Association of Corporate Growth & M&A 2022

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January 17, 2022 S1

CORPORATE GROWTH & M&A PRESIDENT’S LETTER

ACG Cleveland: moving beyond your expectations

By CHERYL STROM

A

fter a remarkable year in the dealmaking community globally, I’m proud to say that Northeast Ohio continues to punch above its weight.

That’s largely thanks to the overachieving group of members, sponsors and stakeholders that make ACG Cleveland so STROM special.

With about 500 members, ACG Cleveland is the fourth-largest chapter in the nation. We have a great history and an incredible network of private equity groups, corporations, investment bankers, attorneys, accounting firms, lenders, advisers, and others dedicated to raising capital and growing businesses in the middle market.

That’s a great foundation for a wonderful chapter, but I think it’s something much more that makes

this such a strong dealmaking community – it’s that word “community.”

ACG is much more than a networking community. It is a place for professionals to meet, build relationships, develop professionally and help each other thrive, while we help companies grow.

As I reflect on why ACG Cleveland is such a strong chapter, I am sure it has to do with the unique culture of Cleveland itself. For example, I remember joining a group for dinner one night before the annual Deal Maker Awards. I sat with dozens of people, and we all had a great time.

Many were direct competitors, yet we were all happy to share our time, networks and insights with each other. Some guests to Cleveland pulled me aside in amazement, noting that such camaraderie doesn’t exist in their market.

That’s just one small slice of what makes Cleveland, and the ACG Cleveland chapter, so special: We understand that collaborating makes us all better — and makes working a lot more fun.

Speaking of Deal Maker Awards, it will take place later this year and we are thrilled to celebrate the 25th anniversary of this event.

Congratulations to the winners for standing out in this unusually high volume but competitive past year.

The Deal Maker Awards event is a great reminder of what makes ACG Cleveland such a big force for good in Northeast Ohio and beyond — it’s a celebration of members of our community and their biggest accomplishments. We hope to see you there!

ACG Cleveland is all about improving our dealmaking community and therefore, our broader region. I’m grateful for the opportunity to take part in it and to be leading this chapter. I’m looking forward to an active and promising 2022.

Cheryl Strom is chapter president of ACG Cleveland and principal at The Riverside Co. Contact her at 216-5352238.

ABOUT ACG ACG is a global organization focused on driving middle-market growth. Its 15,000-plus members include professionals from private equity firms, corporations and lenders that invest in middle-market companies, as well as experts from law, accounting, investment banking and other firms that provide advisory services. Learn more at www.acg.org. ACG Cleveland serves professionals in Northeast Ohio and has about 500 members. For more information, visit www.ACGcleveland.org.

CONTENTS S2

A record-setting year in private markets

S4

Finance relationships a bellwether for pandemic resilience

S6

Technology audits should involve a full sweep of business unit alignment

S7

Lessons learned while closing deals in a virtual environment

S8

Early planning will help drive productive business sale

S8

The challenges of baby boomer business succession

S10

Maximizing company value ahead of the sale

S11

Creativity is fueling a golden age for private equity

S12

M&A expected to continue its robust growth streak

S13

Motivating managers when facing a sale is key to easing transition

S13

Avoid closing pains by addressing HR, benefits issues

S14

Employee benefits due diligence should be at top of M&A checklist

S15

Buyer, seller tax benefits key to structuring M&A transactions

S16

Adapting to disruption in M&A deals in an era of volatility

S18

Programmatic acquisitions create sustainable value

S19

Private equity marketing success analytics

S20

Tax insurance a key risk management tool

S20

Shifting landscapes: legal due diligence is critical for PE buyers

S21

The evolution of due diligence in the wake of COVID-19

S22

Set actionable goals for growth

S24

Hyper-risk environment requires precise contract design

S25

Valuations are expected to remain on fire for top-tier companies

S26

Industries expected to drive the M&A market in 2022

S28

ACG Officers and Board of Directors

S28

Deal Maker Award Winners

S28

2022 ACG Events Calendar

This advertising-supported section/feature is produced by Crain’s Content Studio-Cleveland, the marketing storytelling arm of Crain’s Cleveland Business. The Crain’s Cleveland Business newsroom is not involved in creating Crain’s Content Studio content.

SX January 17, 2022 S2

CORPORATE GROWTH & M&A

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2021: A record-setting year in private markets

By PAUL BODNAR

P

rivate market activity was strong on all fronts during 2021. Fundraising and deal making set new records. Robust exit activity drove significant liquidity for limited partners. Venture investments that previously took a decade or more to generate liquidity exited much quicker, aided by a strong IPO market and BODNAR a resurgence in Special Purpose Acquisition Companies (SPACs).

Through the third quarter of 2021, 6,004 private equity deals closed for $787.6 billion, according to Pitchbook. This partial year dollar value was already at an all-time high.

In addition, bankers and private equity funds report that pipelines were robust for the end of the year.

Service providers’ capacity forced firms to prioritize what deals would get done in 2021 and what had to wait. In addition, potential tax law changes further fueled an already

booming market.

Venture deal activity increased even more, with $238.7 billion in value closed through September 2021.

This was significantly up from $166 billion and $143 billion for the full year in 2020 and 2019, respectively.

Mega deals — those worth more than $100 million — were the biggest contributor to this jump, with $136 billion worth closed through third quarter of 2021.

Funds coming back to market quicker and delayed 2020 fundraises helped drive elevated fundraising activity. In private equity, the average years between fundraises declined to 2.8 years from 3.5 years between 2020 and 2021. It was closer to five years in 2011. As a result, fundraising likely set a record in 2021, surpassing $1.2 trillion in private equity and venture easily exceeding $100 billion.

The volume of capital raised generated some concerns. Thirtyfive percent of respondents in Mergermarket’s 2021 survey cited the amount of money and the ability to put it to work as the private equity industry’s biggest challenge. Capital has become more concentrated as large, $1 billion-plus funds accounted

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for about 70% of money raised last year. The need for these larger funds to deploy capital has supported strong exit values for smaller, lower middlemarket funds. This is one reason CM continues to favor investing in the lower middle market.

Acquisition prices in buyout deals remain elevated on a historical basis, as they have in recent years, with a median EV/EBITDA multiple of 12.8x.

For scale, this multiple was 10.3x in 2007, and the peak was 14.3x in 2019.

In venture, valuations rose aggressively in 2021. Seed round values were up 54% from 2020, while late-stage rounds increased 168%.

Higher public multiples in part fuel this. For example, software-as-aservice (SaaS) company multiples are up 375% since 2016. While there are fundamental reasons why these companies are more valuable,

January 17, 2022 S3

CORPORATE GROWTH & M&A their toes into technology and software. They dove in further last year after the economic downturn from COVID demonstrated the resilience of those business models.

For example, there were 668 private equity-backed software deals through the third quarter versus 687 and 651 over the full years of 2019 and 2020, respectively. This trend will likely gain further momentum in 2022.

Environmental, Social and Governance, or ESG, was a trend that was hard to ignore in 2021. Most funds speak to it in presentations and

some, especially those in venture, may invest based on ESG themes. In North America, 60% of Mergermarket’s respondents noted a significant increase in LP scrutiny of ESG issues.

The challenge with ESG is that LPs that are ESG-focused do not all agree on the ESG standards they want. For example, some LPs also incorporate social justice into ESG while others almost exclusively focus on environmental impacts. Along those lines, 29% of respondents in the survey cited climate change as the single most important ESG issue. One apparent

effect is fundraising within the energy market, where it is challenging to raise capital for oil and gas investments.

CM Wealth Advisors continues to believe that private markets provide the best opportunity for outsized returns for investors. However, after such strong equity returns, valuations at near-record levels and rising inflation risks, it makes sense to add exposure to diversifying strategies within the private markets. For example, investments like real estate can provide a hedge on inflation. Additionally, idiosyncratic strategies targeting more esoteric

assets like legal claims and intellectual property can deliver strong returns by taking different types of risks than traditional equity investments. Returns from these esoteric assets are largely independent of an adverse change in equity valuations and are providing attractive returns to investors.

Paul Bodnar is senior director of Investments & Private Capital at CM Wealth Advisors.

Contact him at 216-831-4023 or pbodnar@cmwealthadvisors.com.

Private market activity was strong on all fronts during 2021. the move in prices is not without concern. This is particularly true in late-stage venture, where deals are priced closer to perfection with less room for error.

The elevated deal activity in private markets drove substantial distributions in 2021 in both private equity and venture for LPs. Venture exit value hit a new record and was up 101% though the third quarter versus the full-year 2020 numbers. M&A activity, shorter holding periods, IPOs and SPACs all contributed to record breaking venture distributions.

INTERESTING TRENDS FROM 2021 A few years ago, funds that historically focused on more traditional sectors started to dip

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Visit key.com/M&A Start the conversation: Jeff Johnston, M&A Group Head and Managing Director jjohnston@key.com KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp and its subsidiaries, KeyBanc Capital Markets Inc., Member FINRA/SIPC, and KeyBank National Association (“KeyBank N.A.”), are marketed. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives, who may also be employees of KeyBank N.A. Banking products and services are offered by KeyBank N.A. Key.com is a federally registered service mark of KeyCorp. ©2022 KeyCorp. 211208-1356366

S4 January 17, 2022

CORPORATE GROWTH & M&A

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Finance relationships a bellwether for pandemic resilience

By DOUG WINGET AND JOE KWASNY

WINGET

KWASNY

T

he ongoing COVID pandemic continues to disrupt the business and lending environment for nearly all industries and sectors. While liquidity was an issue early on due to initial restrictions and lockdowns, businesses are now facing a range of additional headwinds, including labor market challenges, supply-chain bottlenecks, cost push inflation and economic uncertainty. As a result, many companies are turning to assetbased lending to help maintain and even grow their businesses during the pandemic.

NEED FOR LIQUIDITY At the onset of the pandemic, the Small Business Administration’s

(SBA) Paycheck Protection Program provided much-needed liquidity to eligible businesses through the U.S. banking system’s lending platforms. Huntington and other banks supported existing commercial customers by helping them leverage financial-relief resources to deliver liquidity during a time of need.

For most of 2020, the strategic focus for companies was to maintain adequate liquidity and, in general, banks worked with their customers to meet the need and manage through the hardships. However, the effects of the shutdowns were not consistent across all industries, and some companies thrived at record levels while others struggled to maintain operations. Certain technology, metals, lumber, commodities and manufacturing companies generated record earnings, while those affected most by the hardships of COVID restrictions had to actively manage operations to reduce costs.

RESPONSE FROM BANKING INDUSTRY The bank lending and commercial finance markets also have performed disparately through this historically unique period. During 2020, certain

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banks became inwardly focused, while others sought to grow market share. Pricing increased and structures tightened in 2020 due to the perceived increased risk and uncertainty. HNB and HBC opportunistically acted on the market disruption to materially grow intrinsically through new customer financings and geographic growth, including a West Coast expansion and recent expansions in ABL Vertical specialties. Huntington also grew its asset-based lending business as a result of its acquisition of TCF Financial in the second quarter of 2021.

NEW CHALLENGES ARISE After weathering the initial disruption brought on by the pandemic, businesses were challenged with ramping up operations and competing in the COVID era. By 2021, most commercial companies had resumed operations at a more normal level, and the finance markets had generally rebounded with pricing and structure terms returning to pre-pandemic levels. However, through 2021, the trends of labor shortages, supplychain issues and inflation impacted nearly all commercial businesses.

Given today’s unique challenges, a company’s banking or commercial finance relationships have become even more critical.

Early in the fourth quarter of 2021, there were more than 11 million job openings in the United States, with more than 4 million workers quitting their jobs voluntarily, according to the U.S. Bureau of Labor Statistics. To attract or retain workers, businesses have experienced significant cost increases in labor rates, including signing bonuses for entry-level jobs.

Work-from-home, flexibility in hours, work-life balance and compensation have become challenges businesses face in maintaining a productive workforce.

Shipping delays are affecting businesses’ ability to acquire raw materials and finished goods to meet the robust rebound in consumer demand. Supply-chain disruptions have resulted in companies being short of inventory and ordering larger quantities. The result is the need to carry higher inventory levels to meet demand. In addition to higher inventory unit levels, prices have been rising sharply over the past year.

CORPORATE GROWTH & M&A The November Producer Price Index rose 9.6% compared to a year earlier, according to government figures, and the Consumer Price Index increased 6.8% in November — the largest increase in 39 years.

