Association of Corporate Growth 2016

8

Be methodical about your succession plan

11

Tax due diligence a key part of strategy

18

Marketplace trends present opportunities

AND

Corporate Growth M&A SPECIAL ADVERTISING SECTION

ALSO INSIDE: Consider post-closing obligations 19 Assess technology infrastructure 21 Various forms of capital readily available 24

CRAIN CONTENT STUDIO C l eve l a n d

CORPORATE GROWTH AND M&A

S2 January 18, 2016

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TABLE OF CONTENTS 10

3 President’s Letter

7 Involve Accountant

4 Market Diligence & Shrewd Acquirers

8 Succession Planning & Equipment Appraisals

6

Transactional Liability Insurance & Mitigating M&A Risk

11 Thorough Tax Due Diligence

16 Cross-Border Transactions

12 Careful Preparation & Earn-Outs

17 Diversify Growth & Non-Control Investments

13 Charitable Legacy & Bypassing Auctions

Outsourcing Negotiations

14 Delivering Deal Value & Next Acquisition Tips

18 Spin-Offs & Private Equity Trends

19 Post-Closing Obligations & Financial Due Diligence 20 Purchase Price Adjustments & Sell-Side Tax Due Diligence Reviews 21 Navigating Technology

22 ACQUIRING COMPANIES

Your deal gets done here

Sale of stock to Hynes Holding Company

Cottonwood Acquisitions, LLC Acquisition of assets of Roadie Products, Inc.

Industrial Maintenance Services, Inc. Sale to Technology Service Professionals, Inc.

MCM Capital Partners III, L.P. Offering of Limited Partnership Units

23 Working Capital & Purchase Price Adjustments

Apple Sauce, Inc.

Apple Sauce, Inc.

Sale of 10 Applebee’s restaurants to Doherty Apple South Florida, LLC

Sale of 33 Applebee’s restaurants to RMH Franchise Corporation

Sale to CeramTec

Lee Steel Corporation and its affiliates Sale of Wyoming, Michigan facilities and business to Union Partners I, LLC pursuant to Bankruptcy Code § 363

$70 million Senior Guaranteed Notes

Acquisition of certain assets of Hospitality Technical Services that made DCI an Enhanced GPNS Provider to Marriott International

Sale to Aurora Diagnostics, LLC

24 Acquisition of dESCO, LLC

Making Big Investments

25 M&A Insurance & Entity Classification 26 Buying/Selling & Bolstering Buyer’s Advantage

Lee Steel Corporation and its affiliates Sale of Romulus industrial real estate and facilities to Hilco Industrial and Hilco Real Estate

LTS Metrology LLC Acquisition of substantially all the assets of LTS Scale Company, LLC

S. G. Morris Represented independent trustee in the sale to Applied Industrial Technologies

Tioga Air Heaters, LLC Acquisition of Reliable Construction Heaters, Inc.

27 ACG Officers and Board of Directors, Events Calendar, About ACG 28 20th Annual Deal Maker Awards

Advertising director Nicole Mastrangelo, nmastrangelo@crain.com Managing editor, custom and special projects Amy Ann Stoessel astoessel@crain.com

Tioga Air Heaters, LLC Acquisition of Mobile Air

Recapitalization with two private equity firms

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$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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CORPORATE GROWTH AND M&A

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January 18, 2016 S3

PRESIDENT’S LETTER

ACCELERATING CLEVELAND’S GROWTH: education, celebration and community

W

ith the upcoming Republican National Convention, a redeveloped and vibrant downtown, and a championship contending Cavaliers team, it is an exciting time to be a Clevelander. It is also an excellent time to be a member of ACG Cleveland and gain access to the chapter’s outstanding professional development and networking events.

For the 2015-16 programming year, our events are hinged on the theme of Accelerating Cleveland’s Growth.

This theme is more than a clever use of the ACG (Association for Corporate Growth) acronym; it is embodied in all the experiences ACG offers.

During the year, we are celebrating our region by showcasing its thought leaders, compelling civic initiatives and diverse business community, with entities ranging from emerging startups to longstanding bastions of industry. I am proud to represent ACG Cleveland as its president and encourage members and non-members alike to embrace our programming, networking and educational opportunities in 2016.

In 2015, ACG Cleveland celebrated Northeast Ohio’s great success stories with dynamic programming that included: a tour of Dunstan the Global Center for Health Innovation; a first-time gathering of the innovation leaders from Eaton, Goodyear, SherwinWilliams and Owens Corning, which was moderated by Nottingham Spirk; a review of the many infrastructure projects in Cleveland, including the Horseshoe Casino Cleveland, Public Square, the Flats and the lakefront; and an introduction to 3D printing and the leading pioneers who are harnessing this exciting industrial technology.

We are confident that the best is yet to come as we head into 2016 with an in-depth look at the Republican National Convention and its impact on our region.

I would also encourage Cleveland’s young professionals and women in business to take a fresh look at ACG Cleveland. We have developed unique opportunities through two

special interest groups, Young ACG and Women in Transactions, to provide networking, education and entertainment offerings specific to your interests. These groups represent more than 160 of our 500 members and are a growing and valued segment of our membership.

Our signature event, the annual Deal Maker Awards, will be held Jan. 21 at the Cleveland Convention Center. We will honor Northeast Ohio’s top corporate deal makers for demonstrated success in using acquisitions, divestitures and financings to fuel growth.

Honorees will include The J. M. Smucker Co., Ferro Corp., Area Wide Protective Inc. and Resilience Capital

‘‘

IT IS A POWERFUL CHANNEL FOR BUSINESS

Plante Moran is one of the nation’s largest accounting, tax, and management consulting firms with alliances throughout the world. We work with more than 200 private equity groups and 300 portfolio companies and our industry expertise spans many sectors including manufacturing, food & beverage, service, technology and health care.

plantemoran.com

PROFESSIONALS AT ALL LEVELS TO

BUILD RELATIONSHIPS AND THEIR CAREERS,

WHETHER THEY ARE YOUNG PROFESSIONALS

{On the right course.}

A higher return on experience.

Partners. We will welcome nearly 1,000 people from Cleveland and around the country to congratulate the winners, celebrate the event’s 20th anniversary and join in a night of networking and new opportunities.

ACG Cleveland is dedicated to bringing relevant content, education and networking to its members, highlighting the exciting developments in our region and providing access to the individuals, institutions and corporations that are making it happen.

It is a powerful channel for business professionals at all levels to build relationships and their careers, whether they are young professionals just entering the workforce or experienced

JUST ENTERING THE WORKFORCE

‘‘

By DAVID D. DUNSTAN

OR EXPERIENCED SENIOR EXECUTIVES.

senior executives.

To our members, I encourage you to make the most of your membership in 2016 by getting actively involved in the chapter and joining a committee.

For those considering membership, please attend an event to see the benefits of ACG membership firsthand.

I guarantee that you’ll be inspired by the experience.

In closing, I would like to thank our current members for their continued support and active participation in all that we do at ACG Cleveland. It is the commitment of our board of directors and nearly 500 members that make the organization great. Please enjoy the rest of this section, which highlights our members’ expertise and provides valuable content with respect to mergers, acquisitions and capital raising.

David D. Dunstan is president of ACG Cleveland and managing director and president of Western Reserve Partners LLC. For more information about ACG Cleveland, visit www.ACGcleveland.org.

S4 January 18, 2016

CORPORATE GROWTH AND M&A

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BE DILIGENT ABOUT MARKET DILIGENCE Third-party researchers provide valuable, unbiased assessments

By BERT SMYERS

G

athering solid market intelligence (“market research” or “market diligence”) is a vital component of any deal’s diligence process, but it is too often given inadequate focus or neglected altogether.

Market diligence offers significant benefits to buyers, helping them to: ■ Hone valuations during the bidding process; ■ Validate the target’s assertions about market position and growth prospects; ■ Accelerate organic growth post-close by better understanding expansion opportunities; and ■ Identify potential add-on candidates.

Perhaps most importantly, market diligence can identify bad deals by raising red flags that don’t normally surface in other diligence activities.

These red flags can include: customer dissatisfaction that could lead to

attrition, competitive dynamics that suggest future market share loss and changes in the regulatory landscape.

Such actionable Smyers knowledge is especially important in today’s deal climate, as prevailing company valuations climb to historically high levels and the pressure to justify these rich multiples likewise increases.

According to GF Data, middle market EBITDA multiples averaged 7.1x in the third quarter of 2015, which is the highest in the database’s history.

Good market diligence doesn’t have to include expensive and time-consuming assessments. Rather, the exercise is tailored to focus on the key marketrelated value drivers in a given deal.

For platform acquisitions, a comprehensive study may be needed to lay the foundation for post-close strategic planning. However, for addons or smaller transactions, focusing on

only a few issues is usually sufficient.

Common issues include: ■ Evaluating relationships with customers: How durable or “sticky” are they?

■ Assessing the target’s competitive position: Does it have sustainable advantages? How is it differentiated from competitors? Is it gaining or losing share?

■ Understanding overall market dynamics: How is the market segmented? How big is each segment? How fast is each growing?

As mentioned, market diligence should be customized to the discreet needs of a given deal. That said, it often combines secondary research (a targeted review of existing research about the target and its markets) and primary research (information obtained directly from market participants — usually some combination of customers, suppliers, competitors and/ or market experts). Primary research

is collected through phone interviews and/or in-person discussions, but may also include web and phone surveys.

Critical success factors for good market diligence include impartiality and a specific skill set in collecting market insights. These requirements can make it difficult for acquirers to tackle alone.

Third-party research partners exist to fill the gap. Combining research expertise, industry experience and a bullpen of professionals with top consulting skills, research partners ensure a thorough and unbiased assessment of critical market assumptions. They consequently enhance prospects for the deal’s ultimate success.

At the end of the day, investment returns are what matter. Actionable market intelligence can mean the difference between a good deal and a great deal. Avoiding even one bad deal can mean a significant bump in a private equity fund’s ROI. Planning and executing proper market diligence with a reputable third-party research partner is a prudent step to ensure success in today’s M&A environment.

Bert Smyers is managing partner of New Heights Research. He can be reached at 216-523-4295 or bert.smyers@nh-r.com.

Shrewd acquirers set clear strategy, foster relationships

By MICHAEL C. SHAW

C

orporate acquirers are constantly competing with increasing numbers of financial sponsors for auctions and proprietary deals. To become a stronger acquirer, corporations need to focus on setting a clear strategy, designing a long-term pipeline management process and building a strong marketing approach.

Developing the strategy The pace of change in more industries gets faster and the world gets smaller. Which is why Grant Thornton LLP, is part of a global network of member firms, which has more than 40,000 people in more than 130 countries. Combining global scope with local savvy, we’re ready to help you capitalize on opportunities wherever they arise, now and into the future.

Audit | Tax | Advisory | grantthornton.com

“Grant Thornton” refers to Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd (GTIL), and/or refers to the brand under which the independent network of GTIL member firms provide services to their clients, as the context requires. GTIL and each of its member firms are not a worldwide partnership and are not liable for one another’s acts or omissions. In the United States, visit grantthornton.com for details. © 2015 Grant Thornton LLP | All rights reserved | U.S. member firm of Grant Thornton International Ltd

Great acquirers that execute multiple successful deals over time always have a clear strategy prior to acquiring. Corporations typically look to their core capabilities first and determine whether they can leverage these Shaw capabilities to make an acquisition successful, or if a core capability needs to be improved upon with an acquisition.

For example, a large distributor may have a great value-added service capability that smaller distributors aren’t providing to customers.

Conversely, the same distributor may have significant gaps in its sales capabilities because it lacks certain products or territories that could be obtained through acquisition.

Finding targets and managing a pipeline If you’re waiting for deals to come across your table, you’re missing out on the right opportunities. Building a pipeline should be treated the same as a company’s normal sales process — identify leads, convert them to opportunities and manage routine contact to convert the opportunity.

Trade journals, industry associations and trade shows are the best place to begin building your list.

If your company has identified targets, there should be a record of the last time someone communicated with that target’s business owner — and it should be a fresh contact.

Presenting yourself to sellers Strong acquirers find ways to alleviate the pain points of potential sellers, which increases your opportunity conversions. The stronger buyers are able to demonstrate they can close quickly, require little to no financing contingencies, and treat target employees favorably after the deal.

Buyers should develop proper marketing collateral to help communicate their capabilities as a buyer.

Michael C. Shaw is partner at Copper Run. He can be reached at 614-888-1786 or mshaw@copperruncap.com.

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.

