at the Cleveland Clinic Wellness Institute. The website noted that a study of more than 12,500 people published by Public Health Nutrition last year “shows that on days when people eat out, they consume an average of 200 calories more than those” who eat at home. “I think it’s safe to say that restaurant meals have more of everything,” including sugar, fat and salt, Kirkpatrick says. MarketWatch.com suggested a “manageable New Year’s resolution” is to try eating in for an additional day each week. It’s potentially good financially, too, as “saving just $10 a week on lunch adds up to an extra $520 for the year in your IRA or 401(k).” When you do dine out, Kirkpatrick said, make a reservation so you can be seated right away and not spend time waiting around. Waiting often means ordering drinks and getting hungry enough that you’ll over-order when you finally sit down. Also, when dining in a group, choose a healthy option — and order first, so that you’re not swayed by the choices of your companions, she said.
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