Inventory and commodity price inflation are also prompting many commercial businesses to maintain higher inventory order levels. Given this strategy, funding and liquidity have become critical, and most banks have been asked to increase revolving credit line amounts to support the

funding needed. An asset-based lending revolving borrowing base credit structure is a flexible solution to maintain adequate working capital funding and liquidity.

NEED FOR LONG-TERM CAPITAL With pending 2022 tax changes combined with strong capital fund levels and market liquidity, M&A activity also has been increasing. The fourth quarter of 2021 may have been one of the most active quarters in

history. Given this, the need for long term capital to finance acquisitions has increased and banks and nonbank funds have been supportive to finance. On the average, acceptable leverage levels and pricing have returned to pre-pandemic levels.

Given today’s unique challenges, a company’s banking or commercial finance relationships have become even more critical. Credit structures that provide adequate liquidity and covenant flexibility — and the opportunity to grow — are more

January 17, 2022 S5

important than ever to a company’s short- and long-term success.

Doug Winget is executive vice president at Huntington National Bank and president at Huntington Business Credit. Contact him at 216-515-0789 or doug.winget@huntington.com.

Joe Kwasny is senior vice president at Huntington National Bank and managing director of business development at Huntington Business Credit. Contact him at 216-515-0754 or joe.kwasny@huntington.com.

S6 January 17, 2022

CORPORATE GROWTH & M&A

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Technology audits should involve a full sweep of business unit alignment

By TRAVIS GRUNDKE

I

T platforms have the potential to drive profits when properly aligned with business needs.

Conversely, when the technology platform is out of step with business goals, the potential for financial loss increases significantly.

This is why prior to mergers, acquisitions, and add-ons, GRUNDKE information technology audits are critical steps in helping you to identify risks, develop budgets and understand areas of over- or under- investment.

Historically, technology due diligence audits tended to focus on the technology assets of a business,

firm’s ability to generate revenue?

Does the firm have contractual obligations in its sales agreements guaranteeing delivery?

• Are there regulatory/compliance requirements that could pose a financial or legal risk if not properly addressed?

• Are the members of the technology team the right people in the right seats, meeting the business needs of the organization?

RISKS AND OPPORTUNITIES Technology due diligence should result in a Business Technology Alignment Plan that highlights both risks and opportunities. As an example, the Ashton Solutions team evaluated a chemical services firm and found outstanding helpdesk support response. Unfortunately, the technology team was unable to deliver quality financial reporting

As part of the due diligence process, it’s critical to understand where this data lives and how it is protected: in the cloud? On premises? On company-owned devices or on staff-owned personal devices? How is the data controlled?

How do you know if or when it moves?

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treating IT as a business “bucket” focusing on servers, switches and workstations. Most diligence audits then end here and ignore the far more valuable insights gathered by evaluating the technology support team, processes, security stance and potential value the technology platform could deliver.

To get useful answers, technology auditors must have an understanding of what the investment/ownership strategy is prior to performing their due diligence. For example, if your focus is on growth equity, then chances are that you’ll be making some strategic investments in the target firm and will need a multi-year budget for technology. Similarly, if your intent is to roll-up related businesses, then you will need data related to potential systems integrations/consolidation, etc. In any event, some of the most important questions to ask are: • Is the target firm investing appropriately to protect its intellectual property from data loss?

• In the event of a technology systems failure, what is the impact to the

in a timely manner from their ERP solution. The recommendation was to outsource the helpdesk support and to hire data analysts to clean up the data and make it more accessible and actionable. This reshuffling of budget and resultant improvement in financial reporting led to an immediate, positive impact on cash flow. The outside insight from a third-party technology provider also gave the IT director some much needed perspective and guidance.

WORKFLOW INEFFICIENCIES Technology due diligence can also provide a great deal of information about workflow processes and the way employees do or do not work well together. In one case, an Ashton audit revealed the technology platform was solid, but that there was a significant lack of trust between teams within the company. The lack of trust led to an immense amount of double checking and inefficiencies that accumulated as jobs moved from the order intake phase through to the shipping department. This unexpected insight helped the buyer

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understand where they would need to focus their immediate attention after the closing.

DATA PROTECTION Business data in all forms is valuable to you and to your competition: sales lists, marketing campaigns, formulas and related intellectual property – they’re all a form of modern currency.

As part of the due diligence process, it’s critical to understand where this data lives and how it is protected: in the cloud? On premises? On company-owned devices or on staffowned personal devices? How is the data controlled? How do you know if or when it moves?

COMPLIANCE AND REGULATORY REQUIREMENTS Another major shift in focus relates to evolving state-level cybersecurity requirements. In some situations, these are currently voluntary (Ohio Data Protection Act), but in others (California Consumer Privacy Act), some businesses are forced to comply. Adding to this is a push by the insurance industry to require security best practices such as proper firewalls, endpoint security and data access policies prior to granting cyber, general or professional liability insurance. A proper due diligence audit will highlight potential risks

CORPORATE GROWTH & M&A and outline steps necessary for remediation.

A thorough alignment plan will point out specific systems, processes or people which may pose a material risk to ongoing, profitable operations.

As an example, we evaluated the technology for a consumer products firm targeted for a roll-up project.

The leadership team at the target were unaware of security compliance requirements for several of their contracts, and as a result had none of the required systems or necessary security solutions in place. We provided budget options to the buyers and outlined the solutions required to mitigate the risks and to help them more appropriately value the acquisition based upon the potential risks.

Shedding light on the technology platform during due diligence reveals far more about a company than just software and hardware. The results provide valuation guidance, staffing recommendations and budget planning to help ensure a smooth, profitable transaction.

Travis Grundke is executive vice president and director of operations at Ashton Solutions. He can be reached at 216-397-4080 or tgrundke@ ashtonsolutions.com.

January 17, 2022 S7

Lessons learned while closing deals in a virtual environment

By JAKE NICHOLSON AND ANDREW MEDORO

NICHOLSON

W

These factors magnified the level of stress that short deadlines placed on timely closings, and this will continue as flexible work models become permanent for certain organizations.

Between buyers, sellers, and their counsel, this means understanding

MEDORO

ith most transactions operating semi-virtually before March 2020, the shift to remote work did not force a complete overhaul of the M&A process. However, it demanded a heightened emphasis on timing, communication of expectations and organization in closing deals that will stick with buyers and sellers for the foreseeable future.

The pandemic’s fully virtual environment required deals to account for the logistical challenges presented by the work-from-home policies and staffing situations of all parties touching the transaction.

Buyers should not be surprised if a third party requests to meet or review financial statements before consenting to the deal. each other’s expectations for the content and timing of due diligence and other pre-closing deliverables is more crucial than ever.

Planning for longer third-party lead times is also a must. If a government agency such as the IRS will be involved, be prepared for call center service delays and longer processing times for filings. What

third-party consents will be material to closing? Buyers should not be surprised if a third party requests to meet or review financial statements before consenting to the deal. A commercial landlord, for example, might be more sensitive to tenant changes than in past years. Will any liens need to be released? Be prepared because a seller’s point of contact may no longer have the luxury of walking down the hall and handing a payoff letter to their legal department for quick review.

Proper communication and organization have always been basic elements of a successful deal, but shortcomings in these areas were much easier to overlook when the problems they created were easier to fix – when the safety net of in-office availability was a given.

Jake Nicholson and Andrew Medoro both are attorneys in Roetzel’s Corporate, Tax & Transactional Group. Contact Jake at jnicholson@ ralaw.com. Contact Andrew at amedoro@ralaw.com.

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S8 January 17, 2022

CORPORATE GROWTH & M&A

Early planning will help drive productive business sale

By JON DOEHR

a complete exit. Many companies are finding attractive capital solutions that allow them to take chips off the table while maintaining a majority or minority stake. In doing so, the owner gains financial security and an option for a second monetization event in the next three to five years.

If you have determined that a sale is the right path for you, be sure to evaluate the key fundamental drivers of value that can influence the price and process. While nobody has a crystal ball, near-term macroeconomic fundamentals generally do not change overnight (barring another global event.) Owners need to weigh how the following factors may impact the value of their business and should consult with trusted advisers for counsel on these issues.

The pandemic.

Hiring issues.

Supply chain troubles.

Historically high valuations.

T

hese are some of the leading reasons why many business owners are considering a sale of their company.

For many, however, selling 100% of the business may not fit your goals or objectives.

Fortunately, many alternatives DOEHR are available today for business owners who are seeking liquidity, but not necessarily

• Does the company have management depth, or is it entirely dependent on one person? So often, the founder or a key management employee is essential to the business, and the company may fail without them. If you can’t go on vacation or all your key clients want to deal with you only, that’s usually a sign that you need more depth on your management team. You need to begin a transition that includes leadership development at multiple levels before you start the sale process.

• Financial records should be clean and credible. The financial statements should be prepared according to GAAP (Generally Accepted Accounting Principles) with good supporting documentation, explanations and records. Missing or

Roetzel & Andress Corporate and Transactional The Roetzel Corporate and Transactional Group provides strategic and commercial guidance to a broad range of middle-market participants, including privately held and emerging growth companies, debt/equity participants, traditional/alternative lenders, financial advisors, as well as private investors, entrepreneurs and executives.

• Mergers and Acquisitions

• Corporate Governance, Disclosure and Compliance

• Joint Ventures and Strategic Alliances

• Tax Planning and Structuring

• Debt and Equity Offerings

• Labor and Employment

• Commercial Loan and Bond Financings

• Exits, Recapitalizations and Spin-Offs

• Private Equity Sponsor Transactions

• Intellectual Property, Trademark and Technology

incorrect accounting entries will cause delays and may kill a sale process as it raises unnecessary questions. Do not worry about those unique items and perks — those will get adjusted, just keep good documentation.

• Legal obligations need to be removed. Contingent liabilities, unclear contractual commitments and environmental risks are a few examples of potential legal roadblocks that can impact value and stall or terminate a deal. Your transaction lawyer will have a long checklist of diligence items, but the seller is responsible for ensuring that no financial or legal skeletons will be found in the closet when a buyer starts opening doors. Have your advisers help you do your own due diligence so you can address them and not have a potential buyer find them.

• Customer diversification is another key value driver. Imagine being a supplier to one large automaker. Any fluctuations in sales will affect your business, and a change in leadership at your customer could eliminate your business. Buyers will be wary of paying top dollar for a business whose success hinges on a few key customers, even if they have long track records with the company. Companies with diversified customers, vendors and end markets generally receive better valuations.

• Cybersecurity has moved to the forefront of selling processes and needs to be addressed before going to market. A key topic that has become top of mind with the increase in cyber-attacks involves technology security. Has the business invested in technology to develop a secure operating system and business continuity plan? The expertise may be in-house or outsourced but must be credible and proven.

T

he Boomer generation is the second-largest American generation, born between 1946 and 1964, with a population of about 72 million people. The baby boomers hold one of the largest pools of wealth, much of which was generated KEBRDLE from privately owned businesses — and about 40% are small business owners. This will create a massive

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• Finally, a company should have a strategic plan that shows how the business can generate sustainable revenue and EBITDA growth in the next three to five years. Buyers need a return on their investment and thus will pay more for a business with a defendable growth plan than one that has limited growth potential. Evidence that the company can drive sustainable revenue with good margins is a key element of perceived value.

The best advice I can provide is that business owners need to determine their objectives and priorities (financial, family, employees, legacy, etc.) and start planning as early as possible to lay the groundwork for a successful sale or recapitalization. It’s never too early to start planning and discussing your options.

As you begin this process, get help from those that have been there and have done it before.

Selling a company is a unique, once-in-a-lifetime experience for most. Find an investment banking partner that will help you evaluate strategic alternatives and lead the transaction process along with a mergers and acquisition lawyer, not a general corporate attorney. If you are not sure where to find these resources, ask for referrals from your trusted adviser (attorney, banker, accountant, financial adviser). Look for a firm with a solid track record that has completed a wide variety of transactions and will put your best interests at the forefront. Industryspecific expertise used to be essential to know the buyers, but in the age of technology and social media, this is far less critical than finding an adviser that you can trust and has experience driving success across a range of industries, transaction types and business dynamics.

Jon Doehr is a managing director at Cascade Partners. Contact him at jond@cascade-partners.com.

The challenges of baby boomer business succession

By DENNIS R. KEBRDLE

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business shift. It is more important than ever for family owners to prepare for the future.