A portfolio company of:

A portfolio company of:

A portfolio company of:

A portfolio company of:

Undisclosed Amount Senior Secured Credit Facilities

Undisclosed Amount Senior Secured Credit Facilities

$17,000,000 Senior Secured Credit Facilities

$22,500,000 Senior Secured Credit Facilities

Sole Lead Arranger & Administrative Agent

Sole Lead Arranger & Administrative Agent

Sole Lead Arranger & Administrative Agent

Sole Lead Arranger & Administrative Agent

November 2014

January 2015

March 2015

March 2015

A portfolio company of:

A portfolio company of:

Leading Ohio-Based Fluid Power Distributor A portfolio company of: A portfolio company of:

TRP CAPITAL

American Industrial Acquisition Corporation (AIAC)

Undisclosed Amount Senior Secured Credit Facilities

$21,500,000 Senior Secured Credit Facilities

$31,000,000 Senior Secured Credit Facilities

$8,500,000 Senior Secured Credit Facilities

Sole Lead Arranger & Administrative Agent

Sole Lead Arranger & Administrative Agent

Co-Lead Arranger & Co-Syndication Agent

Sole Lead Arranger & Administrative Agent

March 2015

June 2015

June 2015

August 2015

A portfolio company of:

A portfolio company of:

$24,500,000 Senior Secured Credit Facilities

$15,000,000 Senior Secured Credit Facilities

Sole Lead Arranger & Administrative Agent

Sole Lead Arranger & Administrative Agent

September 2015

October 2015

Undisclosed Amount Senior Secured Credit Facilities

$25,000,000 Senior Secured Credit Facilities

Syndication Agent

Sole Lead Arranger & Administrative Agent

November 2015

November 2015

TO LEARN MORE, CONTACT:

Doug Winget, President, FirstMerit Bank Business Credit, at 330-384-7448 or doug.winget@firstmerit.com.

Jacqueline Hopkins, Managing Director, Sponsor Finance Group, at 312-429-3618 or jacqueline.hopkins@firstmerit.com.

Member FDIC 5058_FM15

firstmerit.com

CORPORATE GROWTH AND M&A

S6 January 18, 2016

Empire Business Associates brings 20 years of experience to the sale of distribution, service and manufacturing companies. :H SURYLGH D IUHH FRQÂżGHQWLDO PDUNHW analysis of your business with no fees upfront.

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Outsource intricate M&A negotiations to third-party expert THESE KEY REASONS UNDERSCORE NEED

empire

Specializing in the sale of small and mid-size businesses

business associates

www.empirebusinesses.com

440-461-2202

A

s due diligence wraps, you’ve likely identified a number of red flags with the business you’ve planned to acquire. These obstacles can present both short- and long-term challenges, ranging from immediate cost burdens to the potential

“I know exactly who you should call.�

People who know Private Equity, know BDO.

The Private Equity Practice at BDO Strategically focused. Remarkably responsive. A century of experience. BDO’s Private Equity Practice provides integrated, value-added assurance, tax, advisory, and consulting services across the fund cycle, and across the world – all through a single point of contact.

Ohio locations: Akron | Cincinnati | Cleveland | Columbus Accountants and Consultants www.bdo.com/privateequity Š 2015 BDO USA, LLP. All rights reserved.

for expensive litigation down the road.

Outsourcing complex negotiations to an experienced third-party allows you to focus on your positive assets and lay the groundwork for a smooth, productive transition.

1

CONTRACT NEGOTIATION: As an organization shifts, key leadership positions may be moved or eliminated. Hire an expert to negotiate with executives on your behalf.

A third-party removes emotions from the process and, upon reaching a successful agreement, circumvents any chance for litigation.

There are typically two roads to closure in these circumstances: Dottore The executive can choose to sue the company, which is a lengthy and costprohibitive process, or take a severance package and walk away. Executives almost always choose the path of least resistance. Your negotiator can assist with customizing the details of an exit package and help the executives quickly come to the conclusion that accepting the offer is in their best interest.

2

CREDITOR AND SUPPLIER DEBT: Let’s say the owners of your acquiring company have dozens of unopened American Express bills in their desks. In these cases, cutting off communication to creditors only postpones the inevitable

‘‘

collections headaches and lawsuits to follow.

Creditors and suppliers are often left with very little at the end of an M&A deal, so they’re pleased to speak to a third-party representative who is willing to work out a percentage pay out. Your negotiator can evaluate each circumstance and recommend a buy-out budget to you in advance.

The approved budget empowers the negotiator to close these accounts on your behalf, while minimizing the amount of new capital going to solve old problems. This process often requires dozens of phone calls, so unless you have a persistent employee with time to burn, outsource this task to a partner who can focus on it.

3

GOVERNMENTAL COMPLIANCE ISSUES: When conflicts arise with local, state or federal authorities, it’s essential to find an attorney who specializes in compliance issues. These problems can range from environmental to tax and everything in between. The public sector moves at a slow pace, so never underestimate the value of relationships in these situations. A well-connected attorney or consultant can help expedite resolution behind the scenes and above the board.

Mark Dottore is president and CEO of Dottore Cos. He can be reached at 216-771-0727 or mark@dottoreco.com.

A THIRD-PARTY REMOVES EMOTIONS

FROM THE PROCESS AND, UPON REACHING

‘‘

By MARK DOTTORE

A SUCCESSFUL AGREEMENT, CIRCUMVENTS ANY CHANCE FOR LITIGATION.

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CORPORATE GROWTH AND M&A

Involve your accountant early on before proceeding with acquisition

By JOSEPH V. PEASE JR.

W

hen considering an acquisition, it’s always a good idea to start by speaking with your accountant. A CPA’s experience in tax, financial and business matters allows him or her to provide significant value for dollars spent, whether

on a sell-side or buy-side transaction.

CPAs are in a great position to help their clients with acquisition services.

These services include directing clients to buy-side resources if they haven’t already located a target.

If they have identified a target, the services would include financial and tax due diligence; business valuations;

deal structure to minimize income taxes; assistance with the sourcing and structure of financing the deal; negotiations; working with the attorneys on letter of intent terms; and asset purchase agreement specifics.

Accountants can also assist with cash flow modeling to determine equity needs.

The sale process can be a very stressful experience for a business owner, especially if advisers are not well-versed in what to anticipate.

Being properly prepared to plan and execute the transaction can be the difference between a smooth, low-risk, high-reward experience and one that may crash and burn after the sale.

January 18, 2016 S7 A CPA firm can help in several ways, from preparing or reviewing pro-forma statements about the company’s future performance, to providing shareholders with projections of the deal’s net proceeds after taxes and expenses.

Sellers often rely on their CPA to negotiate working capital adjustments and to negotiate post-transaction adjustments. In extreme cases, the CPA firm plays a vital role when there are contentious issues between the buyer and seller after the closing.

Business owners who are anticipating a sale Pease Jr. or acquisition would do well to discuss the potential transaction with their CPA and gain an understanding of the CPA’s level of experience with prior deals.

The firm should be ready to explain the types of deals it has worked on, issues they faced and how they were addressed.

Buyers should inquire about what to anticipate during the transaction and how the accounting firm would handle various situations. Ask the accountant to prepare a summary of after-tax dollars resulting from the sale and opportunities to minimize taxes to ensure the best possible outcome for you and your business.

Joseph V. Pease Jr. is president and CEO of Pease & Associates.

He can be reached at 216-3489600 or jpease@peasecpa.com.

The right people to get the extraordinary done.

Some opportunities feel like impossible challenges. They’re so big and complicated that they require insights from lots of different fields. But when you have the right team working with you, truly extraordinary things can happen.

See our stories at pwc.com /extraordinary To learn more, visit www.pwc.com/us/deals or contact Brian Kelly at (216) 875 3121 or Thorne Matteson at (216) 875 3441.

© 2016 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity.

Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors

CORPORATE GROWTH AND M&A

S8 January 18, 2016

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It’s never too early for succession planning Craft a well-developed strategy for a smoother transition

By STEWART KOHL

F

amilies are complex. And family businesses can really highlight the intricacies of all those relationships. Succession planning is therefore complex for the owner of a family business.

A capable heir may be waiting in the wings, but family members often aren’t present or ready.

Entrepreneurs who have built their busi- Kohl nesses don’t often get around to the next step, but succession planning is critical to the long-term health of any enterprise.

I don’t think it is coincidental that the words “succession� and “succeed� have a common root.

START NOW Consider bringing in a financial partner well before you want to

hand over the reins. Partnering with a private equity firm can allow you to keep the lead role and either retain a majority or assume minority ownership. In addition to providing personal liquidity, you can allow all stakeholders to make their own decision about staying in or cashing out. And best of all, you will have access to your partner’s resources to drive growth through add-on acquisitions, research and development investments, global expansion and many other strategies.

LOOK AHEAD Good financial partners will nurture the company and help ensure that your ultimate transition will be smooth. The help won’t be like that of a consulting firm or other adviser.

Because of their skin in the game and close alignment of interests, equity firms also provide two opportunities to generate gains for you and the other shareholders: at the time of the private

equity firm’s initial investment, and down the road if you choose to sell your remaining stake.

PLAN CAREFULLY Talk to other business owners who

have worked with partners to find out about their experiences. Work with experienced advisers and attorneys. Consider your goals for the company, yourself and your family, and then ask potential partners for details on how they can help you achieve them. Be clear about your objectives, and ask your investor to do the same. Make sure the partnership is a good cultural fit. You don’t have to like the same adult beverages or sports teams, but you should agree on the big issues facing the company.

DON’T BE INTIMIDATED Rather than being intimidating, succession planning with the right partner will be an exciting opportunity to take your company to the next level and resolve any questions you might have about its future. Get started on your company’s future today.

Stewart Kohl is co-CEO of The Riverside Co. He can be reached at 216-344-1040 or info@riversidecompany.com.

C A L F E E CO N G R AT U L AT E S

The J. M. Smucker Company and Ferro Corporation on their well-deserved 2016 ACG Cleveland Deal Maker Awards.

The attorneys at Calfee are proud to represent companies that engage JO NJEEMF NBSLFU NFSHFST BOE BDRVJTJUJPOT BOE DPSQPSBUF kOBODF We congratulate our longstanding clients and all other award winners.

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Equipment appraisals are key part of M&A

By KIPP A. KRUKOWSKI

A

machinery and equipment appraisal may not be the first thought that comes to mind when negotiating your business transaction. However, the oft-overlooked equipment appraisal plays several important roles during a business sale or acquisition.

First, the appraisal could be used to help justify the asking price or the offer on the business.

Second, if a buyer is looking to get a business acquisition loan, lenders will want an appraisal of Krukowski the machines for collateral purposes.

In addition, once a price is negotiated between the buyer and seller, part of the negotiation is the allocation of purchase price. Since the purchase price normally consists of the buyer acquiring the tangible (machinery and equipment) and intangible (goodwill) assets of the company, both the buyer and seller will have to report the same allocations when they submit their tax documents to the IRS. A fourth benefit of an equipment appraisal is that the buyer will be able to use the details of the report to set up her asset list and depreciation schedule of the newly formed entity.

Although a machine might have a book value of $0 on the selling company’s balance sheet since it has been written off, the buyer of the company will be able to depreciate the asset again starting with its current fair market value. The appraisal provides documentation on what “new� value should be placed on each piece of equipment.

Finally, an appraisal provides potential equipment replacement costs should an insurance claim occur.

Not all equipment appraisals are the same. Estimated online values or appraisals from used machinery and equipment dealers aren’t enough.

Business owners should secure through an accredited appraiser an equipment appraisal that is Uniform Standards of Professional Appraisal Practice (USPAP) compliant.

All three methods of valuation will be considered, and accurate research and analysis will be completed to arrive at values.

A buyer needs proper documentation to support the equipment values and a signed certification showing those appraisals are unbiased if the IRS were to audit the financial statements.

Kipp A. Krukowski is managing director of Equipment Appraisal Services. He can be reached at 216-912-0832 or kipp@ equipmentappraisal.com.

I’m a dealmaker.

I’m also a

lawyer, which helps a

great deal.

Merge or acquire. Divest or recapitalize.

Buy or sell, equity or debt.

Or just organic growth.

Name your aim, and let’s go get it.

Whether you lead a public company, a PE fund or a family office.

I bring people together—the right people, at the right time.

Because that’s how deals get done.

How enterprises grow.

How portfolios get power-sized and businesses achieve their potential.

When the stakes are this high, the know-how has to be higher.

I’m Chair of the Private Equity Practice Group.

But the seat I like best is the one next to you, at the table where we do the deal or plan the strategy that builds your future.

I’m JIM HILL. I’m on your team.

MY BENESCH MY TEAM > Chair, Private Equity Practice Group; Corporate & Securities Practice Group > Representing publicly and privately held growth companies, private equity funds and portfolio companies, family offices, mezzanine finance providers, equity participants. > Legal Services Include: Mergers and Acquisitions, Public/ Private Equity Offerings, Public/Private Debt Offerings, Strategic Planning. > 216.363.4444 | jhill@beneschlaw.com

www.beneschlaw.com

CORPORATE GROWTH AND M&A

S10 January 18, 2016

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Mitigate M&A risk through due diligence, deal structure and favorable terms

By JAKE DERENTHAL

P

articipants in mergers and acquisitions all want to limit the risk arising out of their transactions. Decisions made at each step ultimately determine the level of exposure for buyers and sellers.

With planning and help from experienced advisers, parties can manage M&A risk by conducting effective due diligence, determining optimal transaction structure and negotiating favorable agreement terms.