Many are multi-generational firms, which started 40-plus years ago, with the second generation doing what many of us did — they sent their children to colleges and assisted them in “moving up” by becoming a doctor, lawyer or another education-based professional. Rarely are the boomers’ children planning to return to the small local company that replaces gutters, cleans furnaces or sells fishing bait. They have, with family support, moved “up” and will not be there to take over for the next 40 years.

With market valuations at all-

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time highs, most owners believe that exiting the business will be very lucrative whenever they decide to move. They quickly learn that selling your business is much more personal than just finding the highest bidder. Without the leadership from the next generation in place, who will preserve the behaviors that bred the success which new buyers expect? Existing owners also hope to provide opportunities for the current team, who might even be neighbors. Existing customers also share concerns about behaviors that preserve value.

Who can we count on at this company to ensure continued quality and timely delivery if your place is sold? Customers often note that they’ve worked with “the family” and can even call them directly on any supplier issue! Customers and suppliers both come to trust and depend on current ownership, so a huge question is: “Should we continue with a supplier being

The baby boomers hold one of the largest pools of wealth, much of which was generated from privately owned businesses — and about 40% are small business owners. This will create a massive business shift.

bought by someone like private equity that only cares about profits today and not our historic relationship?” This can be a material issue in demonstrating enterprise value to the buyer.

In most cases, ownership built the company with family and employees at the heart of decisionmaking and did not plan for the expectations or need of today’s buyers. Owner motivation is usually to provide a “good living” for his or her family and to “take care” of lifelong employees who are in the community. Many become soured on the idea of selling externally upon realizing the extent of changes that will be coming. Adding to the focus on having key staff retained is the vast shortage of “capable people” in today’s markets. We all see the staff shortages — imagine how important and valuable the key staffers are for the sale of the baby boomer small company. It is becoming one of the major hurdles for acquisition, more than access to the funding needed or the multiple that is expected

CORPORATE GROWTH & M&A to be paid. Providing a method to maintain the performance by keeping the “flavor” of the company after sale has become one of the most challenging selling features.

We recently supported a small company with this issue by allocating a percentage of profitability to a handful of key employees and formalized it into a contract with extended terms. As the company is now going up for sale, buyers will have a solution to the issue of holding on to the key staffers while the family retires out after a few years. The biggest impact is

that although the funds paid are “bonus,” they must be subtracted from EBITDA. This adjustment is a material factor, large enough to hold the key staffers and one that might, to some degree, bring the pricing down a bit to what was seen before the run up driven by the low interest rates — but the sale process is moving along as hoped!

These boomer businesses to be sold rather than passed on to the next generation are being seen at a growing rate. The challenges for the lenders, suppliers and customers of the baby boomer generation business

owners will continue for the next 10 to 15 years.

When interest rates start their next climb, which we all know will happen, the prices will again be impacted as cost of funds are a big factor. Turmoil is seldom valuable for businesses, and as the American business landscape evolves, boomer companies will be directly impacted.

The need and role for mezzanine players will increase where larger private equity firms can’t make it work. The call will include new “family business” owners, perhaps the current managers, who will

January 17, 2022 S9

carry on the American dream. The American small business landscape will be very different for the next generation and will provide a series of new opportunities for those with an entrepreneurial mindset. Get ready!

Dennis R. Kebrdle is managing partner at Chikol Equities, Inc. Contact him at 574-360-5279.

S10 January 17, 2022

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Maximizing company value ahead of the sale

By JOSEPH M. HERMAN

A

s the saying goes, you get one chance to make a great first impression. When selling a business, that first impression impacts the price, how many and what kind of potential buyers compete for it, how long the sales process takes and even whether a sale takes place at all.

Doing everything you can up front to demonstrate your company’s value, rather than allowing potential buyers to drive the conversation, will enable you to negotiate HERMAN from a position of strength. Preparing your business and preparing your deal team appropriately will pay dividends when the deal successfully closes.

PREPARING YOUR BUSINESS: THE RIGHT TEAM An effective pre-sale preparation team will comprise two groups of people. The first group consists of the company’s own C-suite, general

counsel and talent management.

This team should conduct a business risk evaluation and identify the most material risks to the company’s ongoing performance and success — risks that could take the business off course. These are the critical areas to actively manage especially well during the sales process.

The second group consists of external third-party experts that will help you look at your business through the eyes of potential buyers.

Their role is to help you uncover any problems before they negatively impact the sale process (will a change of control cancel any sales contracts?), to make sure your sales story is supported by your data (do our loss reports truly indicate a safe work environment?) and to help you value your company appropriately (how will carving out certain assets affect our potential value?).

This team should consist of legal experts, investment bankers and accountants. Additionally, risk managers — often forgotten in this process — can play a critical role in helping you identify, mitigate or transfer risks before you become involved in a sale. Examples of areas a

risk manager might look at include: • Cyber: How safe is your network?

How is your client data protected?

• Employee benefits: Are you compliant with applicable laws?

• Property coverage: Do you have gaps?

• Safety: Have known issues been addressed?

• Environmental risks: Are there

As the saying goes, you get one chance to make a great first impression. concerns that merit more study before a potential sale?

• Supply chain strength: Does the business rely on too small a pool of suppliers or clients?

• Business continuity: Has your plan been reviewed and tested recently?

The goal is to uncover and address any issues that could hurt your valuation or trigger questions that slow down the sales process.

Sometimes companies decide to avoid the expense and effort of working with an external pre-sale team because they know buyers will do their own due diligence. However, this is an opportunity for you as the seller to set the tone for the entire transaction.

A thoughtful, comprehensive and transparent (warts and all) presentation will instill confidence in buyers that they are targeting a well-run company that is valued appropriately. Even if potential buyers discover something unexpected during the due diligence process — and something almost always does pop up — they are more likely to feel that it was truly something innocently overlooked rather than intentionally hidden after seeing your preparation process.

Once the pre-sale team has conducted its assessments, prepared its reports and identified and addressed any risks that could upset a sale, it’s time to prepare your internal deal team to tell your company’s story accurately, efficiently and consistently when addressing prospective buyers.

PREPARING YOUR PEOPLE: A CONSISTENT, EFFECTIVE PRESENTATION

As with any important business presentation, it’s critical to practice the delivery. Conduct dress rehearsals to prepare. Consider not only the information you plan to share but also the questions potential buyers might ask. Make sure everyone on the team is aligned in how to respond.

The goal is to tell your story while avoiding any awkward conversations during the sales process.

Also consider what your employees might say if someone asks questions during a facility tour. Keep in mind that buyers may not directly ask the questions for which they want answers.

They may ask questions that allow them to infer answers. For example, rather than asking your shop manager if safety is important or whether the company culture is positive, a buyer may ask employees how long they have been with the company. Is the answer likely to be in line with what has been presented? If there are discrepancies or gaps, how will your team address them?

LEARN MORE To discover how Hylant can help you reduce the uncertainty that often surrounds complex transactions, visit hylanttransactionsolutions.com/.

Joseph M. Herman is chief operating officer at Hylant M&A|Transaction Solutions. Contact him at 419-7248713 or joe.herman@hylant.com.

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January 17, 2022 S11

Creativity is fueling a golden age for private equity

By STEWART KOHL

T

he longest bull market of my lifetime is driving a remarkable era for private equity. It’s easy to point to across-the-board growth and assume the rising tide is lifting all boats, but a closer look reveals the industry has been incredibly KOHL innovative in this stretch as well.

Seeing all this creativity applied by the private equity industry to drive sustainable long-term growth in value has been incredibly inspiring.

Low interest rates, technological revolutions, the forced innovation brought on by the pandemic and other macro factors have made achieving rapid growth easier, but the private equity industry is now decades old with a long history of outperformance. That history continues with outperformance even in today’s frothy markets. Credit a lot of that to the industry’s spirit of innovation.

To be sure, some of that innovation

is financial. For example, singleasset funds, continuation funds, secondaries, GP stakes and the like are new ways that firms are deploying capital. There’s more and more capital being deployed, with some firms approaching about one new deal a day.

That said, the best PE shops learned a long time ago that financial capital is only part of the equation. Human capital is a bigger part. Human capital

The best PE firms have built sophisticated teams with deep industry knowledge and operating experience dedicated to improving the companies they invest in. is what determines the types of companies to buy, where to buy them and – crucially – how to grow them.

Much of that capability is built on a foundation of hard-won experience.

The image of PE firms piling debt onto a company and sucking the wealth out of it decades ago is simply not how the industry works today. The best PE firms have built sophisticated teams with deep industry knowledge and operating experience dedicated to improving the companies they invest in. These deep resources identify and integrate add-on opportunities, drive commercial growth through sales excellence, improve operations, invest in technology and new products, revolutionize marketing and more.

Top PE firms only succeed when the companies in which they invest thrive.

It’s that kind of experience and expertise in a given industry that is driving outperformance in PE today.

A good example is software-as-aservice (SaaS). A decade ago, it was barely a blip on the radar of many private equity firms. Riverside, for example, has completed dozens of SaaS investments, and they represent some of the firm’s strongest growth stories.

Perhaps more surprising is finding growth where the average person – or investor – might never think to look.

You’d probably be surprised to learn that the plumbing business is flush with PE competition, but it is. It’s profitable, offers new technologies

tied to efficiency and is ripe for innovation.

Applying industry experience and expertise to companies where they have a lot of experience allows PE firms to move with speed and conviction to accelerate growth and add value in ways that are simply not possible for an independent owner.

When done well, private equity results in a win-win-win, where an owner of a business can partner with a private equity firm to gain financial capital and the resources to take the business to the next level, increasing employment opportunities and value along the way. So the business owner, investors and employees and even the

community all come out ahead.

The net result of all this PE activity is more competition in economy and more opportunities for everyone. And even if you’re not working in PE or working for a PE-backed company, you should care about it. According to the American Investment Council, the industry employs nearly 12 million Americans and represents about 7% of GDP. PE is increasingly relevant to our lives and businesses.

I believe that’s a good thing.

Stewart Kohl is co-CEO of The Riverside Company, a global private equity firm.

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TMA Northern Ohio Chapter announces 2021 Lifetime Achievement Award winner!

M&A expected to continue its robust growth streak

By ALBERT D. MELCHIORRE

2

The Northern Ohio Chapter of the Turnaround Management Association congratulates John Lane, Inglewood Associates, winner of the 2021 Lifetime Achievement Award.

We thank John for his leadership and the contributions he has made both in the turnaround industry and in our community.

2021 TMA.indd 1

12/10/2021 12:36:11 PM

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021 was the best of times and the worst of times. All businesses have been impacted by the challenges of COVID; some to a great extent and some to a lesser extent. More importantly, our families and loved ones have been impacted as well. In order to help businesses and families, the government has provided several stimulus packages in the form of PPP loans, Employee Retention Credits and extended unemployment benefits to name MELCHIORRE a few. One of the unintended consequences of all this stimulus is inflation (and hopefully not stagflation). Prices are rising across the board, from raw materials to wages. In order to maintain margins, businesses are trying to pass these price increases along to their customers, but trying to keep up with the next round of price increases is becoming more and more challenging.

mid-2020, PE markets have been on fire. According to PitchBook, through the first three quarters of 2021, nearly 300 funds have raised a combined $238 billion, compared to $270 billion in all of 2020.

PitchBook expected fundraising to continue at a rapid pace through the fourth quarter of 2021. From a “dry powder” perspective, PitchBook estimates total uninvested capital in the U.S. to be approximately $829 billion, which is up 8% compared to $766 billion at year-end 2020 and up approximately 12% as compared to year-end 2019.

PE firms have announced more than $940 billion in buyouts in the U.S. in 2021, which is nearly 2.5 times the same period last year, according to Dealogic. Mega deals have been a big factor, as demonstrated through several completed deals in excess of $10 billion. Investors are seeking ways to capture increased returns, and PE is a great place to achieve superior returns compared to other alternatives.

From a pure corporate or strategic buyer perspective, there are several ways to increase shareholder value, including investing in new property,

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From an M&A perspective, however, it has been another record year in the U.S. Through November 2021, total deal volume in the U.S. has surpassed all of 2020. According to S&P CapIQ, total deal volume of closed deals through November in the U.S. was 18,976, which is up approximately 24% compared to 15,260 in all of 2020.

Based on transactions where deal values were disclosed, total deal value in the U.S. was up approximately 82% in 2021 to $2.78 trillion, compared to $1.53 trillion in 2020, according to S&P CapIQ. Drilling down closer to home, deal volume in the Great Lakes region through November increased approximately 27% to 4,852 from 3,827 in all of 2020. Great Lakes deal value also increased about 72%, to $667 billion from $388 billion in 2020. In addition, there has also been a “flight to quality” for the acquisition of businesses and management teams that have performed well during the past 12 months.

There are several key drivers for this boom in M&A activity, including low interest rates and high stock prices. The biggest driver is liquidity.

This primarily comes from two sources: private equity “dry powder” or uninvested capital and record levels of cash on corporate balance sheets.

After a brief slow down during

plant, and equipment or paying dividends, but one way to really move the needle is to make strategic acquisitions. With a record level of cash on balance sheets in the trillions of dollars, strategic buyers are using this war chest to make strategic acquisitions. This, combined with the liquidity in the PE markets, is creating a “perfect storm” environment for sellers. As a result, it continues to be an excellent time to be a seller.

As we look forward into 2022, we expect this level of M&A activity to remain robust, although somewhat tempered. Liquidity in the market should remain strong from the PE overhang and cash on corporate balance sheets for the next 12 to 18 months, as well as banks’ willingness to support M&A activity. With inflation continuing to rise, we may see the Fed begin to raise interest rates, which could have a dampening effect, but probably won’t have any significant impact on the M&A markets until mid-to-late 2023. It’s a good time to be in the M&A business, whether you are a seller, buyer, or adviser.

For the moment, and in the words of the ’80’s rock band the Cars, “Let the good times roll.”

Al Melchiorre is president and founder of MelCap Partners, LLC. Contact him at al@melcap.com.

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CORPORATE GROWTH & M&A

Motivating managers when facing Avoid closing pains a sale is key to easing transition by addressing HR, benefits issues

By DICK HOLLINGTON

C

W Industrial Partners, LLC has invested in lower middlemarket businesses for more than 20 years. In our view, the key factor to being a successful owner is the quality, commitment and engagement of senior management teams, in particular the CEO. When you are the first institutional owner of a private company, it can HOLLINGTON be a challenge for management to navigate the uncertainty of PE ownership that will lead to another sale.

Managers are not only faced with the pressure of leading the company, but the challenges and unknowns related to an exit.

A best practice for motivating and engaging managers for exit doesn’t involve a special plan. The approach is a way of life that follows certain core values:

Collaboration. Treat your managers as business partners. Collaborate on strategy and motivate management to execute. In order to align interests economically, provide wealth creation opportunities through direct investment and equity incentives.

A best practice for motivating and engaging managers for exit doesn’t involve a special plan. The approach is a way of life that follows certain core values.

Humility. Support management teams as opposed to directing them.

Serve your managers by creating likeminded advisory boards and

introducing resources that support continuous improvement.

Family. Maintain perspective on what is most important.

Integrity. The foundation of partnerships is based on acting with integrity. Encourage management to make decisions in the best long-term interest of the business.

By partnering with management to create a shared vision for the business, fostering an atmosphere of trust and maintaining honest lines of communication, managers will be motivated and engaged throughout the term of your ownership. While an exit stage is demanding and stressful, teams have faith in a process governed by values.

Dick Hollington is managing partner at CW Industrial Partners. Contact him at dhollington@cwindustrials.com.

For informational purposes only.

By BRIAN STOVSKY

I

n today’s employment market, employee benefits have become a leading consideration to attract and retain top talent. As such, it is important to make employee benefits a key focus as M&A activity continues to rise and businesses continue to transition through acquisition. Postclose planning performed during due diligence can mitigate and avoid disruption to employees, STOVSKY which is often a pain point for buyers.

Shortcuts taken during employee benefits due diligence will create issues for the new ownership as issues will go overlooked. A common oversight during a transaction is not

discussing the following questions in relation to benefits: What is the structure of the transaction and what is the timing of close?

The successful analysis of benefits plans during due diligence will create a more seamless closing process as well as mitigate future risk for the buyer. Buyers must be cognizant of how the transfer of ownership will impact the treatment of health insurance and benefits plans based on how a deal is structured.

The continuation of coverage for employees, as well as opportunities to create more cost-efficient benefits plans as the result of a deal are often overlooked.

ASSET TRANSACTION GUIDANCE Under an asset purchase structure, the selling entity (oldco) may either roll

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under an existing holding (owned by buyer) or, alternatively, the buyer will form a new company (newco) that is created prior to or at closing. This creates a scenario where various items connected to the seller, including the employee benefits plans, may not transfer to the buyer post-close.

Among other risk-related items, the primary concern around employee benefits is ensuring the continuation of attractive benefits and coverage for the seller’s employees through close and beyond. Health insurance policies are “left behind” during an asset transaction because they are tied to the former company’s name and Tax Identification Number (TIN). Therefore, the buyer must determine which TIN and policyholder is tied with the goforward benefits plans (existing holding/ platform, or newco). Additionally, coordination between the buyer’s advisers and the seller’s payroll and benefits administration vendors must occur as the seller’s TIN is tied to payroll.

Regarding continuation of benefits plans, there are two standard options for a buyer which should be compared during due diligence.

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CORPORATE GROWTH & M&A 1) Maintain separate health plans for buyer and seller. Although the oldco policies are left behind during the asset deal, it is possible to generate new policies that mirror the existing plans under newco on a go-forward basis. How do you determine if this is feasible? The benefits adviser performing due diligence should compare the benefit

maintain separate plans for the two entities, conversations must be had with the carrier partners to amend existing policies to reflect the new policyholder/TIN. Oswald’s carrierpartner relationships often allow us to ensure continuity of benefits with separate policies under the time constraints of a deal.

carriers (buyer) to ensure successful enrollment of employees and transfer of existing deductible and out-ofpocket (OOP) credits from seller to buyer’s plan, so employees are not left with unnecessary OOP expenses.

Additionally, although carriers often have “continuity of care” clauses within their policies to ensure treatment in process is not disrupted,

In today’s employment market, employee benefits have become a leading consideration to attract and retain top talent. plans of both buyer and seller and determine if it is more cost efficient to leave the plans as-is or consolidate.

Considerations include whether the benefit levels (deductibles, out-ofpocket, coinsurance, etc.) are similar enough to avoid disruption through consolidation and understanding the broadness of networks of current carrier partners to avoid provider disruption. If the findings show that it is more effective to

2) Consolidate benefit plan options.

There may be immediate value available to the buyer by merging plans if the analysis shows this is a viable option. If there is enough alignment amongst buyer and seller plan designs and networks, the adviser and buyer would need to work together to transition the seller employees to their new plan. This includes coordination between the incumbent carriers (seller) and new

the adviser would need to obtain pre-existing provider approvals in the event of a carrier change to mitigate ongoing disruption. The key is to confirm continuance of coverage for employees. It may also make sense to market the existing plans, depending on the timing of close in coordination with renewals.

This can be accomplished pre-close to determine if cost savings are available.

STOCK TRANSACTION GUIDANCE Stock transactions typically allow the seller to transfer ownership to the buyer without much disruption to health insurance and employee benefits as the selling entity will remain intact, with its policies and TIN through close. Although the same decisions on separating or consolidating benefits discussed for asset deals are still relevant to post-close strategy, these decisions can often be made post-close without issue. However, incumbent carriers may need to be notified of a change in ownership by the seller or their adviser, which could change compliance requirements of the seller moving forward (most likely due to number of commonly owned employees).

Brian Stovsky is a business development leader at Oswald Private Equity. Contact him at 216-777-6114 or bstovsky@oswaldcompanies.com.

Employee benefits due diligence should be at top of M&A checklist

By JEFF SMITH AND MELISSA DIALS

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istorically, personnel and employee benefit issues were not given much attention during the diligence process when employers and investment groups contemplated acquisitions. Focus has shifted more recently, in large part because of: • the rise of class and collective action litigation; • the emergence and increasing popularity of “Reps & Warranties” insurance products and; • the resulting scrutiny of employment law issues by insurers and the broad application of successorship liability principles to employment matters in both asset and stock purchase transactions.

Regardless of the structure of the transaction, when it comes to employment-related liabilities, the buyer must conduct meaningful diligence. Potential liabilities can be handled through various mechanisms, whether by establishing

a substantial escrow for liabilities, negotiating protection through a strong indemnification or other mechanisms. No matter how the buyer seeks to limit its potential liability, however, the days of ignoring employee benefits and other employment-related issues in the diligence process are history. These issues matter in terms of legal liability, deal valuation (and evaluation) and post-acquisition integration of operations/policies/assets.

Our due diligence focuses on the need for assessing compliance to minimize unnecessary expenses and distractions, as well as

Employee benefits issues sometimes take the backseat to corporate issues in mergers and acquisitions. providing insight into possible cultural challenges that need to be addressed to ensure a successful integration. Three common areas for benefits planning in mergers and acquisitions are health and welfare plans, retirement plans and executive compensation arrangements.

1. Health and welfare plans. The buyer will need to determine whether

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the target’s plans comply with various laws affecting group health plans, including Affordable Care Act compliance. Although the ACA has been in place for many years, we see target companies with varying levels of compliance with the ACA. When target employers cannot adequately prove ACA compliance, we often suggest additional, specific indemnification language.

2. Retirement plans. Retirement plan concerns are directed at target company plans, as well as multiemployer pension plans, which are contributed to by many unionized employers. We tend to see more issues in the multiemployer plan area.

These plans are often misunderstood by smaller employers, even though contributions have been made for long periods of time. It is not uncommon for a small, unionized employer to know nothing about withdrawal liability, and often times, the questions asked during diligence are met with surprise by employers.

Addressing these plans early on will allow adequate time to gather needed information, especially when many multiemployer plans cannot quickly respond to information requests.

3. Executive compensation agreement.RS-HALF-PAGE-Ad-2021_v1.pdf The buyer will need

January 17, 2022 S15

CORPORATE GROWTH & M&A to evaluate whether executive employees of the seller will be retained following the sale, and under what terms and conditions.

However, even if a buyer decides not to retain high-level employees, the buyer will want to carefully review any executive employment contracts.

Many such agreements contain “change in control” language that trigger expensive payouts should the company be sold or acquired by another entity. For example, many executive employment agreements contain “incentive retirement compensation” provisions that provide for retirement payments, which kick in at a determined retirement date or age. However, it is very common for such agreements to contain a “change in control” clause to require expensive payouts to be made immediately upon a sale of a business. Buyers will want to carefully review any executive employment contracts for any similar triggering provisions.

All of the foregoing underscores the critical reason for buyers to conduct an accurate due diligence review prior to making any decision to merge with or acquire another company. Conversely, by understanding the concerns of buyers, a seller can anticipate, address, and in some circumstances even remedy these concerns pre-acquisition, 1 11/4/21 2:13 PM

leading to a more successful sale.

Employee benefits issues sometimes take the backseat to corporate issues in mergers and acquisitions.

Turning this process around and focusing on employee benefits issues at the outset can lead to fewer and smaller surprises down the road. We recommend that a comprehensive diligence request list include detailed questions about employee benefits issues. This should be followed with early communication with seller and its counsel, and further follow-up as needed. Simply dumping documents in a data room tends to lead to confusion and poor answers.

A good due diligence review will analyze the issues discussed above and evaluate any potential liabilities the buyer may be taking on. Nothing can sour a deal like learning (after the fact) that not only did you acquire a new company, but you also picked up several millions of dollars in liabilities. A due diligence review should be done early on to determine how these issues may impact the buyer’s desire to complete the transaction, and how these issues might affect the purchase price.

Jeff Smith and Melissa Dials are partners at Fisher Phillips LLP. Contact Jeff at 440-740-2124. Contact Melissa at 440-740-2108.

Buyer, seller tax benefits key to structuring M&A transactions

By JAMES B. SKAKUN

A

properly structured transaction can provide tax benefits to both the buyer and the seller. Typically, buyers want a deductible step-up in basis while sellers want capital gains treatment.

Proper planning is crucial to achieving both.

Tax SKAKUN considerations are important factors in how transactions are structured. The buyer needs to determine which type of acquisition vehicle, e.g., corporation or partnership, will be used, and which type of investment vehicle currently holds the target business.

There are several options at the

buyer’s discretion, depending on the seller’s structure, to ensure it receives a step-up in basis that, in part, would be eligible for immediate expensing with the remaining step-up deducted over time. The immediate expensing can provide significant tax savings in the first year for the buyer and result in increased cashflow.