Conduct effective diligence The diligence process is designed to flush out essential information about

the target, which allows the buyer to understand the facts before committing to the purchase. The quantity and detail of diligence required varies by transaction but generally includes analysis of historical financials, material contracts, customers and suppliers, employees, technology, real property and applicable regulatory issues. Parties should create deal-specific diligence lists focusing on critical areas for the applicable business. Discovering unforeseen risks upfront provides options — whether it’s walking away, adjusting the price or creating new escrows — and is the best way to avoid buyer’s remorse.

Optimize transaction structure Deal structure will determine who assumes or retains the target company’s li- Derenthal abilities. Buyers generally prefer to acquire assets, which automatically excludes obligations not expressly assumed. Alternatively, sellers like to sell stock to create a clean break in which all assets and liabilities transfer to new shareholders by operation of law.

In some situations, a merger or joint venture may best accomplish the parties’ goals. Parties may want to

Negotiate favorable language

and covenants ensures purchasers acquire what they intend. Focusing on indemnification is critical to determine who is responsible for post-closing risk. The difference between expansive or capped indemnity will have longterm consequences. Finally, ancillary documents should be properly drafted to effectively transfer title.

Risk allocation reflected in M&A documents and purchase price are closely related. One side will often assume more risk to complete a transaction when the price is right.

Savvy dealmakers don’t shy away from these calls but make sure decisions are made in light of all facts and available options.

Regardless of what is said during negotiations, the language in definitive transaction agreements will govern the deal. Incorporating the right representations, warranties

Jake Derenthal is a partner in the Corporate Transactions Group of Cleveland-based Walter | Haverfield LLP.

consider forming new companies as acquisition vehicles or to hold spin-off assets to isolate risk. And in all cases, analysis of tax implications is required to avoid surprises from the IRS. Using a combination of working capital adjustments, earn-out payments, escrows, holdback and seller notes as part of the deal structure can further align seller and buyer interests in future performance.

Transactional liability insurance bridges gap between buyer, seller

By JEFFREY SCHWAB

I

t’s no secret that whether you are the buyer or seller, protecting yourself from the chaos of unforeseen liabilities should be of utmost priority. Fortunately, a number of carriers offer transactional liability insurance products.

Transactional insurance is a collection of products including representations

and warranties, tax liability, pollution and contingent liability.

These products can be used to distinguish a bid and bridge the gaps that arise between buyers and sellers.

Sellers seek to minimize indemnities and survival periods, while the buyers want to maximize the escrows and extend the representation period.

■ A representations and warranties

• Key insights delivered: market sizing, growth and risk assessments; “voice of the customer” analyses • Expert, custom, and cost-effective market research to support all phases of the deal cycle ✓ Pre-LOI “quick hit” exercises ✓ Post-LOI market diligence reports ✓ Post-close portfolio company support ✓ Sell-side research to support owners and investment banks • Serving small & middle market PE firms, corporations and advisors for more than a decade

policy is designed to protect an individual from a financial loss that occurs because of a contractual breach of representation and warranties.

These Schwab policies are designed to mirror the asset purchase agreement or sales and purchase agreement.

■ Tax liability policies address known tax positions taken by the seller and can also cover transaction-related tax positions.

The IRS may place a lien on assets at the time of sale for unpaid federal taxes.

Federal tax liability for unpaid taxes may result in the IRS placing a lien on assets at the time of sale. State and local tax issues

may arise depending on the jurisdiction. A tax policy minimizes or diminishes these concerns.

■ Contingent liability stems from an issue identified during due diligence that could lead to financial loss postclosing. This often arises because of litigation or potential litigation, and both the buyer and seller have to properly valuate the risk. A contingent liability policy removes this exposure from the transaction.

Keep in mind, unplanned liabilities can affect both sides of the transaction.

In general, underwriters will require both buyers and sellers to have “skin in the game” when structuring the policy. While there is a minimum policy premium plus

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due diligence fees, in the end both will benefit from streamlined negotiations and more confident transactions.

Look for a solid broker with a dedicated M&A practice and the right carrier markets.

Seasoned professionals can help both buyers and sellers navigate to the most appropriate transactional product, which helps you to increase your close success rate by removing a deal’s intrinsic uncertainties.

Jeffrey Schwab is senior vice president and practice leader of the Mergers & Acquisitions/Private Equity Practice at Oswald Cos. He can be reached at 216-658-5208.

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

Aim for your targets We understand the unique challenges you face in your business. Across all industries, our experience, depth of knowledge, and global reach can help you overcome challenges and achieve your goals. Deloitte serves corporate acquirers and private equity investors throughout the entire M&A lifecycle. From strategy through execution, integration and divestiture, Deloitte’s M&A Services can help you achieve deal success.

Cleveland | 216.363.0100 Canton | 330.966.9400 Delaware | 740.362.9031 Elyria | 440.323.3200

Giovanni DiCenso +1 216 589 5150 / gdicenso@deloitte.com Kevin Murphy +1 216 589 1471 / kevinmurphy@deloitte.com

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January 18, 2016 S11

AVOID PITFALLS, MAXIMIZE PROFIT WITH THOROUGH TAX DUE DILIGENCE T

here was a time during the 1980s when environmental due diligence was not viewed as important to the transaction. Today, it is integral to most transactions because of the potential for hidden deal killers. Similarly, the need for tax due diligence was sometimes overlooked in past transactions, but the need has never been greater than it is today.

It is easy to understand why tax due diligence has become increasingly significant. Tax laws are becoming more complex. Businesses that operate beyond state borders or in international jurisdictions face myriad taxes and vigorous enforcement by tax authorities.

Tax due diligence traditionally focused on examining the various types of taxes businesses faced, Godenswager II including those they may have been obligated to pay depending on the jurisdiction in which they operated.

Going forward, effectively involving the tax team early and throughout the deal process presents an opportunity to leverage the diligence process beyond conventional results and render the deal more profitable.

While laying the groundwork for diligence, here are some suggestions:

Do not overlook potential opportunities and credits Not all tax diligence needs to be focused on averting risk. Appreciable opportunities for unrealized growth may arise throughout the course of conducting diligence.

‘‘

Examining the business’s tax position provides the opportunity to review certain tax credits and other incentives, such as the R&D credit, employment tax credits and local incentives. These credits are often overlooked or not pursued, but they can easily add value.

Proper tax due diligence has become a vital part of any successful deal.

An understanding of the potential tax exposures and planning opportunities equips the parties to effectively deal with it during negotiations and move the deal forward.

David H. Godenswager II is a senior manager in BDO’s Transaction Advisory Services practice. He can be reached at 216-325-1700 or dgodenswager@bdo.com.

TOO OFTEN, OUTSIDE ADVISERS ARE NOT ENGAGED UNTIL AFTER A LETTER OF INTENT IS SIGNED, WHICH RESULTS IN LOST DOLLARS TO THE SELLER OR ADDITIONAL COST TO THE BUYERS.

Solicit advice early Although structured as nonbinding, the terms of the letter of intent can place one of the two parties in a superior bargaining position early on in the deal process. Too often, outside advisers are not engaged until after a letter of intent is signed, which results in lost dollars to the seller or additional cost to the buyers. For example, if structured properly, and in many cases involving a flow-through entity target, the buyer can secure the benefits of a tax basis step up without materially increasing the seller’s taxes.

Ensure a proper scope and consider nonincome-based taxes Many parties focus only on incomerelated taxes, which leave the results incomplete. They potentially overlook fatal exposure risks.

Properly identifying tax exposures is important, but non-incomebased taxes, such as sales taxes and employment taxes, have the potential to derail the otherwise stable acquisition.

Today, many jurisdictions are increasingly scrutinizing the characterization between employees and independent contractors. Misclassified employees could inherit significant employment tax liabilities.

Likewise, a business with relatively small international operations might be easy to overlook during diligence but could result in a significant tax exposure and penalties.

‘‘

By DAVID H. GODENSWAGER II

CONNECT with

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S12 January 18, 2016

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CAREFUL PREPARATION WILL PAVE WAY FOR A SUCCESSFUL BUSINESS SALE

By MICHAEL BENSON

W

hether you’re hoping to sell your business next month or next year, smart preparation can lay the groundwork for a transaction that maximizes the company’s value. Here’s how to get started: ■ Make yourself redundant (or even expendable). You are not ir-

replaceable. You are not Winston Churchill. If you’ve run a solid operation, your company should be just fine after you leave.

But consider the buyer's point of view. His greatest fear is that you just might be indispensable and that when you walk out the door, the business will collapse.

Avoid that impression and the uncertainty it generates with clear,

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easily understood business operations, competent staff that will stay with the company after the sale, and thorough documentation of activities relating to every facet of the business.

■ Document, document and document some more. Documentation is so important to a business sale that it merits further explanation.

Document supplier and customer relationships. Suppliers and customers are often more important to a company’s success than any individual employee.

Buyers will want to know that these arrangements are established and secure.

Document all profit performance (taxes). Some decisions are driven by the potential tax implications in a privately owned business. Some of those decisions can be damaging when it’s time to illustrate the true profitability of a company. Work with your accountant or bookkeeper to construct an accurate picture.

Document all profit performance (nonoperating expenses).

Most privately held companies run a variety of non-operational expenses Benson through the business.

Make sure supporting paperwork for these expenses is retained.

■ Do your housekeeping. It’s the little things. First impressions count.

Ask any car dealer — a dented fender can leave a prospect wondering, “What else could be wrong?” The primary goal is to let the buyer see the real value of the business, so eliminate as many

distractions as possible. The cleaner and more uncomplicated the environment is, the better the first impression. That goes for the office, work areas, and financial information and records.

Selling a business is not always easy, but preparing with these steps improves your chances of converting a prospect into a buyer who clearly understands how he can buy — and grow — your company.

Michael Benson is the president at Empire Business Associates.

He can be reached at 440-461-2202 or mike@empirebusinesses.com.

Earn-outs may help bridge valuation gap

By MICHAEL TUCCI and JENNIFER HORN

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ne way for buyers and sellers in M&A transactions to agree on a purchase price when their valuations of the target company’s future income differ significantly is through contingent consideration, commonly known as an “earn-out.” Earnouts provide that a certain portion of the purchase price be contingent on certain future events occurring over a specified Tucci period of time.

These future events may be based on financial metrics, such as EBITDA, revenue or gross profit, or on non-financial metHorn rics, such as product development milestones, regulatory approvals, or employee or customer retention goals.

For example, a buyer and seller may agree that 20% of the purchase price will be contingent on the purchased business achieving EBIDTA targets over the next eight quarters. After each quarter, the buyer will pay to the seller an agreed-upon amount, which is either a fixed amount or a percentage of EBIDTA for that quarter. If the target is not met, no payment will be made.

A common variation is to have a target EBIDTA range with a sliding scale earn-out payment based on where in the range the target was met.

Earn-outs can bring a buyer and

seller together on price to help close the deal, but if they are not crafted and executed carefully, they may delay the valuation gap dispute. At that point, it is usually much more difficult and expensive to resolve.

If earn-outs are based on financial metrics, sellers should be aware of several issues.

One is how to isolate the performance of the target’s business while the buyer is integrating the target entity into its existing business.

Another is what happens if the buyer determines that it will put fewer capital resources into the purchased business than originally expected, because new opportunities or challenges require greater expenditures in other segments of the buyer’s business.

Finally, expectations may differ on accounting methodologies.

This is particularly problematic if the earn-out is based on gross profit. While these issues cannot be eliminated, a properly crafted purchase agreement can help mitigate these risks.

Overall, earn-outs work best if the seller remains involved with the business during the earn-out period and when the metrics are as objective and verifiable as possible, with all calculation methodologies agreed to in advance.

Michael Tucci and Jennifer Horn are attorneys. Horn is in the Business and Corporate Services Group at Mansour Gavin LPA. She can be reached at 216-523-1500 or jhorn@mggmlpa.com.

CORPORATE GROWTH AND M&A

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January 18, 2016 S13

Building a charitable legacy from a business sale

By LAURA MALONE

W

hen owners of closely held businesses meet with their trusted advisers, two important and interrelated questions guide the discussions: 1) “What is the best strategy for exiting my business?” 2) “How can I maximize the financial and tax benefits from that exit?”

In enlightened discussions, owners may choose to address more than tax savings and net proceed increases. They may want to talk about reallocating some of their tax savings toward giving back to the community or figuring out how to manage wealth in a way that

won’t alter their children’s values.

A donor advised fund (commonly known as a DAF) is that point of intersection where the owner’s personal and social interests intersect in simple, tax-smart and meaningful ways. Many owners find the donor advised fund affords them the opportunity to ensure the same sense of enduring significance as a private foundation but without the labor and oversight that private foundations require.

Furthermore, they can offer a level of privacy that is not available in the public tax filings of a private foundation.

How does the business owner benefit?

Because donor advised funds are

sponsored by public charities, gifts of closely held stock, real estate, or other assets qualify for the highest benefits available, including:

■ Tax-free philanthropic growth.

Could this ‘kill the sale/deal’?

down the transaction process. Most buyers hardly notice the DAF charity’s involvement in the transaction.

Professional legal/tax advice is necessary to avoid an IRS challenge of these favorable tax benefits.