One common structuring tool for pass-through entities such as an S corporation is an F reorganization.

This allows the transaction to be treated as an asset purchase with the buyer acquiring the legal entity.

The seller will still have capital gains treatment, the buyer will receive a step-up in basis, and there is an added layer of protection to the buyer from a tax exposure standpoint.

Tax considerations can also affect the timing of transactions. In

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Through 30 Years and more than

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September 2021, Congress released legislative text that contained several significant tax changes, including a significant capital gains tax rate increase and effectively eliminated the small business stock tax strategy.

Although this proposed increase in capital gains tax was not ultimately passed, the legislation may have

Typically, buyers want a deductible step-up in basis while sellers want capital gains treatment. Proper planning is crucial to achieving both. caused sellers to move more quickly than originally planned.

Although taxes tend not to drive business decisions of whether to sell, anticipated changes, especially to capital gains rates, could impact when sellers go to market.

James B. Skakun, CPA, is senior manager at Bober Markey Fedorovich.

Contact him at 330-255-2429 or jskakun@bmf.cpa.

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Adapting to disruption in M&A deals in an era of volatility

By CHRISTOPHER J. HEWITT AND JAYNE E. JUVAN

HEWITT

A

JUVAN

s disruptive as the current M&A landscape has been, deal practitioners have seen and successfully navigated similar disturbances before. Doing so is never easy, however, especially during dark days like March 16, 2020, when the Dow Jones Industrial Average sharply dropped 2,997 points due to COVID-19. Many presumed that deal activity would grind to an extended halt. While volume initially plummeted, a “V-”shaped recovery ensued even as the pandemic raged on.

Perhaps similar to a wartime period, today’s challenges are daunting. The world continues

to fight an ever-changing, deadly virus that is outmaneuvering the medical community’s efforts at eradication. Couple that with supply chain disruptions, an inflationary environment and jockeying over U.S. tax policy, and headwinds are the only thing that seem bountiful. But while brighter days seem lost or far off, history has proven at least one thing is for certain – they always return.

Executives who study the current situation to identify opportunities for their businesses, have the audacity to execute on them, and do so in an intelligent way have a jump on those who take themselves out of the game.

The following are a few of the issues to understand to position yourself for a lucrative outcome.

GOVERNMENTAL REGULATION Mask and vaccine mandates, social distancing, capacity restrictions, COVID-19 testing, contact tracing, quarantines, travel restrictions, border closings, facility shutdowns, stay-at-home orders, and other COVID-19 protocols are unique

to the current pandemic. These measures have caused hiring problems, supply chain issues, and production problems, and they have cost companies hundreds of millions of dollars in lost sales and increased expenses. They also have created additional legal exposure.

While these particular measures are unique to this pandemic, government regulation is not. Sarbanes-Oxley and Dodd-Frank are just two examples of reactionary regulation that created additional responsibilities and legal exposure. Beyond these types of seminal regulatory developments, governments at all levels, and in all countries, are continually tweaking their regulatory regimes.

Understanding how target companies have managed and complied with these new and ever-changing regulations — and the associated exposure — is a key feature in a thorough due diligence process today.

Any material exposures identified should be addressed through adjustments to economic terms, indemnification and escrows.

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SUPPLY CHAIN RISKS It is an understatement to say that recent supply chain issues have created a material disruption to business. Worse yet, before the current challenges, legal teams may not have mitigated supply chain risk when contracting. We have seen numerous situations in which companies have contractually promised to deliver goods even under exigent circumstances, only to find that their suppliers contractually may back out at the first sign of trouble.

Contract due diligence should not simply be “check the box,” but should aim to gain a thorough understanding of supply chain risk and the legal exposure created by failing to take a holistic approach to contracting.

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

Calfee celebrates the accomplishments of Dan T. Moore, the ACG Cleveland Lifetime Achievement Award recipient!

We are grateful for the opportunity to have worked for decades alongside Dan T. Moore who has achieved the highest level of sustained success, personally and professionally, over a lifetime of deal making.

Calfee also congratulates Blue Point Capital Partners and Cleveland-Cliffs Inc. as ACG Cleveland Deal Maker Award recipients! Calfee is honored to represent many companies and private equity funds, including the Dan T. Moore Company, Blue Point Capital Partners and Cleveland-Cliffs Inc., that generate employment and economic success in our region and beyond.

Calfee’s Corporate and Finance Group Leaders Thomas M. Welsh | Jennifer L. Vergilii | Karl S. Beus

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ORDINARY COURSE OPERATIONS NEW FACES IN NEW PLACES In many deals, parties will sign a purchase agreement, but the closing does not occur immediately due to financing delays, regulatory approvals and other outstanding items. In the interim period, the seller will often covenant to operate the business in the “ordinary course.” But what does “ordinary course” mean, especially during these uncertain times? For example, can the seller engage in extreme cost-cutting measures if a perilous situation surfaces? If the seller deviates from its own past practices, but its actions are consistent with those taken by the industry as a whole, is the seller in compliance?

Should the buyer have consent rights?

Parties should clearly define this covenant so the nature of permissible activities is without ambiguity.

transaction and needs to retain the ability to back out of the deal, the buyer may want to attempt to reallocate nonbusiness risks to the seller. While we are in a seller’s market, buyers should take an educated and thoughtful approach to these provisions and not simply adhere to the supposed “norms” that Delaware courts and other deal attorneys have created.

RISK-SHIFT WITH MACS Delaware courts have suggested that the most economic allocation of risk for material adverse changes is for the seller to retain responsibility for risks specific to the business, and for the buyer to bear all other risks (such as macro-economic risks, risk of a stock market decline and industry risk), but sophisticated parties may agree to allocate these risks in any way they desire. If a buyer is undertaking a riskier

Christopher J. Hewitt is partner and co-chair of the Tucker Ellis M&A and Corporate Governance practice groups at Tucker Ellis LLP. Contact him at 216-696-2691 or christopher.hewitt@ tuckerellis.com.

CONCLUSION Buyers, sellers, and deal practitioners need to continually adapt to the environment in which they do deals. Unanticipated disruptions share characteristics with both prior unanticipated and anticipated changes. Savvy deal practitioners will be able to identify these similarities and apply lessons from the past to keep the deal engine humming.

Jayne E. Juvan is partner and co-chair of the Tucker Ellis M&A and Corporate Governance practice groups. Contact her at 216-696-5677 or jayne.juvan@ tuckerellis.com.

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Programmatic acquisitions create sustainable value

By JASON STEVENS

deliver better returns for shareholders.

According to research ompanies looking to conducted and recently grow through M&A updated by McKinsey, should consider programmatic acquirers looking at deal making not have delivered about 2% as a one-off event but rather more in excess total returns as a sustained, systematic STEVENS to shareholders annually strategy. as compared to non-programmatic Although large, isolated deals have acquirers. Moreover, these premium their place in the M&A playbook, a returns are shown to come with lower programmatic approach is proven to

C

levels of risk, persist during periods of economic volatility and span multiple sectors of the economy.

A single, targeted acquisition can be perfect for firms looking to expand with a defined strategy involving organic, selective or large deals. However, a programmatic approach can really boost value creation when the systems and processes are in place to integrate target companies, giving programmatic acquirers an edge relative to their peers.

EMBRACING PROGRAMMATIC M&A The programmatic approach has been shown to deliver better shareholder returns across most sectors.

McKinsey found that companies employing the programmatic strategy outperformed other approaches (selective, large deal, organic) across advanced industries; transport, logistics, and infrastructure;

Tenacity and Creativity to Respond to Extraordinary Challenges

Our experienced, savvy corporate team helps our clients navigate tough times to maximize opportunities as they arise.

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consumer packaged goods and retail; financial services; energy and materials; pharmaceutical and medical products; and healthcare systems and services.

Programmatic M&A also pays off during periods of greater economic volatility, including amid the COVID-19 pandemic.

Between January 2019 and December 2020, programmatic M&A among companies with market caps greater than $2 billion delivered median excess total returns to shareholders of 2.9%, compared to -1% for organic strategies, -0.2 % for large-deal strategies, and 0% for selective strategies. We find similar results playing out among middlemarket companies.

Additionally, the consistent nature of programmatic M&A allows acquirers to hone their deal making abilities.

When M&A is treated as an ongoing commitment rather than

Acquirers can achieve better results with a dedicated and disciplined approach to deal sourcing, due diligence and integration planning.

a one-off occurrence, outcomes are maximized. Like professional athletes honing their natural abilities with physical training, acquirers can achieve better results with a dedicated and disciplined approach to deal sourcing, due diligence and integration planning.

In the same way that acquirers should be developing a business strategy and executing daily to sell products or services, they should be in the weeds every day evaluating M&A opportunities. Even deals that do not come to fruition are beneficial, as you can learn just as much from those deals as from the ones you close.

With a programmatic approach, acquirers become accustomed to thinking through all the details of a transaction, such as how to redefine roles and combine processes with the target company. In a 2018 report, McKinsey found programmatic acquirers were better prepared: more likely to estimate revenue and cost synergies as well as designate personnel to manage every step of the process.

We find that the most successful acquirers view the deal making process as part of ongoing operations,

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allowing the organization to establish relationships, pursue off-market opportunities, and sharpen their deal making capabilities.

Conversely, a more passive approach to M&A typically leads to subpar results. We have seen otherwise savvy and successful businesses dramatically underestimate the process and the resources necessary to complete a transaction. Inexperienced and undisciplined buyers believe they can finalize a deal by contacting only one or two targets, despite the fact that it can take dozens of interactions with dozens of potential targets to push a single deal across the finish line. Many of these buyers simply have not established the proper procedures to go about pursuing deals and following up with targets; they will inevitably become frustrated and walk away.

PLANNING PROGRAMMATIC M&A The best results come when a buyer identifies its own competitive advantage, shows conviction in sourcing and following-through on acquisitions, and has capacity to find opportunities, complete due diligence and integrate an acquired business. McKinsey calls these the “Three Cs”: • Competitive Advantage: Programmatic acquirers are 1.4 times more likely to strongly agree that they understand how to meet the company’s goals.

• Conviction: Programmatic acquirers are 1.4 times more likely to proactively reach out to targets.

• Capacity: Programmatic acquirers are 1.9 times more likely to strongly agree that they have the right tools and talent to execute their strategy.

Advisers are critical at all three levels.

A trusted adviser works with a client to clarify what sets them apart while building an acquisition pipeline full of opportunities to enhance or complement a company’s competitive advantages. A good buy-side adviser provides a clear framework and structure around an acquisition search, bolstering buyer conviction and providing external capacity to handle the most time-consuming parts of the process.

Programmatic M&A is about consistent investment in a welldesigned plan. Acquirers and their advisers should establish a sustained, systematic approach to maximize value and reduce risk, regardless of sector or macroeconomic conditions.

Jason Stevens is chief operating officer and a partner at Copper Run. Contact him at 614-888-1786 or jstevens@ copperruncap.com.

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Private equity marketing success analytics

By BRAD KOSTKA

A

s competition for investors and deals has grown more fierce, having a strong digital marketing strategy is crucial for private equity firms when it comes to sourcing acquisition targets, raising capital for new funds or accelerating the growth of their portfolio companies. Whether you have years of experience using digital marketing to tell your story or are just dipping your toes in the process, here are the primary analytics you should be using to gauge how well your marketing initiatives are meeting your KOSTKA objectives.

EMAIL MARKETING CAMPAIGN SUCCESS In the digital space, email marketing is one of the most cost-effective tactics. Once you’ve built a list of email subscribers, you can keep your private equity firm and investment criteria top of mind with investors, business owners and referral sources by regularly distributing news about your funds, platform investments, add-ons and partners.

While developing engaging content is integral to your email marketing program, perhaps just as important is tracking what happens after you hit send. Tracking open rates and unsubscribe requests will help you understand if your content is hitting the mark — in terms of being engaging and interesting — and reaching the right audience. An additional key indicator of interest is the email’s click-through rate. Your email should provide just enough content to interest your readers and entice them to click on links to learn more. Linking back to additional content will drive traffic back to your site, providing additional opportunities for you to engage with your target audiences.

SOCIAL MEDIA METRICS An effective social media strategy offers a variety of benefits — from building greater brand awareness and boosting the visibility of your business to increasing website traffic. Once you have finalized your strategy and posted to appropriate social media channels, it’s time to see how well your posts engaged your targets.

You can track that performance through a few metrics, including the number of likes, comments and new followers gained after each new post. However, the best measure of success is when your followers share your content with their own social media circle. This expands the reach to hundreds, if not thousands of additional viewers with a single click — resulting in an exponentially increased audience reading about your experience and expertise, opening your

private equity firm up to a bevy of new investors and deal opportunities.

DIGITAL ADVERTISING CAMPAIGN CONVERSION A highly measurable and dynamic tool for any business, digital advertising can be used to build brand awareness, generate highquality leads and drive product sales — even with a limited budget.

There are five main types of digital advertisements that can be useful for your private equity firm, including search (text ads in search results), display (image ads on websites), social media sponsored posts, video and retargeting ads. With retargeting, tracking code (called a cookie) is placed on the computers of your website visitors. After they leave your website, the code will allow you to retarget them with your firm’s advertisements as they continue to browse other sites on the internet.

The aim of advertising is to build

greater awareness for your brand and earn a prospect’s trust with tailored content — such as webinars or e-books — that will draw them to

In today’s digital landscape, your website is the very first impression that prospects will have of your private equity firm. your site where they become leads when you capture their contact information. By nurturing these leads, you can convert them into investors, acquisitions or customers.

WEBSITE TRAFFIC In today’s digital landscape, your website

is the very first impression that prospects will have of your private equity firm.

And, if your marketing emails, social outreach and digital advertising succeed, it’s where your audience will go to learn more about your performance, platform attributes, industry sector focus and transaction types.

Some key indicators of the effectiveness of your site include number of visitors, including unique and returning visitors. Once visitors find your site, it’s helpful to know how long they stick around. This is where your bounce rate — a percentage calculated by dividing the number of single-page sessions by the number of total sessions on your website — is helpful. If your website has a bounce rate of 56% or greater, this could be an indication that users are finding your website difficult

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Unique Solutions for Complex M&A Issues Securing Investments & Enhancing Returns Aon’s M&A and Transaction Solutions team is with you throughout the life of your deal - from structuring coverage that optimizes results on the front end, to helping you navigate client negotiations and settlements on the back end - we pride ourselves on providing unparalleled service and advice, all on deal time.

We can help protect your investments from unknown risks through the use of representations and warranties insurance and help you ring-fence potential tax risks through tax insurance. We can also help mitigate exposure to known issues and pending litigation through a suite of contingent liability solutions.

To learn more about Aon M&A risk management, human capital and transactional insurance solutions, Please go to aon.com/m-and-a-transaction/index

or contact us Tyler Adkerson

+1.773.401.0660

tyler.adkerson@aon.com

S20 January 17, 2022

to navigate, experiencing technical errors, or that your website features low-quality or under-optimized content, which could drive prospects to a competing firm to get the service they desire.

KEEP IT ORGANIZED Implementing a marketing automation platform can help your business centralize your digital marketing efforts and analytics.

Platforms like Hubspot, SharpSpring and others allow you to build or customize email templates, maintain audience lists, score leads and track performance of your email, social and advertising campaigns. This provides you with the intel you need to continuously improve your marketing outreach.

For private equity marketing resources, visit www.roopco.com/pe.

Brad Kostka is with Roop & Co. Contact him at 216-902-3800 or bkostka@roopco.com.

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Tax insurance a key risk management tool

By JESSICA HARGER

T

ax reserves for uncertain tax positions maintained by U.S. companies are substantial and can negatively impact earnings.

Companies reserve funds when auditors cannot get comfortable with the potential for a tax authority challenge of a tax position, and this balance sheet liability can create a drag on earnings, which will continue until the tax authority review HARGER period expires.

Tax insurance protects companies against a transaction or tax planning failing to qualify for its intended treatment, resulting in an unanticipated loss. It is a proven, efficient and cost-effective tool to

bring certainty to the treatment of a tax position. Traditionally used in a transactional context, such as in an M&A deal with a pre-closing tax-free restructuring, there is a broader

provided Aon with guidance on the proper accounting treatment of tax insurance and its impact on the financial statements. They confirmed that tax insurance can

Companies can transfer tax risk to insurers, neutralizing the reserve and creating a credit to income, potentially resulting in higher earnings.

application that can be accretive to a company’s earnings due to favorable accounting treatment under U.S. GAAP in addition to cash flow certainty.

A Big Four accounting firm

positively impact corporate earnings and balance sheets, where uncertain tax positions have been reserved for under FIN 48. Companies can transfer tax risk to insurers, neutralizing the reserve and creating a

“Benesch was extremely responsive at a critically important time as we were completing two platform investments.

The fact that they have both transportation industry knowledge and a strong M&A practice really helps them understand the full set of issues and how they interconnect.”

By JASON KLEIN AND CHRISTOPHER HAWLEY

MARK FORNASIERO Managing Partner Clarendon Capital, LLC MICHAEL RAUE Partner Clarendon Capital, LLC

KLEIN

T MY TEAM PETER K. SHELTON CHRISTOPHER D. HOPKINS MARC S. BLUBAUGH DARYLL V. MARSHALL RYAN J. WILLIAMS JONATHAN R. TODD JESSICA N. ANGNEY GEORGE STOWE RICHARD A. PLEWACKI

Complex M&A transactions often require different law firms to handle different aspects of the deal—adding even more complexity as well as costs. But for private equity investor Clarendon Capital, Benesch’s deep transactional expertise and nationally renowned Transportation & Logistics Practice eliminate the need for multiple representation.

Clarendon also gains access to useful introductions and exposure to potential opportunities through Benesch’s extensive transportation, logistics, private equity, and investment networks. It’s a winning combination of legal and business capabilities that is helping Clarendon and its portfolio companies grow and thrive.

Can we do the same for your business? Learn more about our relationship with Clarendon Capital at beneschlaw.com/myteam.

www.beneschlaw.com © 2021 Benesch Friedlander Coplan & Aronoff LLP

ClarendonCap4c_6x8Ad.indd 1

Jessica Harger is managing director at Aon M&A and Transaction Solutions.

Contact her at 914-572-2422 or jessica. harger@aon.com.

Shifting landscapes: legal due diligence is critical for PE buyers

MY BENESCH

Featured team (left to right)

credit to income, potentially resulting in higher earnings. Tax insurance has become a versatile and impactful risk management tool, with tax risks unrelated to M&A routinely covered.

Tax insurance is not used to avoid reporting and disclosure requirements under U.S. GAAP, and many aggressive positions requiring reserves are not insurable. However, where companies have conservatively posted a tax reserve, tax insurance offers a means to avoid or reverse the financial statement impact of such positions. Companies should consult with their tax advisers and Aon for advice on the applicability of tax insurance.

11/17/21 12:29 PM

HAWLEY

he sprawling impact of COVID-19 has touched every industry and has ripple effects that will continue to be felt for years.

Companies are experiencing difficulties and setbacks across industries, most recently in the labor market and in various supply chains. In light of the dynamic environment brought on by the pandemic, private equity buyers should be targeted and thorough with their acquisition processes. The legal due diligence process is vital for private equity buyers to ensure they are wellequipped to face this shifting landscape.

This is true now more than ever.

In order for PE buyers to remain flexible with their portfolio companies post-closing, it is imperative to become even more critical of every target’s material contracts used in their business. Concerns raised during a PE buyer’s review of material contracts likely would not prevent the deal from closing. However, the negotiation process can allow the PE buyer to have a full understanding of the scope of customer and vendor obligations. The outcome may require revised contracts with key customers

or suppliers to be closing deliverables from the seller.

In the current corporate environment, the following are key concepts that every PE buyer needs to analyze in a target’s material customer and vendor agreements: force majeure, requirements and forecasting, and price flexibility.

FORCE MAJEURE With every one of the target’s material customer and supplier agreements, it is crucial to understand whether they have effective force majeure clauses. Given the current commercial environment, PE buyers need to ensure that they will not encounter events of default for delays in compliance with the agreements outside of their control. These force majeure clauses ideally will cover situations specific to COVID-19, uncontrollable delays in the global supply chain and availability of required raw materials as they are particularly applicable today.

REQUIREMENTS AND FORECASTING With the constraints present in the global supply chain and the challenges associated with high-demand, lowinventory products and raw materials, PE buyers need to fully understand and measure a target’s obligations and rights associated with supplying or purchasing products. For a target’s agreements with key customers, PE buyers should look for provisions in which the target is obligated to supply the customer with their full requirements of certain products or provisions in which the target is bound

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CORPORATE GROWTH & M&A

by certain forecasts the customer may deliver throughout the term of the agreement. If the raw materials or component parts associated with these products are in high demand, but difficult to source, this could put the target in an unenviable position where default is inevitable. Understanding the customer’s available remedies in an event of default is equally important.

PRICE FLEXIBILITY Private equity buyers need to be particularly aware of not just their target’s pricing structures, but also the situations in which the targets can institute price increases with their customers. The prices of certain raw materials and scarce component parts have driven many companies into economic uncertainty due to inflexible pricing provisions in their material customer contracts.

Ideally, targets will have the ability to fluctuate pricing with their customers based on material increases in outside costs such as raw materials or labor. The pricing for certain products may even be tied to a global index for certain raw materials, which can allow targets to remain economically flexible. Additionally, certain provisions can be drafted that if such outside costs increase by a certain percentage above historic figures, the target is able to institute

a corresponding price increase with the customer. No matter how the agreement provisions read, PE buyers need to ensure that post-closing their acquired target can remain flexible with pricing.

While it may not be the most exciting part of the acquisition process, thorough legal due diligence in today’s environment is paramount. Paying particular attention to a target’s material customer and supplier contracts can allow PE buyers to avoid constraints post-closing and allow them to be flexible in the future. Whether a PE buyer uses due diligence to simply better understand the target’s material obligations and rights or begins negotiating with customers and vendors as a part of the acquisition process, due to the unsteady commercial landscape, the legal due diligence process is more important now than ever.

Jason Klein is a member in the Mergers and Acquisitions Practice Group at McDonald Hopkins LLC. Contact him at 216-348-5817 or jklein@ mcdonaldhopkins.com. Christopher Hawley is an associate in the Mergers and Acquisitions Practice Group at McDonald Hopkins LLC. Contact him at 216-348-5469 or chawley@ mcdonaldhopkins.com.

The evolution of due diligence in the wake of COVID-19

By MICHAEL S. SOUTHARD

C

OVID-19 has affected the financial performance of many companies, and buyers are treading cautiously during due diligence to determine the true impact of the pandemic on performance.

Here are five ways due diligence has evolved following COVID-19: SOUTHARD

they driven by the pandemic? It’s important for buyers to discern whether businesses struggled or thrived through the pandemic or because of it.

Due diligence in a remote world has its challenges.

• Expanded EBITDA analysis.

Buyers look at EBITDA, but they are examining trends before and after the pandemic. What items have a onetime impact versus others that may be permanent?

• Closer examination of debt-like items. Has a demand drop caused inventory to age? Does historical working capital reflect current needs?

How is a company accounting for the Paycheck Protection Program (“PPP”) funds? Has the PPP loan been forgiven? If not, it must be accounted for and possibly paid off by the seller before close.

• Top line impact. Buyers are looking for COVID-related losses or windfalls. Were such changes to revenue permanent? Or were

• Vendor and supply chain scrutiny.

Buyers should carefully examine how a company’s supply chain has been impacted by the COVID pandemic.

Have the negative changes such as delivery times, increased costs, etc. been accounted for in the forecast?

• Tax evaluation. While the Coronavirus Response Act, CARES Act, and other legislation helped many, they left taxpayers and accountants with lingering questions.

Buyers will want to ensure aggressive tax positions will not create future liabilities.

Due diligence in a remote world has its challenges. Thankfully, the use of virtual data rooms and video conferencing services have greatly helped to facilitate the process. As transactions increase in the wake of COVID-19, sellers should brace themselves for increased scrutiny and a new category of questions borne from the pandemic.

Michael S. Southard is managing director at Elvisridge Capital, LLC. Contact him at 216-678-9900 or michael@elvisridgecapital.com.

EXCEEDING EXPECTATIONS. EVERY DAY. Hahn Loeser provides tailored solutions for our clients looking to grow. We have years of experience representing businesses selling to private equity, and our responsive team is committed to getting the deal done for our clients. Whatever your legal needs are, we are here to help.