However, thanks to the simplicity and cost-effectiveness of DAFs, business owners now have a meaningful way to ensure that they will be remembered over successive generations.

Because the gift must be made before any formal, legally binding agreement to sell or merge the company, gifting the shares to the donor advised fund and the subsequent transition of those shares to the buyer can take place without slowing

Laura Malone is vice president of development at American Endowment Foundation. She can be reached at 888-440-4233 or lauramalone@aefonline.org.

Won’t the owner lose control?

Malone

■ Immediate and maximum income deduction at the highest percentages of adjusted gross income; ■ Avoidance of capital gains on gifts of long-term appreciated stock or other property; ■ No estate taxes on the asset; ■ Potential reduction of alternative minimum tax or possible avoidance of net investment income tax; and

Savvy business owners understand the difference between ownership of a business and control of a business.

Often, the owner is only gifting nonvoting shares or a portion of the asset that is not large enough to impact the owner’s business control.

Bypass the chaotic auctions when sourcing deals Consider these best practices

By JAMES M. HILL

ny? These practices are key:

M

■ Either a strategic or a financial buyer has a former CEO or former operator that has a vast network in the chosen industry and you pay this individual to find "not for sale" companies. A CEO often has a thesis for an industry platform that will draw him into being the CEO or the chairman if a financial buyer.

any strategic buyers and financial buyers are trying to avoid frenzied auctions where the leverage is liberally permitted and the valuations are intimidating. So how does one go about avoiding the frenzied auctions — often without any exclusivity and having to greatly leverage up the compa-

■ There are a large number of buy-side firms that often do add-ons, as larger EBITDA companies often go to auction but find a boutique Hill firm that specializes in the industry. Sell-side firms are usually not attracted to buy-side opportunities because they want inventory to sell. You will have to pay a retainer for this and make sure the buy-side firm understands your industry.

■ Strategic and financial buyers often seek a confidential information memorandum from the large regional or international firms. However, smaller investment banks are an ideal avenue, too. Closely held businesses don’t want to send out 200 teasers. They want to know the best targets on which to focus. Buyers often overlook this consideration.

■ Attend the industry conferences that interest you most as a buyer. You will fraternize with certain CEOs that own their own company (not sponsored

companies) and learn to build a relationship. You cannot focus on general industries but most financial buyers have limited their focus to two or three industries.

■ This requires hard work, and you need a full time corporate development officer to handle this.

James M. Hill is chairman of the Private Equity Practice at Benesch, Friedlander, Coplan & Aronoff LLP. He can be reached at 216-3634444 or jhill@beneschlaw.com.

S14 January 18, 2016

CORPORATE GROWTH AND M&A

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Retain, motivate talent to deliver deal value These strategies help guide transition

By PwC DEALS PRACTICE

T

he talent aspects of M&A have long presented challenges for deal makers, but they can also be a critical part of an M&A strategy.

Achieving success in M&A calls for an incisive capacity to evaluate leaders and teams; an understanding of what motivates them; and an ability to design incentives, environments and roles to retain the most valuable talent.

Getting M&A right from a talent strategy perspective can help propel companies ahead in today’s market.

Bringing in new talent has increasingly become a key goal for M&A transactions.

According to PwC’s 2014 M&A Integration Survey, access to management or technical talent has increased in importance by 27% since 2010.

Yet only about a third (36%) of

executives say they were completely able to achieve those objectives following the transaction’s close.

There is little doubt that talent integration is difficult. In fact, 37% of executives claim that organizational structure, people management and work practices are a top post-close difficulty. These factors are the thirdmost frequently cited challenge after integrating information technology and systems, and aligning operating procedures and business processes.

Yet an acquirer may also face challenges when it comes to existing employees.

M&A transactions can carry huge opportunity costs that can drag down the economic value of the transaction.

Three key aspects are usually the problem: Employee disengagement and productivity declines, voluntary attrition and market share shrinkage.

During the deal’s planning phase, it is important to establish strong leadership and a contemplative approach to employee retention.

Kelly On day one of the merged entity, continuity is paramount: there are customers to be served, employees to be onboarded, payrolls to be met, emMatteson ployee benefits coverage to be extended and workplace infrastructure to be maintained.

As the new organization enters into its initial 100 days, success will Thompson depend on the acquirer's ability to provide the right support for a smooth

workforce transition — one that assists employees from both companies to be engaged in their careers and add value to the organization.

Potential steps include: 1. Assess talent at target company 2. Identify and engage the future leaders 3. Identify the future mid-level managers 4. Determine non-monetary incentives 5. Motivate millennials 6. Communicate throughout the M&A process 7. Design the future organization The M&A transaction can serve as the impetus for building a talent strategy that embodies such policies as work-life balance and flexibility.

Although M&A can be disruptive to employees at both the acquirer and the target organization, it can also be an

What secrets are hiding behind the IT door?

By JIM ABBOTT

I

nformation technology can be a pretty scary thing, since many of us neither speak the language nor have any training on the topic. As such, IT is often overlooked during the acquisition process.

Whether you’re on the buy side or sell side, IT due diligence needs to be a part of every merger or acquisition.

When spending millions to acquire, the last thing you need is to find out (after closing the deal) that a huge

capital outlay is necessary to bring the IT systems up to speed.

Looking to sell your business or carve out a business unit? You present a much more valuable opportunity if your systems have been brought into the 21st century and your IT team is on top of its game.

If you’re looking to acquire, you should be very concerned about the target’s network infrastructure, its security and its compliance with regulatory guidelines, as well as those who manage it. IT can be a tremendous asset or

a huge liability, and only by getting under the hood and knowing what questions to ask can you really gauge the value of what you’re buying.

Abbott A proper review and analysis should consider the acquisition from two perspectives: how the business affects IT and how IT affects the business. It should also consider not only the hardware and software, but also the people because

Brian Kelly and Thorne Matteson are deals partners at PwC. Bradley C. Thompson is an M&A tax partner at PwC. Brian Kelly can be reached at 216-875-3121 or brian.kelly@pwc.com. Thorne Matteson can be reached at 216875-3441 or thorne.matteson@ pwc.com. Bradley C. Thompson can be reached at 216-875-3062 or bradley.c.thompson@pwc.com. you turn to an IT company for advice on accounting? In any network, there are many variables to consider, and no two are alike.

By working with a team that handles IT on a daily basis, you’ll better understand the short- and longterm implications of a system and its operating team. The right source will be one that regularly solves a variety of IT challenges, while also bringing a strategic perspective to the table.

Jim Abbott is the sales and marketing manager with Ashton Technology Solutions. He can be reached at jabbott@ashtonsolutions.com, or 216-539-3685.

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216.658.5208 jschwab@oswaldcompanies.com

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they determine how much value the network adds.

A well-architected system, managed by people who really know what they’re doing, can lead to a much more efficient and productive workplace. A haphazardly constructed network, getting little to no regular maintenance, is a ticking timebomb. But one could easily be mistaken for the other by an untrained eye.

Some business consultants and CPA firms offer “technology consulting� and “IT due diligence� as an additional service, but look at it this way: would

opportunity to re-energize all employees around a new purpose and growth agenda. Where senior executives are successful in communicating an inspiring vision and story around a new corporate future with a merged entity, they can win the “hearts and minds� of employees and re-recruit them with a new zest and energy.

A bigger corporation with a new growth trajectory and mission can be a powerful lure for talent.

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To learn more, contact: Mergers & Acquisitions Paul Schneir 216-689-4005 pschneir@key.com

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S16 January 18, 2016

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Will your next cross-border transaction receive government approval?

Agency carefully monitors swath of transactions

By MARY I. EDQUIST

I

f you are contemplating a merger, acquisition, joint venture or other form of investment by foreign companies or individuals, you should be aware of the Committee on Foreign Investment in the United States.

An inter-agency committee of the U.S. government, CFIUS is composed of representatives from nine federal agencies, including the Department of Defense, the Department of State and the Department of Treasury.

CFIUS has the authority to review, investigate and block almost any foreign investment in a U.S. company or asset that either raises national security concerns or involves critical infrastructure. Given that the president has the authority to unwind such transactions at any time, even postclosing, parties regularly file voluntary

notifications with CFIUS in order to gain a safe harbor.

Among other matters, a CFIUS notice provides the government with informa- Edquist tion concerning the nature of the transaction and the seller’s domestic operations, as well as the foreign buyer’s background and future intentions with respect to the business or assets being acquired.

Depending on the circumstances, it can take between 45 to 90 days after a formal filing is made to obtain approval from the committee.

While some may think their transaction is far removed from “national security” or “critical infrastructure,” CFIUS interprets these terms very broadly.

Recent CFIUS reviews of transac-

tions, ranging from the sale of a U.S. pork producer to the acquisition of gene sequencing technology, illustrate the extent of the committee’s reach.

CFIUS regularly investigates transactions involving finance, aerospace, telecommunications, mining, oil and gas, pipelines and refineries, government contracting, computer devices and software, among a range of other industries.

In addition, the size of a deal has little bearing on whether CFIUS will take interest in a transaction. Unlike in an antitrust setting, the actual dollar value invested or the purchase price are not major factors.

For example, CFIUS in 2011 informed China-based Huawei Technologies that it would be required to divest its acquisition of $2 million worth of assets from 3Leaf Systems, a server technology company.

Aon Risk Solutions

A successful transaction.

Easy to say, hard to do.

Aon M&A Solutions can help you achieve success from due diligence through integration planning, implementation, and transformation.

Be sure you have the right people at the right time, linking compensation to corporate objectives while protecting your business assets and optimizing financial position.

To discover more, contact Jeff Nicholson (jeffrey.nicholson@aon.com) at 216.623.4152, or Jay Moroscak (jay.moroscak@aon.com) at 216.623.4143.

Risk. Reinsurance. Human Resources.

Parties understandably may hesitate to undertake the burden of yet another regulatory filing in connection with their transaction. However, they should take into consideration certain matters before deciding whether to forego a filing: ■ Foreign buyers commonly insist on such filings; ■ CFIUS regularly reviews company websites, press releases, Securities and Exchange Commission filings, and other public notifications and government filings to understand what transactions have occurred or are in process; ■ CFIUS may learn of the

transaction from competitors or other federal agencies; and ■ Without a filing, there is no safe harbor to prevent the president from unwinding a transaction, an action the executive has not hesitated to take previously.

Given the scope of CFIUS jurisdiction, it is wise to ensure that any cross-border transaction is carefully analyzed to determine the risks and rewards of filing a notice with CFIUS. Mary Edquist is an associate in the Business Department at McDonald Hopkins. She can be reached at 216-348-5415 or medquist@mcdonaldhopkins.com.

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CORPORATE GROWTH AND M&A

January 18, 2016 S17

Build a culture of innovation to diversify growth

By DAVID MUSTIN

I

t has been often reported that the U.S. Commissioner of Patents in 1898 said, “Everything that can be invented, has been invented.” While that quote has been debunked, it often feels that way to those who are seeking the next great invention. So, if lacking the innovation DNA, how does one start?

The late economist Theodore Levitt said, “Creativity is thinking up new things, while Mustin innovation is doing new things.” To truly be successful at innovating, you may start with creativity, but then it must be translated into actual results.

Innovation starts with leadership and vision. Leaders should shift from homerun thinking to smaller, yet clear achievable objectives. Start with simple goals for new services or extensions to existing services. Some organizations just

start with simplifying internal processes.

Develop a balanced team with a bias for innovating. Ideas come from one

STAY IN CONTROL OF NON-CONTROL INVESTMENTS Protections available for minority investors

By BRENT PIETRAFESE

M

ost traditional private equity firms tend to avoid minority, or non-control, investments.

However, the number of minority investment transactions has been increasing amid the rise of new single and multi-family offices that want to deploy capital but lack the desire or ability to source, diligence and manage control deals.

The increase in minority investments has placed a renewed focus on which protections are available to minority investors. Pietrafese When evaluating a minority investment, it is important to not think of control/non-control as a zero-sum game.

Not having a controlling share in a company doesn’t mean the investor has to accept a position of merely being “along for the ride.” There are a number of protections available to minority investors that will allow them to exert influence and have an active role in the investment.

The three most basic of these protections are information rights, preemptive rights and “tag along” rights.

Information rights require a company to provide investors with certain financial statements (typically annual and monthly) and other material company information. Most information rights also include the opportunity to visit the company’s facilities, inspect its books and discuss matters with management.

Board observation rights also fall into the information rights category. Such rights allow a minority investor (or their designee) to attend board meetings in a non-voting role and, depending on company/board culture, participate in board discussions.

Many minority investors prefer board observation rights over having an actual board seat because they have a “seat at the table” when material issues are discussed, but do not have the fiduciary responsibility and potential liability that comes with an actual board seat.

A preemptive right is simply a privilege extended to certain investors that allows them to maintain a proportionate share of the ownership of a company by purchasing a proportionate share of any new equity issuances before they are sold to third parties.

Minority investors are generally restricted from selling their equity interests, but they commonly are given the right to participate, or “tag along,” in sales of equity interests by the controlling investor, who is not similarly restricted.