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Set actionable goals for growth

By BRANDON FREDERICKS

B

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usiness owners have likely seen the statistics stating how many small businesses won’t survive past the first two, FREDERICKS five, or even 10 years from origination. The fight to

overcome these statistics can be an excellent motivator and energizer, but how do leaders ensure their energy is directed at the “right” strategies that will succeed?

There is also a difference between sustainability and growth. A common leadership quote rings true: “If you’re not growing, you’re dying.” Taking the leap from sustaining marginal profits to achieving substantial growth can occur with the proper

strategy in place.

Growth doesn’t happen accidentally. A clear, actionable plan for growth is essential to remain strategic and intentional at every step and to ensure your business has every chance of long-term success. Organizations can achieve growth through a plan that is clearly communicated, that puts purpose ahead of profits and creates a culture of accountability.

There are a variety of paths to growth, from expanding current markets and product offerings, to acquiring another business to take advantage of synergy opportunities.

The question is: which is best for the company? There’s no cookiecutter answer — success will be to each business owner’s unique needs.

Before thinking about any specific growth aspect, such as acquiring a competitor, organizations should take a deeper look into the core of why great growth companies are always able to succeed.

MelCap Partners would like to thank everyone who helped us to continue to grow over the last two years, which empowered award-winning performance. Below, please view some of the deals completed and awards received.

has been sold to

a division of has been acquired by

has received an investment from

has been sold to

a portfolio company of

SHARPENING THE “WHY” As Simon Sinek has said, “All organizations start with why, but only the great ones keep their why clear year after year.” How sharp and in focus is the organizations’ “why”? What is the businesses’ purpose? Without clarity, any strategic growth plan will struggle to be achieved and/or sustained long term. Before jumping into any growth idea, business owners should take a moment to really ask why they do what they do. It is amazing what this exercise can do for an organization and the clarity it can bring to any future growth ideas.

WINNING ON TALENT The ongoing pandemic has shined a huge spotlight on any organization’s most precious asset — their people. Whether a company is a manufacturer in multiple states, or a small service provider for the local community, business leaders are all looking to find, develop and retain great individuals. Without people that believe in the company’s “why,” live the business’s values every day, and are committed to something bigger, very little can be accomplished. Before

has acquired

has been acquired by

Fidelis Holdings, LLC

has been acquired by

has been acquired by has been acquired by

has been acquired by

has been acquired by

has been acquired by

Peerless Management LLC

Business owners have likely seen the statistics stating how many small businesses won’t survive past the first two, five, or even 10 years from origination.

The Foodservice Division of

a portfolio company of has been acquired by has been acquired by

has been acquired by

has been acquired by has been acquired by

Summit Machine Solutions, LLC

a portfolio company of

Recent Awards

5021 Ridge Rd, Wadsworth, OH 44281 www.melcap.com (330) 239-1990 al@melcap.com

2X Award Winner

2X Award Winner

2X Award Winner

2019 & 2020 Boutique Investment Banking Firm of the Year 2021 Finalist

2020 & 2021

Best Investment Banking Advisory Firm of the Year Ohio, USA 2019 & 2020

Services: Sell Side M&A Buy Side M&A Private Placement Agent Corporate Restructuring Business Valuations Feasibility Assessment

Award Winner

Securities offered through M&A Securities Groups, Inc. | Member FINRA / SIPC. MelCap and MAS are not affiliated entities.

Outstanding Restructuring Firm for Boutique Investment Banking Firm of the Year 2021

Honoree

business owners can achieve growth in a traditional sense, they should first reflect on whether their company has the right people in the best roles.

DIGITAL TRANSFORMATION Today’s world is very interconnected and interdependent. Industries are rapidly changing. Customers’ needs and wants are evolving. And because of that, to remain relevant and thrive, organizations must be designed in a manner to change just as quickly. Whether it’s preventative maintenance on a key piece of machinery to make a customer deadline or identifying an alternative raw material source to head off supply chain issues, building an organization around data and information puts business owners in a stronger position for growth.

INNOVATING AND INVESTING FOR TOMORROW Creating a culture of continuous improvement that breeds innovation and change are what can propel an organization to the next level.

Whether its new product designs, a change in the customer experience, a state-of-the-art piece of technology,

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January 17, 2022 S23

ANNOUNCING AND IMPROVE [DATA MEMBE Our newly enh data offering n vides the follow high-level busi telligence serv your lead-gene market researc

or lowering the company’s environmental footprint — great and growing companies never stop seeking ways to improve from yesterday. Thus, as leaders begin building out a strategic growth plan, they should ask how the company is bettering for tomorrow and in what specific ways.

TOP TIER FINANCIAL LEADERSHIP As business leaders round out a strategic growth plan, they need to evaluate how the company’s finance team will put the business in a position of strength throughout the journey. Today’s finance leaders are less about the debits and credits, and rather a key strategic component.

Growth takes time, energy and money. A strong finance team will be critical for managing cash flow, financial modeling, assessing return on investments, securing capital and steering the organization around any financial headwinds that could slow growth.

Discover how to achieve the next phase of growth – visit applegrowth. com/advisory.

Brandon Fredericks, CPA, is principal at Apple Growth Partners. Contact him at bfredericks@applegrowth.com.

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Learn more by downloading our free white paper, Transaction Risk Management: Strategies for Protecting Owners and Capital Investors.

S24 January 17, 2022

CORPORATE GROWTH & M&A

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Hyper-risk environment requires precise contract design

By CRAIG OWEN WHITE AND CALEB P. OHRN

WHITE

OHRN

S

uccess in business is frequently determined by how effective the enterprise is at identifying and managing risks. Risk, simply put, arises from any factor, event, or occurrence that has the potential to interfere with a desired outcome. Business lawyers help their clients identify, quantify, and price each risk based on the likelihood and consequences that would result from its occurrence. No matter how much Wall Street tries to

convince the market, risk cannot be eliminated. There is no such thing as an inherently good or bad risk, there are only mispriced risks.

The dynamics of dealmaking have and continue to change. With each technological breakthrough or geopolitical event comes new risks that must be quickly evaluated, priced and allocated among the parties, or off boarded to insurers or other third parties. Allocation of these risks

must be appropriately documented to ensure enforcement. It is more essential than ever for the business lawyer to understand his or her client’s business model, industry dynamics and transaction objectives to develop a true appreciation of that client’s true risk profile.

Clients generally adapt and are comfortable dealing with an array of traditional risks falling into certain buckets that include compliance,

reputation, competition, operational, and now, supply chain. Information necessary to evaluate these risks is extracted through due diligence and disclosures in the form of representations and warranties from the counterparties with exceptions being set forth on schedules. Deal terms could be adjusted to respond to the disclosed risks, a process that was cumbersome but generally worked in a world where risks were static and slow changing. Consequently, parties can be lulled into a false sense of complacency wherein the formal contract is never again addressed until the contract was set to expire.

Today’s new hyper-risk environment demands more nimble contracts designed for timely administration and action. New risks such as cyber-hacking that shut down production facilities; the imposition of tariffs and trade restrictions and unchecked inflation that unexpectedly spike the cost of critical inputs; travel restrictions that limit access to foreign-based consultants to repair machinery, to name a few, can quickly threaten core operations.

Further complicating matters, the interconnectivity within a business’s own operations and with its customers and suppliers add an additional level of complexity in spotting, containing and resolving risk factors.

The solution is to first build a dynamic negotiating framework that clearly identifies known risks, that if were to occur, could materially impact a business’s model and pricing assumptions.

And, in a worst-case scenario, would that impact likely be transitory or permanent? For each risk, identify which counterparty is in the best position to prevent it from occurring and, thus, should bear all or a portion of the loss or additional cost should the risk materialize. In some instances, the parties may be able to shift the risk to a third party, such as an insurer, with the focus of the negotiations pivoting to how much coverage to acquire and who will pay the corresponding premium.

Whether dealing with traditional risks or new, novel risks, two considerations are frequently overlooked: • Any issues that went wrong must be fixed immediately. Assigning blame and financial responsibility can wait, but a business’s customers and limiting the harm to its name and reputation cannot. Clearly establishing this principle in the agreement is as critical as defining the process the parties will follow in escalating issues. Determining how problems will be resolved is worth the time in negotiations. When it matters, it matters.

• The ability to properly evaluate and price various risks depends on timely access to accurate information. Decide what information is needed and which party has it. If your counterparty has access to the information, your contract should provide you with

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CORPORATE GROWTH & M&A

January 17, 2022 S25

Valuations are expected to remain on fire for top-tier companies

immediate access to it, especially during a crisis situation.

The dynamic and ever-changing nature of risks in commercial contracts requires adopting business protocols that move signed contracts from the back shelf to the front, with a commitment to periodically review, revise and enforce agreements, if necessary. Doing so enhances predictability and increases reliability between the counterparties.

The goal is to ensure that contract provisions align with reality and provide clear economic and financial incentives (and disincentives) to lessen the risk or severity of disruptions. In doing so, negative outcomes when a risk turns pricey can be mitigated by a sound working relationship with your counterparty. In the end, failing to communicate timely with your counterparty when you see signs that change is on the horizon may be the biggest risk factor to your business.

OT, HOT, HOT. Coined as an M&A market “awash with liquidity,” this PETRYK tinder has lit the spark for robust valuations, with purchase price multiples rising to historic highs in many industries. It is a battle between strategic and financial buyers for the most sought-after assets. Sellers are enjoying the rewards of more aggressive pricing and terms.

Craig Owen White, Esq., is the partner-in-charge of Hahn Loeser & Parks LLP’s Cleveland Office. Caleb P. Ohrn, Esq., is an associate at the firm.

They both are members of the firm’s Corporate Practice Area. Contact Craig at cow@hahnlaw.com. Contact Caleb at cohrn@hahnlaw.com.

UNLEASHING OF PENT-UP DEMAND Generally, private credit markets continue to be highly active since the COVID-19 pandemic has subsided and the broader global economy has strongly recovered. High levels of private equity activity, fueled by low interest rates, availability of credit, and growth in dry powder, have created

By ANDREW K. PETRYK

H

an increasingly “borrower-friendly” market for many industries.

Financial buyers are coming to the table in droves to deploy capital into quality deals. PitchBook reports a breakneck pace for U.S. private equity dealmaking, with record-setting deal volume and value through the third quarter of 2021. The total 6,004 closed deals ($787.6 billion) recorded for the nine months is above the highest-ever full-year numbers, and deal pipelines were reportedly bursting through year-end with carryover expected into 2022. Valuations are equally strong, according to PitchBook metrics, illustrated by a median purchase price multiple of 12.8x EBITDA for the period.

Middle-market issuance (including syndicated and direct lending) surpassed $78 billion in the third quarter of 2021, nearing a quarterly record set in 2018 and boosted by an ever-expanding direct lending market.

Leverage multiples in the broader middle market rose to 5.7x total debt (total debt/EBITDA) in October, with a purchase price multiple of

10.9x EBITDA for all leveraged buyouts, according to S&P Leveraged Commentary & Data (S&P LCD).

For lower middle-market private equity deals (transaction values of $10 to $250 million), average valuations reached 7.6x EBITDA in the third quarter — the highest quarterly level in GF Data’s 16-year history — with the deal valuation premium increasing with transaction size. Average lower middle-market leverage rose to 4.1x total debt during the quarter.

Strategic buyers have clearly defined acquisition interests and are showing selectivity, but when a high-quality deal comes to market, they are moving faster and are aggressive on valuation and deal terms. S&P LCD metrics for strategic buyer transactions highlight healthy valuations across the size spectrum and little variation between the lower (less than $250 million in transaction size) and upper ($500 million or greater) middle market, with EBITDA multiples of 10.6x and 10.9x, respectively.

QUALITY PREMIUM IS UP Due to the sheer amount of deal activity, the market has continued to experience a “barbell”-shaped distribution in terms of valuation and leverage. High-quality companies operating in defensive sectors receive significantly more interest and capital than companies with more nuanced business models and financial performance, or those operating in industries perceived to be more “cyclical” or experiencing disruption or long-term threats from the COVID-19 pandemic. COVID has affected a firming of “have” and “have not” businesses, with aboveaverage performers achieving outsized valuations. Sixty-two percent of the completed deals by sponsors in the third quarter met GF Data’s quality premium standard— compared to a historic average of 56% of the deals.

The premium for the above average deals was 28% above the other deals that did not fit those parameters.