This right provides minority investors an opportunity to share in the control premium that would otherwise only be paid to the controlling investor.

Minority investors in private companies must carefully consider a host of issues when evaluating such investments, but fear of being merely “along for the ride” need not be one of them.

Brent Pietrafese is a partner in Calfee, Halter & Griswold LLP’s Business Transactions practice.

He can be reached at 216-622-8623 or bpietrafese@calfee.com.

set of resources. Another set should design and develop the details. A third group should develop the business

case, while a fourth group should manage to completion.

Leading organizations use tools such as DISC or Herrmann Brain Dominance Instruments to identify resource availability.

They also test during hiring to verify skill, behavior and thought diversity.

Organizations with a shortage of any of these resource types will be limited in their ability to innovate.

Innovation is impossible without a solid process to move from ideation through implementation. Tools and techniques such as program/portfolio management coupled with Stage Gate methods are critical.

Sizing the portfolio correctly is also important. Smaller organizations or those with limited resources and budgets should take on no more than three to five significant initiatives annually.

Finally, it’s important to put culturebending techniques in place. To increase innovation, celebrate rather

Because no two deals are alike.

than punish failure. Thomas Edison failed 10,000 times before inventing the light bulb.

Start small and prepare for incremental advances. Take the long view and invest over time to grow the team and the portfolio.

Lastly, give your teams a vested interest by rewarding those that succeed. Start with public recognition.

Over the long term, consider financial rewards to align the team to organizational objectives.

According to Harvard University professor Michael Porter, “Innovation is the central issue in economic prosperity.” Balancing organization objectives between acquisitions and innovation is a healthy approach to diversifying growth.

David Mustin is founder and managing director of Stafford Snyder. He can be reached at 216-570-4283 or david.mustin@ staffordsnyder.com.

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S18 January 18, 2016

SPIN CYCLE: THE RISE OF SPIN-OFFS

By GIOVANNI DI CENSO and MATTHEW KOLMAN

W

hile conglomerates regularly make headlines for their billion-dollar-plus acquisitions, the marketplace is seeing an increasing number of spin-offs and asset sales. In most cases, companies are spinning-off units to allow them to better focus management attention, capture value not appreciated by the market and increase strategic and financial flexibility.

Spin-offs often are treated as tax-free transactions to investors, which make them even more attractive. However, companies can’t assume that all spinoffs will be treated as such. They still must meet certain conditions.

And even when they go through, the spun-off entities must avoid certain transactions for a period of time.

Many boards and executives recognize that identifying the next breakthrough, internally developed idea is time and energy-intensive. It can be an uncertain process, especially in large organizations where business division managers may want to focus on other priorities. In large organizations, the competition for capital can mean that

promising ideas may not get needed support.

By spinning off a portion of the business to form two independent organiDi Censo zations, and following that with strategic acquisitions, a corporation may be able to quickly “build” what it needs to increase revenue and market share.

Of course, a spin-off is not the same as a sale. An outright sale can produce significant liquidity, but sellers may incur meaningful tax costs. A spin-off often is tax-free but doesn’t provide a meaningful boost to short-term liquidity.

In fact, some companies begin the spin-off process and an outright sale on parallel tracks, as market conditions could favor one strategy over another.

If asset valuations decline, an outright sale may be the preferable outcome.

If a company goes forward with a spin-off, it needs to be prepared. A host of issues can prove disruptive, if not catastrophic: Each business will require its own dedicated blueprint for, among other things, future operating and organizational needs, legal structure, ownership of

intellectual property, branding strategy and governance structure.

Certain projects that are “in-flight” may need to be suspended until the spin-off is Kolman complete.

Employee relations are critical, especially in projecting key steps and milestones, and setting expectations around roles, compensation and strategy. Cost structures need to be analyzed thoroughly to mitigate the risk of post-transaction bloat.

In short, while many factors argue for a spin-off rather than a sale — and tax costs are among the greatest — successfully executing a spin-off requires significant energy and attention.

Giovanni Di Censo is a tax partner in M&A Transaction Services at Deloitte and the office tax managing partner in Cleveland. He can be reached at 216-589-5150 or gdicenso@deloitte.com. Matthew Kolman is an advisory director in M&A Transaction Services. He can be reached at 216-589-3981 or mkolman@deloitte.com.

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Private equity trends foretell continued optimism

By CHRISTOPHER P. REUSCHER and CONNIE A. PORTER

D

espite a recent slowdown in deal activity, current overall trends in private equity provide reason for optimism. Private equity buyers offer unique advantages to sellers that increase the likelihood of deal success.

Current deal trends Private equity firms have a tremendous amount of dry powder with which to invest. With their continued success at fundraising and the median time for holding a target declining for the first time in six years, the outlook for private equity’s ability to invest is positive.

The middle mar- Reuscher ket continues to account for the majority of private equity buyouts.

Many private equity firms see value in the buyPorter and-build model, meaning these investors are acquiring lower middle market and core middle market companies to grow themselves.

An increasing number of baby boomers in the U.S. are looking to sell their companies and focus on retirement, so more businesses are expected to be for sale. With valuation-to-EBITDA multiples decreasing from 2014’s highs, opportunities for private equity firms should be strong in 2016.

Trends that are expected to continue are: 1) the rise of family office investing; 2) independent sponsors sourcing deals; and 3) limited partners wanting to actively participate in deals as co-investors.

Challenges To successfully navigate the deal

landscape, private equity firms need to be prepared to meet current challenges, including regulatory scrutiny, cybersecurity issues and cost of financing.

Among some of the biggest challenges private equity firms face are regulatory hurdles. During the past year, the SEC focused on transparency issues, particularly spotlighting transaction fees and expenses.

Pitching the advantages of a private equity buyer October was a blockbuster month for megamergers and acquisitions in the public sector.

Corporate acquirers have money to deploy, and their funds are accessible. In this competitive environment, private equity firms need to be prepared to market their advantages to potential targets.

Advantages of selling to a private equity buyer include the lower probability of antitrust roadblocks and the lower risk during due diligence when the buyer is a financial buyer and not making a strategic acquisition (meaning no disclosure of sensitive information to a competitor).

A private equity buyer can be more creative with deal structure and has the ability to retain current management, which may be important to a seller who has nurtured the current team and intends to retain some upside in the company’s continued success.

Despite the recent slowdown, the target market is likely to become more robust. Private equity firms can take advantage of this market with creative deal structures and by pitching their strengths to potential sellers.

Christopher P. Reuscher is a partner at Roetzel & Andress, LPA. He can be reached at 330-762-7994 or creuscher@ ralaw.com. Connie A. Porter is an associate at Roetzel & Andress LPA. She can be reached at 330-849-6679 or caporter@ralaw.com.

Counseling companies and financial sponsors in M&A and other corporate transactions has been a cornerstone of strength for BakerHostetler since the firm’s founding a century ago.

Mark Weisman Managing Director Tel: (216) 415-7509 Email: mweisman@navidar.com

Navidar is an investment banking firm, providing companies and investors in dynamic industries with strategic M&A advice, capital raising solutions, vital insights and breakthrough opportunities.

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January 18, 2016 S19

Before you sign on dotted line, address post-closing obligations in a business sale

By MICHAEL D. MAKOFSKY and STEVEN P. LARSON

capital or EBITDA adjustments and indemnification.

T

Working capital or EBITDA adjustments

he sale of a business is one of the most significant events in a business owner’s life. The owner is excited to move on to the next chapter and is often eager to close and monetize the deal. However, there are often terms and obligations in the purchase agreement that survive the closing of the transaction, which can impact the owner’s return or create liability.

Consequently, business owners need to understand the significance of these post-closing obligations and address them before closing.

Two important examples are working

A purchase price is often derived from a multiple of a company’s working capital or EBITDA (earnings before interest, taxes, depreciation and amortization). After the closing, parties calculate working capital or EBITDA adjustments to true up the actual value of the company. It is important to understand when and how the adjustment will be calculated so the owner is prepared for the possibility of refunding a portion of the purchase price to the buyer. If the actual working capi-

tal or EBIDTA varies from the estimate then the owner could potentially be obligated to refund the difference.

Indemnification

Makofsky

In a purchase agreement, an owner makes representations and warranties regarding various facets of the business. Representations often include veracity of financial statements, payment of taxes, condition of assets and status of contracts. An owner will also agree to perform or refrain from performing certain actions.

For instance, a buyer may require an

owner to keep certain information confidential, not solicit current employees nor compete with the business.

If the buyer incurs damages because a Larson representation or warranty is untrue, or an owner breaches a covenant, then the buyer may be entitled to indemnification. Indemnification is a process in which an owner repays a buyer for the losses incurred as the result of such inaccuracy or breach.

Almost all buyers require the right to indemnification. However, an owner can try to mitigate or box-in potential liability before closing by limiting

the survival period of representations and warranties, providing minimum (basket) and maximum (cap) dollar limits and narrowly defining the scope of damages.

By understanding the potential postclosing liabilities, business owners and their legal teams can work to negotiate the sale in the owner’s best interest.

Michael D. Makofsky and Steven P. Larson are attorneys in the Mergers and Acquisitions Practice at McCarthy, Lebit, Crystal & Liffman Co., LPA. They can be reached at 216-696-1422 or mdm@mccarthylebit.com and spl@mccarthylebit.com.

For strategic acquirers, financial due diligence goes beyond the numbers

T

here is always a lot of excitement when a company announces an acquisition. Press releases are issued and investors are eager to hear about growth and synergy opportunities.

Management teams communicate the deal rationale to current employees while welcoming the target’s employees into their organization.

But getting to that point, and charting the course for the most effective integration possible, starts with a thorough and efficient due diligence process.

For successful strategic acquirers, due diligence goes beyond an evaluation of the target, and includes a thorough review of the strategic fit, cultural alignment, value chain Libeg and the potential benefits from collaboration between the two companies.

In today’s competitive mergers and acquisitions environment, it is essential for strategic acquirers to be able to identify how the combination of the target and the existing business can create incremental value (including geographic expansion, size/scale, complementary technology, etc.). At the same time, they also have processes in place to identify risk factors that allow them to walk away from the wrong deals.

For strategic acquirers, effective financial due diligence goes beyond simply confirming the target’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). If executed properly, it can provide valuable insights into the growth drivers and risks present at the target, which can help with negotiating leverage, terms and conditions in the purchase agreement, the purchase price allocation and integration strategy.

Here are a few examples of areas where financial due diligence can add value to strategic acquirers:

Validate synergy assumptions For public companies, one of the first questions investors and analysts typically have are related to synergy

estimates (and what a post-synergy EBITDA multiple might look like).

This is not something that executives take lightly — these are targets that they will be measured by in the coming quarters and years. Being able to set appropriate synergy targets requires a strong understanding of the recurring earnings base after eliminating any accounting tricks or non-recurring revenues and expenses.

It is also important to identify potential dis-synergies, such as channel conflicts that could exist between the target and the buyer’s current customer base, and any under-investment in the target business. Potential red flags include lack of investment in sales personnel or capital expenditures in recent years.

‘‘

BEING ABLE TO SET APPROPRIATE SYNERGY

TARGETS REQUIRES A STRONG UNDERSTANDING OF THE RECURRING EARNINGS BASE AFTER ELIMINATING ANY ACCOUNTING TRICKS OR

‘‘

By TOM LIBEG

NON-RECURRING REVENUES AND EXPENSES. identified is critical. These issues have the potential to impact contract negotiation — which is often occurring concurrently with the diligence review — and due diligence requirements in other functional areas, such as human

resources, operations and information technology.

Even with excellent collaboration among the functional teams, no due diligence process can provide a guarantee of deal success. But by

engaging the right internal resources and external advisers who understand the strategic rationale, key risk factors and what it takes to get a deal done, strategic acquirers can certainly tilt the odds of success in their favor.

Tom Libeg recently joined Grant Thornton LLP's Transaction Services practice as a managing director after spending the last four years at PolyOne Corp., where he was the director of M&A. He can be reached at 216-858-3588 or tom.libeg@us.gt.com.

Understand commercial trends It is vital for strategic acquirers to develop a strong understanding of the target’s commercial position and end market dynamics. Diving into the underlying trends of the business can help answer critical questions about the target’s relationships with key customers, ability to generate revenue from new products, exposure to swings in raw material prices and drivers of margin improvement or deterioration. These are factors that can significantly impact valuation and, potentially, whether or not to move forward with the deal.

Investigate. Learn. Share. Prosper.

Purchase agreement terms and conditions Financial due diligence teams can add value to many aspects of the purchase agreement. A thorough examination of the balance sheet is required to negotiate the most appropriate working capital target, evaluate and account for the impact of debt-like items and ensure the closing accounts are compiled in a consistent manner. Additional risk factors and potential unrecorded liabilities (e.g. threatened litigation, environmental and product liability) may also be identified, which can impact materiality thresholds or indemnification provisions in the contract.

For corporate development teams at strategic acquirers, receiving timely feedback on any financial issues

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

To reach our Cleveland office, call 216.241.3272

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CORPORATE GROWTH AND M&A

S20 January 18, 2016

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Purchase price adjustments warrant scrutiny Experienced counsel can help structure working capital adjustments

By JEFFREY A. FICKES

W

ith the growth and influence of private equity during the last 20-plus years, post-closing purchase price adjustments in mergers and acquisitions have become the norm.

Today, more than three-fourths of middle market transactions include price adjustment mechanisms based on the actual amount of working capital delivered by the seller at closing relative to an agreed-upon target amount.

This adjustment mechanism is used for a very simple reason: Businesses require a certain amount of working

capital to meet ongoing cash flow needs.

If a seller delivers less-thanadequate working capital, the buyer will be required to make an additional investment in the business. On the other hand, if the seller delivers more-thanadequate working capital, the seller will be leaving money on the table.

If this is so simple, then why do approximately two-thirds of transactions with working capital adjustment mechanisms result in downward price adjustments? And why is the average downward adjustment approximately 1% of purchase price ($1 million on a $100 million deal)?

It is generally not because buyers game the system or sellers intentionally pull working capital out of the business before closing.

Fickes For the most part, parties conduct themselves in good faith, especially when they will continue working together after closing (including equity rollovers or executive employment relationships).

Maybe the lawyers are to blame.

This is a provocative suggestion coming from a lawyer for sure, but it

just may be true.

Although simple in theory, structuring working capital adjustment mechanisms is not simple in practice. There are many complex variables that involve the disciplines of law, accounting and finance. Investment bankers and CPAs cannot do this all on their own.

Deal counsel must first possess adequate knowledge of accounting and finance in general. They need to understand the business, the numbers and the accounting methods so the working capital calculation and target are properly established.

Finally, deal counsel can help

reduce the likelihood of material price adjustments and related disputes by being proactively involved in structuring adjustment mechanisms that meet the parties’ objectives and ensure adequate working capital for the business.

Jeffrey A. Fickes is a partner at Tucker Ellis LLP. He can be reached at jeffrey.fickes@ tuckerellis.com. Associates Christina Suh, Paul J. Malie Jr. and Thomas R. Peppard also contributed to the story. They can be reached at christina.suh@ tuckerellis.com, paul.malie@ tuckerellis.com and thomas. peppard@tuckerellis.com.

Thinking of selling? Maximize your return with sell-side due diligence

By ROBERT SHEFFERLY III and DON STANOVCAK

M

ore and more sellers of businesses in the U.S. are performing what is referred to

as sell-side tax due diligence. This is the practice of reviewing the company’s tax positions and compliance before starting an active sale process.

Some sellers are initiating these due diligence reviews, which were

popularized in Europe, early in the transaction life cycle because they’ve proven so helpful. From maximizing transaction value to expediting the sale process to remediating tax exposure, here’s why it’s important not to

overlook this crucial process:

Maximize transaction value Sell-side tax due diligence can be used to negotiate a higher sales price in cases where the seller has substantial tax attributes, such as net operating losses, general business credits or capital loss carryforwards. Sellside tax due diligence could provide insight on the tax situation of the seller and the extent to which these tax attributes can be used after the transac- Shefferly III tion. Given this information, some buyers might increase their purchase price. Some buyers might be more confident in submitting offers if they betStanovcak ter understand the tax situation of the target companies and believe that it’s less likely their own due diligence would derail or add complexity to the deal process.

Expedite the sale process

ƚ DĞů ĂƉ WĂƌƚŶĞƌƐ ŽƵƌ ŐŽĂů ŝƐ ƚŽ ƐŚŽǁ LJŽƵ ŽƵƌ ǀĂůƵĞĚ ĐůŝĞŶƚ ƚŚĂƚ LJŽƵ ĂƌĞ ŶŽƚ ũƵƐƚ Ă ŶƵŵďĞƌ ƚŽ ƵƐ tĞ ƐƚƌŝǀĞ ƚŽ ƉƌŽǀŝĚĞ ŚŝŐŚ ƋƵĂůŝƚLJ ĂŶĚ ŝŶŶŽ ǀĂƟǀĞ ŝŶǀĞƐƚŵĞŶƚ-ďĂŶŬŝŶŐ ƐĞƌǀŝĐĞƐ ƚŽ ŵŝĚĚůĞ ŵĂƌŬĞƚ ĐŽŵƉĂŶŝĞƐ tĞ ĂƌĞ ŚĞƌĞ ƚŽ ŚĞůƉ LJŽƵ ƌĞĂĐŚ LJŽƵƌ ŐŽĂůƐ ĂŶĚ ŽďũĞĐƟǀĞƐ

A buyer will likely examine the seller’s records to determine whether the business has complied with all relevant tax requirements and that taxes filed were calculated accurately. A seller’s pre-sale review documentation can help expedite the buyer’s review.

The buyer will still undoubtedly conduct its own due diligence, but the process may go faster since this would be verifying the seller’s work as opposed to a full-on examination from scratch. Sell-side due diligence also makes it less likely that a buyer would turn up tax issues previously unknown to the seller that could potentially change the deal structure or price, or possibly kill the deal altogether.

Opportunity to remediate tax exposures

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The testimonial presented above does not guarantee future performance or success.

If conducted early, sell-side due diligence allows time for sellers to remedy any previously undiscovered tax problems. While the types of problems and the remediation process may vary based on the taxing authority and underlying issue, the seller benefits from early awareness regardless of the venue. This early awareness may

allow sellers to take such steps as: ■ Perfecting certain elections that are important to their tax classification or tax situation ■ Formally changing to permissible accounting methods ■ Seeking private letter rulings from the IRS to perfect certain tax positions ■ Filing previously unfiled returns under certain programs that limit their exposures These steps can relieve buyers from their concerns and fix, eliminate or reduce the amount of their exposures. Even in cases where exposure is theoretical, most buyers will take steps to protect themselves from liability for tax errors made under the previous ownership.

As a result, the elimination or minimization of these exposures can reduce or simplify the need for purchase price adjustments, indemnification provisions and escrows later in the transaction cycle.

Sellers who perform an effective sellside tax due diligence review before going to market can often increase a business’s selling price, reduce buy-side due diligence times and concerns, and increase credibility with potential buyers.

On the other hand, sellers who don’t take the necessary steps to review federal, state, and international obligations in the early stages of preparation could wind up paying for it down the road in delays, deal-time stress or negotiation over the financial terms of the deal.

As buyers conduct closer examination of taxes in their due diligence regimens, the value to sellers of reviewing and remediating tax issues prior to the sale continues to grow.

Most sellers find that it is better to uncover any potential tax exposures and deal with them now rather than waiting until the buyer brings them up later during the sale process. As in any other negotiation, surprises are rarely good.

Robert Shefferly III is a partner in the National Tax Office at Plante Moran. He can be reached at robert.shefferly@plantemoran.com.

Don Stanovcak is an attorney in the National Tax Office at Plante Moran. He can be reached at don.stanovcak@plantemoran.com.

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January 18, 2016 S21

NAVIGATING THE WORLD OF TECHNOLOGY M&A Invest time, resources into maximizing company’s position

By MARK WEISMAN and STEPHEN DAY

Y

ou have decided to sell your technology company. What can you do to best position your company to realize the maximum value?

First, the technology M&A market, especially for private companies, is extremely imperfect. There are large discrepancies in what different buyers are willing to pay for similar assets.

Many of our sale processes have

involved dramatic differences in what different buyers are willing to pay for the same company. Recognizing this key fact about the technology M&A world is the critical starting point for any sale process.

Without a strong team of professionals (investment bankers, lawyers, accountants), these imperfections will work to your disadvantage.

Second, most strategic buyers of technology companies are focused on the growth prospects of the business they are buying because of the multiples

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paid for technology companies.

Finally, given the sophisticated and esoteric nature of many technologies, it is important to Weisman understand that your technology will be a critical focus area for the buyer. Showing the buyer that you have something truly different is key to realizing strategic value for your company. While this may seem obvious,

technology companies often underappreciate this notion.

So how does this all translate into how the sale process should be managed?

Day It is critical that you invest a lot of time thinking about your positioning — how you convey your value proposition and growth prospects to potential buyers — because this can greatly enhance your valuation.

Mark Weisman is the managing director of Navidar’s Cleveland office. He can be reached at 216415-7509 or mweisman@navidar. com. Stephen Day is the cofounder and managing director of Navidar.

He can be reached at 512-7656973 or sday@navidar.com.

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As we say, “equity is a story sale.”

In a sale process you may need to tell that story in a slightly different way to different buyer groups.

It is best to never assume that an interested buyer understands your technology and what it may mean to them. It helps if you and your banker can clearly communicate the value of your technology in terms that the buyer will most understand and appreciate.

We frequently see that companies have not reconciled their qualitative highgrowth story with convincing quantitative support in the form of highly defensible financials (including projections). One common example involves a company telling a very interesting market growth story but then showing in their financial plan a growth rate below that of the market in which they are participating.

We wish we had a nickel for every time a client told us that they knew who would buy his or her company or that he or she was sure a few “logical acquirers” would be there at the end. The reality is that things often work out very differently.

The key takeaway is that it makes sense to approach a broad buyer universe, and make sure that international buyers are well-represented among those you approach.

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Cascade Partners manages Cascade Growth Partners, an operationally focused private investment fund which provides growth capital to healthcare, valueadded manufacturing and technology-enabled service businesses generating less than $4 million in EBITDA.

For additional information about Cascade Partners please contact: RAJESH U. KOTHARI, CFA rajk@cascade-partners.com GARY N. LEWIS garyl@cascade-partners.com KEN MARBLESTONE kenm@cascade-partners.com THOMAS K. COX tomc@cascade-partners.com

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CORPORATE GROWTH AND M&A

S22 January 18, 2016

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4

THE DEAL. Negotiations don’t start with price. Before getting your lawyer to send out a term sheet outlining the deal, you need to establish a relationship with the potential seller and lay out the reasons why the opportunity makes sense for both parties. Be sure to listen and understand their objectives, goals and needs. This provides a fallback position that will help keep the opportunity moving forward when the negotiations become difficult, which almost always happens.

By KEN MARBLESTONE

A

cquiring a company is one of the biggest decisions a business owner makes. These are largedollar, high-risk decisions that may positively or negatively impact a business for years. So, why do business acquisitions often involve happenstance, and what obstacles prevent business owners from undertaking a proactive, well-thought-out acquisition strategy?

Too often, business acquisitions happen because of chance introductions to people who are ready to sell their company. This is a reactive (as Marblestone compared to proactive) approach. This strategy can work, but before moving forward the following questions must be asked: 1) Does the acquisition fit my strategy? 2) Do I know the universe of companies that do fit my strategy, and have I contacted them?

These questions often are not asked prior to an acquisition because of the time and resource constraints inherent in all businesses. If you are intrigued by the idea of making acquisitions based on proactive strategy and process, then read on.

Below are four important steps to determining your acquisition strategy and process:

1

DEFINE YOUR BUSINESS STRATEGY. Taking a proactive approach to the acquisition process starts with your strategy. To determine your strategy, a few questions that need to be answered include: ■ What are our existing core strengths, and how do we build on them?

■ Are there key customers that are better to add through

ACQUIRING COMPANIES THAT FIT YOUR STRATEGY Proactive approach offers several advantages acquisition rather than organically?

■ What do our clients want that we are not providing?

■ Do we need to expand vertically or horizontally to grow, or just our geographical footprint?

■ What is the best way for us to leverage our current platform to reduce costs?

■ Are there new technologies or capabilities that we could add to drive growth?

2

IDENTIFY POTENTIAL TARGETS THROUGH RESEARCH. There are far more companies out there than you might realize, and you should not just depend on those companies that are brought to you for

sale. This is a key step in letting your strategy drive the acquisitions, and not the acquisitions that happen to be available drive the strategy. You also need to investigate the market and understand what companies fit your strategy. Then, determine if they can be acquired. Make sure they have the customers, product, technology or geographic fit that your company needs strategically.

3

REACH OUT TO THE TARGETS. Once your list of potential companies is developed, you need to contact them and engage in a dialogue.

Our experience has been that many of these companies may not have even thought about selling their business. It will take time to build a discussion and

for the target company to determine that it might be time to consider a transaction. You need to connect with them, talk to them about your business and how they could benefit by affiliating with your company.

Making contact with the right person at the target firm and establishing a dialogue is not easy. It is a timeconsuming process and requires many attempts to connect with the right person. Networking, trade connections and advisers are effective ways to initiate communication. Of course, just having a conversation does not get the process very far. It may take several calls and discussions to actually focus in on the concept of an affiliation. Remember, you have to date before you get married.

Leading a business is never easy.

You and your team are already time-constrained competing, hiring, developing products and building client relationships. Adding an acquisition mandate to a full workload can be done, but must be well thought through. A full-time corporate development team is an ideal solution, but very few firms consistently need or can retain that expertise.

An in-between alternative is to engage an outsourced corporate development team. Some investment banks focus on executing the acquisition process and have experienced considerable success.