(Continued on next page)

Employee Benefits Can Make or Break Your M&A Deal If they’re not carefully evaluated, employee benefits issues can sink a proposed transaction. Our lawyers help buyers and sellers with all benefits planning aspects of business transactions to make sure clients’ deals proceed on track and on time, with every angle covered. We’ll team with you to plan, evaluate, mitigate risk, maximize protections, and integrate all pertinent benefits packages.

• Proactive planning

• Compliance

• Negotiations

• Qualified and Non-Qualified Plans

• Analysis

• Executive Compensation

• Cultural impact

• Communication

We’ll help you minimize surprise and disruption— and get on with the exciting new business ahead.

Jeffrey D. Smith

Melissa A. Dials

jdsmith@fisherphillips.com

mdials@fisherphillips.com

Partner, Cleveland

200 Public Square | Suite 4000 | Cleveland, OH 44114

Partner, Cleveland

fisherphillips.com

S26 January 17, 2022

CORPORATE GROWTH & M&A

Larger transaction size and EBITDA size (i.e., larger scale deals) also factor into higher valuation premiums paid.

Buyers and lenders have also been focused on understanding companies or industries that may have experienced a “COVID bump” and look to mitigate the risk by normalizing EBITDA to be more reflective of “steady state” earnings, or structuring deals more conservatively.

OUTLOOK Notwithstanding any unforeseen geopolitical events, we expect the M&A market to remain active into 2022, with economic growth and buoyant capital markets to sustain deal flow. As deal volume regresses to more normalized levels, demand and supply of capital should move closer to equilibrium, resulting in more lender-friendly terms.

Valuation multiples should stay strong, but any material upside is unlikely given current pricing levels.

Andrew K. Petryk is managing director and head of industrials at Brown Gibbons Lang & Co. Contact him at 216-920-6613 or apetryk@bglco.com.

Kenneth B. Liffman, President

Jennifer R. Hallos, Principal

Industries expected to drive the M&A market in 2022

By J.R. DOOLOS AND JEFF JOHNSTON

DOOLOS

T

JOHNSTON

he last 24 months have proven to be a unique and exciting market in M&A resulting in a remarkable increase in transaction activity in almost every industry.

This historic increase was the result of several factors, the most prevalent being the release of pent-up activity that was deferred in 2020 as the world was adjusting to the COVID-19 pandemic. In addition to clearing

Kimon P. Karas, Principal

the 2020 deal backlog, there was a shift in macro-dynamics, resulting in a disconnect in global supply and demand dynamics. The environment afforded several industries to achieve outsized growth. The result has been increased valuation multiples, encouraging more sellers to market while building momentum throughout 2021 and into 2022.

Almost all industries are experiencing transaction volume growth, but for different reasons.

Increased deal activity by industry can be more broadly characterized and understood in two categories: 1. Historically cyclical industries that have managed to skip the normal downturn cycle 2. Industries driven by technological advancement and change.

David A. Lum, Principal

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Our Corporate Transactional Attorneys have the EXPERIENCE your business needs to get the RESULTS you deserve.

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It’s more than a tagline — it’s our solemn promise to you that we will deliver exceptional legal service that gives you peace of mind and confidence that someone is watching out for your best interests.

Whether you need help negotiating the financing terms for your new distribution center, or you need advice about restructuring distessed business assets to maximize their value, or maybe you’ve got your eyes set on a prospective acquisition target, or maybe you’re ready to sell your business and need an experienced M&A attorney to help you close the deal -- our team has you covered.

Our team get deals done. Period.

Visit www.McCarthyLebit.com or call 216-696-1422 to request a consultation.

CYCLICAL INDUSTRIES These industries have historically tended to ebb and flow with cyclical forces, whether it be commodity pricing, consumer sentiment, administration / regulatory changes, and / or construction spending.

Illustrative examples include building products, metals and mining, chemicals, business and consumer services, paper and packaging and certain real estate sectors.

The brief COVID-19 recession and subsequent surge in demand created global challenges and imbalances in supply and demand dynamics for manufacturing businesses, while a historic labor shortage has brought about continued inflationary pressures. As an example, prior to the pandemic, housing starts and construction spending had been hovering at a consistent level for the previous six years, forming the expectation of an imminent cycle, or at a minimum, muted growth trajectory. These forces fostered the opposite, shining a spotlight on decades of underinvestment and driving a majority of commoditydriven inputs to surprising levels while supporting downstream

Although the pandemic will continue to linger and many unknowns remain, 2022 will continue to generate significant M&A activity across a number of attractive industries with the potential to be yet another record volume year. investment and construction demand.

Global stimulus policies buoyed many small businesses and consumers, which encouraged a return to normal and drove spending to consumer staples in goods and services. Industries within this category are experiencing the most notable growth as 2022 gets underway, often with extended backlog commitments and unrelenting demand as companies struggle to catch up. Due to muted activity in 2020 and early 2021, these industries are likely to experience substantial M&A volume growth in 2022.

TECHNICAL CHANGE These industries have been significantly influenced by technological change that has either shifted consumer preferences or created an entirely new industry segment. Examples include automotive, distribution,

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transportation and logistics, energy, consumer and the general technology sector.

Although extremely disruptive, the pandemic accelerated the advancement and proliferation of technology in the way we communicate, work, purchase goods and services and live our everyday lives.

Industry experts are predicting that over 25% of the entire workforce in the U.S. was working in at least a partially remote environment at the end of 2021. This fundamental change in environment required upgrades in communication technology and demand for a new form of virtual communication and connectivity beyond what has been previously experienced.

Stay-at-home orders accelerated the persistent shift in consumer buying preferences away from traditional brick-and-mortar locations to online options. This shift also encouraged more spending through the directto-consumer channel and has driven significant investment in broader distribution infrastructure and related transportation and logistics companies. Another significant trend from 2021 that continues to drive M&A deal activity heading into 2022 is the focus on alternative energy and sustainable technologies. This trend is most evident in the significant uptick in 2021 electric vehicle investments and continued capital commitments to large battery and wind and solar projects. Industries within this category will continue to show meaningful M&A growth in 2022, although investors are likely to be more selective after significant transaction volume in 2020 and 2021.

These macro factors complement an already supportive deal environment with significant dry powder available from both private equity (over $1 trillion available) and strategic buyer sets, in addition to an abundance of debt capital in both the independent and traditional leverage markets. Although the pandemic will continue to linger and many unknowns remain, 2022 will continue to generate significant M&A activity across a number of attractive industries with the potential to be yet another record volume year.

Jeff Johnston is a managing director and Group Head of the Mergers & Acquisitions Group of KeyBanc Capital Markets. Contact him at jjohnston@ key.com. J.R. Doolos is a managing director in the Mergers & Acquisitions Group of the KeyBanc Capital Markets.

Contact him at 216-689-7674 or jdoolos@key.com.

This article is for general information purposes only and does not consider the specific investment objectives, financial situation, and particular needs of any individual person or entity. KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp® and its subsidiaries, KeyBanc Capital Markets Inc., Member FINRA/SIPC, and KeyBank National Association (“KeyBank N.A.”), are marketed.

Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives, who may also be employees of KeyBank N.A. Banking products and services are offered by KeyBank N.A.

Cash Flow and Asset Based Solutions for Private Equity Sponsors With dedicated expertise, our national Business Credit and Sponsor Finance teams are ready to help bring your next deal over the finish line.

Copper Smelting $25,000,000 Growth Financing Senior Secured Credit Facility provided by Business Credit

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Find out why these companies trust us to help them grow their businesses.

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$10,000,000

Ed Ryczek Senior Vice President Huntington Sponsor Finance Phone: 312-696-8808 edward.j.ryczek@huntington.com

Loans subject to credit application and approval. Member FDIC. ⬢®, Huntington® and ⬢ Huntington® are federally registered service marks of Huntington Bancshares Incorporated. © 2021 Huntington Bancshares Incorporated. p/n 221651

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Northeast Ohio’s top deal makers to be honored

A

CG Cleveland, Northeast Ohio’s leading organization for merger and acquisition and corporate growth professionals, will recognize the winners of its 25th Annual Deal Maker Awards. The event was scheduled to be conducted on Thursday, January 20, but the event has been postponed due to the Omicron variant of COVID-19. Please stay tuned for the new date which will be announced at www.acg.org/cleveland.

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

Blue Point Capital Partners

Blue Point Capital Partners teams up with entrepreneurs and managers, investing in and growing lower middle-market companies. Blue Point manages over $1.5 billion in committed capital across its second, third and fourth institutional funds, and its principals have been investing together for more than two decades.

The Riverside Co.

The Riverside Co. is a global investment firm focused on being one of the leading private capital options for investors, business owners and employees at the smaller end of the middle market by seeking to fuel transformative growth and create lasting value.

Cleveland-Cliffs traditionally has been recognized as the largest and oldest independent iron ore mining company in the U.S. Today, they are now the largest flat-rolled steel company and the largest iron ore pellet producer in North America.

EXECUTIVE OFFICERS

Terrence Doyle, Calfee, Halter & Griswold

President Cheryl Strom, The Riverside Company

Michael Ferkovic, Sunvera Group

President Elect Tricia Balser, CIBC Executive Vice President — Annual Events Jonathan Ives, SCG Partners Executive Vice President — Branding Matthew Roberts, First Brands Group Executive Vice President — Governance Charles Aquino, Citizens Capital Markets Executive Vice President — Innovation Beth Haas, Cyprium Investment Partners

Lifetime Achievement Award: Dan T. Moore, The Dan T. Moore Co. Cleveland-Cliffs, Inc.

2021-22 Officers and Board of Directors

Throughout his life, Dan T. Moore has applied his innovative mind across the industrial spectrum: from the semi-conductor industry to basic materials science to the big five automotive companies. In addition to continually starting and growing new businesses, Moore has found his way into managing multiple companies in turnaround and distressed situations. His style has always been hands-on and working directly with management and engineering to build a solution that can bring a company back to life.

Executive Vice President — Membership Bryan Fialkowski, J.P. Morgan Chase Executive Vice President — Programming Thomas Libeg, Grant Thornton Treasurer Mark Heinrich, Plante Moran

Sarita Gavhane, Edgewater Capital Partners Nicholas House, Vorys, Sater, Seymour and Pease LLP Margaret Jordan, KIKO Matthew Kolman, Deloitte John Kramer, RPM International Mindy Marsden, Bober Markey Fedorovich Thorne Matteson, PwC Martin McCormick, FNB Mezzanine Finance Ryan McGovern, Star Mountain Capital Corrie Menary, Kirtland Capital Partners Jay Moroscak, Aon Risk Solutions

Immediate Past President Thomas Welsh, Calfee, Halter & Griswold

Katie Noggle, Align Capital Partners

BOARD OF DIRECTORS

Wes Perry, ADP

John Allotta, BakerHostetler

Jim Rice, Ernst & Young

Mark Brandt, RSM

Robert Ross, Benesch

J.R. Doolos, KeyBanc Capital Markets

Michael Yee

2022 ACG EVENTS CALENDAR DATE

EVENT

LOCATION

TIME

Feb. 15

Joint Event with Financial Executives International

The Union Club

4:00 PM

Feb. 17

ACG Cleveland Presents the Finance Farm League

The Union Club

7:30 AM

Mar. 10

ACG Cleveland Regional Central, “The Positive Impact of Green Spaces in Metropolitan Cities”with Brian Zimmerman, CEO of the Cleveland Metroparks

TBD - Independence

5:30 PM

Mar. 15

YACG March Social

Wild Eagle Saloon

6:00 PM

Mar. 24

ACG Cleveland Regional West, “Big Things on the Horizon as Viewed from the Lorain Port Authority” with Tom Brown, Executive Director of the Lorain Port Authority

Lakewood Country Club

5:30 PM

Spring 2022

ACG Cleveland Presents the 25th Annual Deal Maker Awards

Hilton Cleveland Downtown

5:00 PM

Apr. 26

ACG Cleveland Breakfast Event, “Cleveland’s Renaissance” featuring Kerry McCormack (Ward 3 City Council Member), and Joe Cimperman (President, Global Cleveland

The Union Club

7:30 AM

May 19

ACG Cleveland’s Spring Panel Event, “SPACS from Acquisition to Zcash”

The Ritz-Carlton

4:00 PM

June 21

ACG Cleveland Summer Social at The Shoreby (jt. With TMA Northern Ohio)

The Shoreby Club

5:30PM

Fall 2022

ACG Cleveland’s 40th Anniversary Event

The Silver Grille

5:00 PM