Working with investment bankers specializing in buy-side advisory services offer several advantages, including reduced costs; skill and research capabilities at finding targets; success at contacting and engaging the targets; and ability to quarterback the negotiation, due diligence and closing phases. This allows your team to focus on integrating the new purchase.

Ken Marblestone is a managing director at Cascade Partners LLC. He can be reached at 216-404-7221 or kenm@cascade-partners.com.

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January 18, 2016 S23

Never underestimate the importance of working capital

By LLOYD BELL

W

orking capital is an oftoverlooked component to most acquisition transactions. Business owners who have not engaged in a transaction may find that the conversation has suddenly shifted from EBITDA and purchase price multiples to net working capital.

What is net working capital? The individual components depend on the business, but it should be limited to the assets and liabilities that will transfer in the sale. For simplicity, think of it as the current assets excluding cash minus the current liabilities excluding

interest-bearing debt.

The concept in a transaction context is relatively simple: the buyer assumes that a certain amount of net working capital will be delivered at closing. The purchase price may change depending on whether the actual amount is higher or lower. The reality is that the working capital adjustment is anything but simple.

Different issues can arise when determining the working capital’s impact on the transaction, but the two most common problems are establishing the proper target amount and the true value of the components.

For businesses with seasonal peaks,

the amount of net working capital may vary during the year.

If the targeted amount of net working capital is based on the balance sheet when Bell net working capital is at its highest, it’s likely that the amount reported at close will be lower.

Therefore, the purchase price will be adjusted downward. It is essential that an appropriate target amount be agreed to during negotiations to avoid a downward adjustment.

Understanding the true value of the components of net working capital is a

more serious problem.

Some adjustments are easy to identify, such as the need to writeoff uncollectible accounts receivable.

Others not only are more difficult to quantify, they may reflect poorly on the quality of the information coming from the seller.

Inventory balances may be inflated by large amounts of slow-moving or obsolete inventory, which indicates that historical profits may be overstated.

Similarly, expenses that should be accrued for may be left off the balance sheet. Concern arises when report totals (such as accounts receivable aging or inventory detail) don’t match the

balances on the financial statements.

Owners contemplating the sale of their business should make it a point to understand how much working capital their business needs to ensure that no surprises pop up during the due diligence process.

Sell-side due diligence, or even some solid conversations with the company accountant, will go a long way toward a successful sale.

Lloyd Bell is director of the Corporate Finance Group at Meaden & Moore. He can be reached at 216-928-5360 or lbell@meadenmoore.com.

Purchase price adjustments can alter a deal’s final price tag

By JUSTIN THOMAS

A

fter lengthy negotiations, a buyer and seller agree upon the enterprise value of the business for sale. This is a step in the right direction; however, the purchase price is not yet final.

Round two includes analyzing and negotiating purchase price adjustment mechanisms, which can materially affect the final cash payment in a deal.

These mechanisms are increasingly being built into the letter of intent, pre-due diligence, and are almost always part of the final purchase agreement.

While purchase price mechanisms are intended to preserve value and allocate economic risks to the buyer and seller in an equitable and “fair” manner, too often one or both parties use these mechanisms to manipulate the final deal valuation.

The most common purchase price mechanisms — net debt and working capital adjustments — work hand in hand. They are particularly necessary when a deal is being valued on a “cashfree/debt-free” basis, in which the buyer establishes the enterprise value, or headline price, for a business.

The buyer effectively agrees to pay the seller an additional amount for any cash

left in the business and reduce proceeds paid for any debt transferred in the sale.

The difference between these cash and debt amounts is the Thomas net debt adjustment.

To ensure sellers do not reduce working capital to artificially increase cash at closing — and alternatively compensate sellers for working capital invested in a business — a working capital adjustment mechanism complements the net debt adjustment.

Typically, price is adjusted on a dollar-for-dollar basis to the extent

closing working capital is higher (price increase) or lower (price decrease) than a negotiated working capital target.

The specific language used in the purchase agreement to define cash, indebtedness, working capital, target working capital, accounting principles and even Generally Accepted Accounting Principles is negotiable and critical to determining the final cash price.

Buyers and sellers should know that there are no standard definitions for these key terms. For example, debt is often more than bank debt or outstanding notes. There is

no standard way to establish the appropriate net working capital target.

The best way, and possibly your last chance, to preserve value in a deal is to use the most advantageous definitions for your scenario.

Work with your advisers early on in the process to assess the right language for your specific deal and current market norms. Then, make sure both sides of the table — seller and buyer — are on the same page.

Justin Thomas is a partner in Transaction Services at Cohen & Co. He can be reached at jthomas@cohencpa.com.

TMA Ohio Chapter announces 2015 award winners!

We congratulate Bob Greenwald, RMG Consulting, winner of the 2015 Lifetime Achievement Award pictured with Sally Barton, TMA Chapter President.

We congratulate the winner of the 2015 Turnaround of the Year Award Charles Deutchman, Shared Management Resources, Ltd. and Alan Grochal, Tydings & Rosenberg, LLP (not shown).

We thank Bob 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 award. Thank you for your contributions to the Turnaround Management Association.

CORPORATE GROWTH AND M&A

S24 January 18, 2016

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CLEVELAND IS MAKING BIG INVESTMENTS: SHOULD YOU FOLLOW SUIT? Select right form of capital to optimize your growth

By REBECCA LYNN WHITE

I

n this fast-paced world, it isn’t easy to shift the momentum in a city. But it is essential to make this shift in order for the city to stay vibrant and thriving. Walk around Cleveland, and you will see various sites and buildings under construction or planned for near-term development, most notably the redesign of Public Square.

Companies go through a similar shift at times to ensure White their products and services are relevant and innovative. This can involve a facility expansion/renovation, product line expansion/redesign, revamped marketing/business strategy and/or additions to the management team/

employee base.

Each of these initiatives requires a great deal of time and capital to implement. While you may be able to justify the time, can you justify the cost of capital? And even if you can, where does one find this capital?

Fortunately, capital is readily available in the market today from a variety of providers and in a variety of forms: ■ TRADITIONAL BANKS: Typically the most common and least-expensive form of capital, banks generally make loans based on a company’s cash flows or collateral base. Debtors are required to meet several financial covenants (including debt service, cash flow and/or operating covenants), which assure the lender that their capital is secure. These covenants, however, can sometimes have the unintended

consequence of restricting growth, depending on the company’s financial situation.

this capital is typically less restricted by covenants and offers more flexible repayment terms.

■ ALTERNATIVE LENDERS: In a highly liquid market such as this, alternative financing sources have emerged, including Business Development Companies and Small Business Investment Companies. They provide capital to small and growing businesses, as well as those that are light on traditional collateral. Although capital from alternative lenders is generally more expensive than from traditional banks, it can be structured in a more accommodating manner, such as senior term, unitranche, second lien, junior secured and equity co-investments. As such,

■ MEZZANINE PROVIDERS: Although more expensive, mezzanine capital can be structured in a variety of ways, but typically consists of subordinated notes or preferred stock provided by an institutional fund. The structure of these capital investments is varied and driven primarily by certain rate of return thresholds upon exit. To achieve these returns, elements such as cash interest, paymentin-kind interest (or accrued interest) and equity warrants are often utilized. While this can be expensive, principal payments are often minimal or delayed entirely until the loan’s expiration, which allows some financial flexibility for the company along the way.

FOCUSED ON WHAT MATTERS TO YOU In a sea of complicated legal issues, it’s easy to lose perspective.

What are your business goals? How do you plan to accomplish them? Your strategy for business growth matters, and the experienced corporate lawyers at Roetzel will collaborate with you to develop and execute a customized plan designed to unlock value at your enterprise.

At Roetzel, we advise our clients through the entirety of the lifecycle, from early stage, entrepreneurial companies to highgrowth private companies and publicly traded entities. Whether the growth you seek is domestic or international, organic or driven by acquisitions, our attorneys are here to propose innovative solutions and assist you every step of the way.

For more information, visit us at ralaw.com/mergers_acquisitions

1375 East Ninth Street One Cleveland Center, 10th Floor Cleveland, OH 44114 216.623.0150

222 South Main Street Akron, OH 44308 330.376.2700

■ MINORITY EQUITY: Typically the most expensive option in terms of dilution to the current shareholders, this form of capital avoids the expense burden of principal and interest payments, freeing up cash entirely for continued growth investments.

The new equity partner(s) will require some measure of operational and financial control, typically in the form

of a board seat or other “negative” covenants. So even if one can justify the dilution, because they believe the additional capital will enhance the value of the business beyond the status quo, it is imperative to identify a partner who shares a similar growth vision for the business.

Like every city, each company has a different strategy for growth.

Determining the appropriate amount of capital and analyzing the various costs and benefits is key to choosing the best form of capital to enable your business to achieve its growth objectives.

The good news is this is a healthy market with much liquidity and many options. The challenge comes from the fact there are many options and no obvious, one-size-fits-all shortcut to get there.

Whichever form of capital you choose, by investing in your business you will be contributing to the further growth and development of our great city.

Rebecca Lynn White is a director and head of the Capital Raising Practice at Western Reserve Partners LLC in Cleveland. She can be reached at 216-574-2109 or rwhite@wesrespartners.com.

Eliminate Surprises

Serving private equity groups nationwide, BMF Transaction Advisory Services provides thorough due diligence and quality of earnings assessments that help you better evaluate the value of a target company so there are no surprises down the road.

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CORPORATE GROWTH AND M&A

January 18, 2016 S25

M&A insurance products facilitate deal execution

By JAY MOROSCAK and MATTHEW HEINZ

T

ransaction liability products have emerged as a staple of the M&A landscape. These products, which cover representations and warranties, tax, litigation and other contingent risks, are viable alternatives to an escrow or indemnity in any deal structure.

Transaction liability is a reliable tool that enables M&A practitioners to allocate certain deal risks to the insurance markets for a fixed cost. This ability to manage and allocate risk on the front end of a deal has Moroscak allowed buyers to bid more aggressively and sellers to extract more funds at closing.

Representations and warranties insurance covers liabilities arisHeinz ing out of a breach of one or more of the representations and warranties in an M&A transaction. Policies can be tailored to address a client’s specific indemnity needs on a deal, from amount of coverage to duration of coverage to scope of loss.

Buyers can use R&W insurance to achieve a lower purchase price by offering a very aggressive seller indemnity package in exchange for a slightly reduced enterprise value, and potentially even shut down an auction

Jay Moroscak is senior vice president at Aon Cleveland. He can be reached at jay.moroscak@ aon.com. Matthew Heinz is senior managing director at Aon Transaction Solutions. He can be reached at matthew.heinz@aon.com.

Tax changes may warrant review of entity classification

By PAUL H. SPEYER

A

ll businesses, especially small and mid-size businesses and their owners, are subject to a plethora of taxes.

Income taxes, payroll taxes, sales and use taxes, property taxes, gross receipts taxes, excess Medicare tax, and net investment income tax, just to name a few.

Depending on how the business entity is classified, the owner may be subject to a higher or lower amount of these Speyer taxes. With the addition of the excess Medicare tax and the net investment income tax in 2014, it may be time to reevaluate what entity type your business operates as, if you haven’t already.

For example, if your business operates in one of the entities taxed as a partnership, general partnership, limited partnership, limited liability partnership or limited liability company, your allocable share of income may be subject to self-employment tax.

If certain thresholds are met, your income may be subject to the excess Medicare tax.

If your company is not a personal service company — such as those operating in the fields of law, accounting, actuarial sciences, consulting, health, engineering or

EXPERT ACQUISITION ADVISORY SERVICE

process by offering up an “as is” deal construct to a seller.

Sellers can utilize the insurance by convincing buyers to accept an insurance alternative to the traditional indemnity structure, thereby reducing escrows and holdbacks. This strategy increases deal efficiency and produces a cleaner exit.

In addition to the benefits of representations and warranties insurance addressing unknown risks, M&A-based insurance products are also available to address known or heightened exposures. For example, tax liability insurance can address exposures tied to uncertain tax positions. A whole host of other contingent liabilities tied to M&A transactions can potentially be underwritten and boxed through tailored, one-off insurance policies, as well.

The M&A insurance market has grown and matured significantly over the past three to five years.

R&W insurance, in particular, is now a commonplace feature of M&A practice in the U.S. Deal makers would be wise to familiarize themselves with the particulars of the suite of M&A insurance products through discussions or tutorials with their insurance brokers and M&A counsel.

architecture — you may be able to separate your manager interest from your investment interest and not pay the self-employment tax or excess Medicare tax on the investment interest allocable share of income.

Depending on the income and loss sharing of your partnership, it may make sense to examine if converting to an S corporation may save the owners taxes.

Perhaps you operate as a sole proprietorship or a single member limited liability company that is treated as a sole proprietorship. You may want to consider making an election to be treated as a corporation, followed by an election to be treated as an S corporation.

This would allow you to pay yourself compensation subject to payroll taxes while any income in excess of a reasonable salary could be distributed to you free of payroll taxes.

It is imperative the salary be reasonable and not minimal in order to avoid payroll taxes. Presuming you’re active in the activity — that is generally working at least 500 hours annually — the remaining profit would not be subject to the net investment income tax.

It’s important to periodically review the type of tax entity your business operates as, along with all the other items.

Paul H. Speyer is a principal in the Tax Group at Maloney + Novotny. He can be reached at 216-344-5284 or pspeyer@maloneynovotny.com.

JOSEPH V. PEASE, JR., CPA Co-Author of “Mergers & Aqusitions for Distributors: Expert Advice for Buyers & Sellers”

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CORPORATE GROWTH AND M&A

S26 January 18, 2016

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Buyer battle is seller payday Market dynamics provide competitive acquisition landscape

By ANDREW K. PETRYK

P

rivate equity firms with a need to deploy both new and aging funds, and strategic buyers under mounting pressure from shareholders to accelerate growth beyond organic means, are locked in epic battles for acquisitions. Sellers have the high ground and are enjoying the spoils in the form of attractive valuations and exceptional deal terms.

Armed with strong balance sheets and clear directives from their boards of directors, strategic buyers are aggressive, forcing private equity groups to look for ways to differentiate

themselves in competitive auctions.

Cash on corporate balance sheets stood at a staggering $1.43 trillion* in December, and credit is readily available at attractive terms.

With a low cost of capital and quantifiable synergies, strategics generally have more pricing flexibility and are having success competing with private equity and contributing to valuation multiple expansion. The need for growth and a highly competitive M&A market have also forced strategics to expand their acquisition criteria, driving deal activity into different geographies and across a wide spectrum of targets.

The weapons of private equity firms remain aggressive debt markets, powder kegs of equity sitting on the sidelines, and a willingness to consider sub20% targeted internal rates of return.

Combined, these have proven formi-

dable in offsetting the synergies taken into account by strategics in developing their valuations for targets.

Sponsors are paying up to win auctions, Petryk and for solid targets, lenders are supporting them.

Leverage has escalated to record highs, mirroring levels observed in the previous 2007 peak. According to Standard & Poors Leveraged Commentary & Data (S&P LCD), total leverage in the broader middle market (EBITDA below $50 million) ticked up to 5.5x in November.

The lower middle market (enterprise values below $500 million) saw total leverage creep up to 4.9x. As of September, private equity’s war chest ballooned to over $130 billion in equity

capital earmarked for the middle market (fund size $100 million to $1 billion) alone, according to PitchBook.

Purchase price multiple inflation of 1x to 2x (multiple of EBITDA) over the last 12 to 24 months has been observed across the market irrespective of size or sector. The inflation is a function of excess capital, cheap borrowing costs and competitive dynamics.

Significantly greater premiums have been observed when companies are able to attract strategic buyers.

Strategic buyer multiples are up significantly from 2007 levels, topping financial buyers across almost all size segments: In November 2015, S&P LCD reported an EBITDA multiple of 9.1x for companies across all industries with enterprise values below $250 million, which compares to 8.2x

for financial buyers.

Similarly, for enterprise values between $250 million and $499 million, reported strategic and financial buyer multiples were 10.7x and 9.1x, respectively.

How long will today’s elevated pricing environment last?

From their perch, sellers are enjoying the battles playing out in front of them between strategic and private equity buyers. If they wait too long, they may be drawn into a battle of a different sort — that of managing through the downside of a long-in-thetooth economic cycle.

Given the stage of the current cycle and looming interest rate hikes, sellers are encouraged to take advantage of these favorable market dynamics.

Andrew K. Petryk is managing director of Brown Gibbons Lang & Co. He can be reached at 216-9206613 or apetryk@bglco.com. * Cash & short-term investments in the S&P 500 (ex-financials), S&P Capital IQ.

Scrupulous due diligence bolsters the buyer’s advantage

By MARK BOBER and STEVE SWANN

T

he current M&A market remains a “seller’s market,” both in terms of economics (purchase price multiples), as well as the structure of key deal terms.

The buyer may be at a disadvantage since there could be multiple potential buyers performing due diligence with no exclusivity nor any guarantee or commitment that they will be able to close the deal.

The confluence of all these factors makes performing thorough due diligence more vital than ever to best position the buyer to maximize her return on investment.

Among those best practices are: ■ Understand key value enhancement drivers. What is the historical growth rate, and is it sustainable? What is driving such growth?

Where are the opportunities to enhance revenue/profitability, and what actionable initiatives can be undertaken to

achieve growth?

■ Analyze quality of earnings to better understand sustainability of historical revenue and cash flows. This includes Bober assessing the impact of non-recurring, owner discretionary, and out-of-period adjustments on cash flows. It also includes assessing customer and vendor trends, as well as trends for the nature of cost of goods sold. Further, what is the history of sales price increases/

DEAL MAKERS

decreases and vendor price increases/decreases?

■ Assess the cash conversion cycle, and analyze the Swann net working capital trends. How much capital is tied up in net working capital, and what additional working capital will be necessary to fund growth? Are there opportunities to reduce working capital and improve the cash conversion cycle?

■ How realistic are pro forma projections in relation to historical performance? Are such projections built on a bottom-up or a top-down basis? It is critical to understand the underlying assumptions and to reconcile them to historical trends as well as the sales pipeline and order book.

■ Assess the strengths and weaknesses of the infrastructure in place, and determine whether it

is adequate to serve as a platform for growth. This includes the key management team, current workforce and the underlying systems that provide the data to monitor performance.

■ Assess qualitative factors, including culture, attitude, mode of communications, teamwork, etc.

The above items represent a few of the factors to consider in terms of due diligence.

It is critical to understand these topics when developing a business plan, including a 90-day plan on which initiatives will be undertaken postacquisition.

Mark Bober and Steve Swann are partners in the Transaction Advisory Services Group at Bober Markey Fedorovich. Mark Bober can be reached at 330-762-9785 or mbober@bmfcpa.com. Steve Swann can be reached at 330-762-9785 or sswann@bmfcpa.com.

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ACG Cleveland 2015-16 Officers and Board of Directors OFFICERS

January 18, 2016 S27

2016 ACG EVENTS CALENDAR DATE

EVENT

LOCATION

January 21

20th Annual Deal Maker Awards

Cleveland Convention Center

February 9

Weston Smith, Former CEO, HealthSouth (joint event with FEI)

Union Club

February 10 February 10

Regional Networking, Central WiT Leadership Program (part 1 of 2 for members only)

Lockkeepers Jones Day

February 16

ACG Akron – Akron Accelerator CEO Anthony Margida

Akron Accelerator

February 25 February 25

Regional Networking, West Young ACG Lunch & Learn – Live Once, Plan Often

Lakewood Country Club Bernstein

March 2

Young ACG – Presentation & Tour

Market Garden Brewery

March 3

Regional Networking, East

Shaker Country Club

March 10

Workforce Development

Union Club

March 16

WiT Leadership Program (part 2 of 2 for members only)

Deloitte

IMMEDIATE PAST PRESIDENT Murad A. Beg, Linsalata Capital Partners

April 14

Al Green, CEO, Kent Displays

Union Club

May 12

WiT – Happy Hour & “Marie Antoinette”

Dobama Theatre

BOARD OF DIRECTORS

May 19

Republican National Convention (members only)

Ritz-Carlton

Kevin W. Bader, HTV Industries

June 14

Spring Social (joint event with TMA)

Shoreby Club

September 13-14

Great Lakes Capital Connection

Cleveland Convention Center

September 26

12th Annual Golf Outing

Firestone Country Club

PRESIDENT David Dunstan, Western Reserve Partners PRESIDENT ELECT John Saada Jr., Jones Day EXECUTIVE VICE PRESIDENT, BRAND Brad Kostka, Roop & Co. Strategic Integrated Communication EXECUTIVE VICE PRESIDENT, PROGRAMMING & INNOVATION Dale Vernon, AB Bernstein Global Wealth Management EXECUTIVE VICE PRESIDENT, RESOURCES Joseph Adams, Plante Moran PLLC TREASURER Brian Leonard, Edgewater Capital Partners SECRETARY M. Joan McCarthy, MJM Services, LLC

Rudolf Bentlage, JP Morgan Chase Denise Carkhuff, Jones Day Elizabeth Evans, Republic Steel

For complete event details and registration, visit www.ACGcleveland.org.

John Grabner, Hylant James M. Hill, Benesch (Trustee Emeritus) Christopher Hogan, KeyBanc Capital Markets Jonathan Ives, SCG Partners Brian Kelly, PricewaterhouseCoopers Raymond Lampner, BCG & Co. Randolph D. Markey, Global X Sean P. McCauley, Citizens Bank Trent Meteer, TriState Capital Bank Kevin Murphy, Deloitte Consulting Jeff Schwab, Oswald Companies

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, visit www.ACGcleveland.org

Peter Shelton, Benesch Bertrand Smyers, New Heights Research Jennifer Stapleton, Jones Day Karen Tuleta, Morgenthaler Private Equity Theodore Wagner, Bober Markey Fedorovich William Watkins, Harris Williams & Co.

What Secrets Are Hiding

Behind the IT Door?

Thomas Welsh, Calfee Halter & Griswold Rebecca White, Western Reserve Partners

It may not seem obvious at the start of an acquisition or merger, but overlooking the IT assets of a company could be costly down the road.

WHERE WILL YOUR GROWTH COME FROM?

A weak or compromised digital infrastructure can devalue your business from the beginning.

Ashton can provide a thorough on-site analysis of hardware, software, IT staffing and practices–identifying strengths and exposing vulnerabilities long before the ink dries on your deal.

Copper Run’s merger and acquisition advisory professionals provide senior level attention on every transaction. We help our clients transition ownership, grow through acquisitions, RU VHFXUH ¿QDQFLDO SDUWQHUV for future growth.

Our team provides the comprehensive IT reporting you’ll need as you finalize your transaction and begin building for the future.

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Call Ashton at 216.397.4080 or ashtonsolutions.com and find out how bits & bytes effect the bottom line.

CORPORATE GROWTH AND M&A

S28 January 18, 2016

20th annual Deal Maker Awards to honor leaders in M&A

ADVERTISEMENT

ACG Cleveland, Northeast Ohio’s leading organization for merger and acquisition and corporate growth professionals, will recognize the winners of its 20th Annual ACG Cleveland Deal Maker Awards at 5:30 p.m. Thursday, Jan. 21, at the Cleveland Convention Center.

The Deal Maker Awards are a tribute to Northeast Ohio’s preeminent corporate deal makers for their accomplishments in using acquisitions, divestitures, financings and other transactions to fuel sustainable growth. The 2016 Deal Maker Awards winners are:

The J. M. Smucker Co.

Ferro Corp.

Area Wide Protective

Resilience Capital Partners

The ambitious acquisition and divestiture program of The J. M. Smucker Co. has been key to its growth. Over the past two years, JMS made two sizable acquisitions.

Big Heart Pet Brands, a producer of premium pet food and pet snacks, was a $6 billion acquisition, providing JMS with a significant presence in the category. As a result of the acquisition, the company plans to create an additional 400 jobs at its Orrville headquarters. Sahale Snacks Inc., a privately held manufacturer of branded nut and fruit snacks, was an $80.5 million acquisition. Additionally, JMS has entered into an agreement to sell its U.S. canned milk brands and operations to Eagle Family Foods Group LLC.

During 2013 and 2014, Ferro aggressively restructured from nine business units to three. It then executed a disciplined acquisition program. Over the past 18 months, Ferro acquired Vetriceramici S.p.A., a European leader in ceramic coatings, for approximately $108 million; TherMark, a leader in laser marking technology; Nubiola Pigmentos, a leading European pigment producer, for approximately $165 million; Al Salomi, a leading manufacturer of frits and glazes in the Middle East and North Africa, for approximately $36 million; and the porcelain enamel assets of Turkish chemical manufacturer Ege Kimya San. These transactions have been vital to improving Ferro’s balance sheet and its stock price performance.

Area Wide Protective Inc. is a leading provider of outsourced traffic management services. The company was acquired by Blue Point Capital Partners in 2006, and under its ownership diversified both its customer base and geography, leading to significant top-line and margin growth. It expanded from a regional business with 10 locations into a business with 43 locations across 17 states. The Riverside Co. acquired AWP in June 2015. AWP subsequently completed the add-on acquisition of Traffic Specialties Inc.

Over the past two years, private equity firm Resilience Capital Partners has been active in managing its portfolio of niche manufacturing, distribution and business service companies. During this timeframe, Resilience made 12 acquisitions, two divestitures and one recapitalization in industries including: manufacturing, technology, energy and construction. Its portfolio companies today employ more than 7,000 people in 15 states and collectively represent more than $2 billion in revenues.

THE 2016 ACG CLEVELAND DEAL MAKER AWARDS PLATINUM SPONSORS ARE: BENESCH, FIRSTMERIT, GRANT THORNTON, KEYBANC CAPITAL MARKETS, MERRILL DATASITE AND OSWALD COS.

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.

February 3, 2016

11am - 1:30pm • InterContinental Hotel, Cleveland

ECONOMIC OUTLOOK

Tickets: CrainsCleveland.com/Outlook2016

or contact Kim Hill at 216-771-5182 • kehill@crain.com

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