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Growth MIDDLE MARKET

// JULY/AUGUST 2016

Disrupting the

Color Spectrum MADISON REED’S SALON ALTERNATIVE

The official publication of


Challenging the status quo in Private Equity. With more than 25 years experience in PE markets worldwide, Dentons’ Private Equity team advises fund sponsors and their portfolio companies on all aspects of their business, including fund formation, M&A and financing transactions, tax and regulatory matters. Dentons and 大成 have combined. Together we form the world’s largest global elite law firm.* Contact: Paul Gajer Partner, New York T +1 212 398 5293 paul.gajer@dentons.com Steve Rist Partner, Kansas City T +1 816 460 2645 steve.rist@dentons.com Michael (Mick) J. Cochran Partner, Atlanta T +1 404 527 8375 michael.cochran@dentons.com

dentons.com © 2015 Dentons. Dentons is a global legal practice providing client services worldwide through its member firms and affiliates. Please see dentons.com for Legal Notices. *Acritas Global Elite Law Firm Brand Index 2013-2015.


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Strength, solutions and strategic growth for private equity Audit | Tax | Advisory | grantthornton.com

“Grant Thornton” refers to Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd (GTIL), and/or refers to the brand under which the independent network of GTIL member firms provide services to their clients, as the context requires. GTIL and each of its member firms are not a worldwide partnership and are not liable for one another’s acts or omissions. In the United States, visit grantthornton.com for details. © 2016 Grant Thornton LLP  |  All rights reserved  |  U.S. member firm of Grant Thornton International Ltd


EXECUTIVE SUMMARY GARY LABRANCHE // President & CEO, ACG Global

No Summer Vacation for Chemicals Deals

S

ummer is here—time for picnics, parties and vacation with family and friends. And while M&A in some sectors has cooled a bit, dealmak-

ing in the chemicals industry shows show no signs of waning. As this issue reveals, the expansive and highly fragmented sector is a prime target for consolidation by middle-market players. In his regular column, PitchBook founder John Gabbert explains why some 70 PE deals were completed in the chemicals space last year alone. “Bidding by strategic buyers will keep the biggest opportunities highly competitive, but that only renders the middle market more attractive,” Gabbert contends. Speaking of being attractive, our cover story examines how a middle-market company backed by growth capital is disrupting the salon services industry with a business model that offers women custom hair color without the hassle or expense of visiting a stylist. Madison Reed offers women a chemical formula free of harmful ingredients, such as ammonia and parabens, which they can apply at home. Ben Scharff, a consultant with M&A advisory firm Grace Matthews, explores some of the do’s and don’ts when conducting due diligence for chemical deals in A Qualified Opinion. And among our other stories is a look at the increasing impact of social media on the M&A process. ACG is increasing its impact in Washington by helping to introduce a bill to amend the Investment Advisers Act of 1940 to better align with the sophisticated business model used by private equity. Learn more about this important legislation. ACG has also announced the publication of the “Guide to Private Equity Regulatory Compliance.” The guide was produced by Thompson Information Services, and written and edited by Scott Gluck, special counsel with Duane Morris and outside counsel to ACG. It is designed to help ACG members and others involved in private equity compliance decode the complex and evolving regulatory landscape. You can order a print or digital copy on the Thompson website. On the events front, there is a lot to look forward to. Having wrapped up a successful InterGrowth 2016 in New Orleans, ACG’s sights are now set on EuroGrowth, which takes place in Barcelona on Oct. 20-21. Stay tuned for more exciting details. In the meantime, please enjoy this copy of the magazine and check out the MMG website for some new video interviews, featuring a range of industry experts who joined ACG at InterGrowth. Happy summer! //


INSIDE THE MIND OF THE

DUANE MORRIS DEAL LAWYER

BROAD PRIVATE EQUITY SECTOR CONVERSANCY

CLIENT PRIORITIES

DEEP BUSINESS EXPERIENCE

REGULATORY INSIGHTS

STRATEGIC GROWTH ADVICE

KNOW THE INDUSTRY PLAYERS

MARKET TERMS

FINANCE EXPERTISE

360° VISION

PRIVATE EQUITY INDUSTRY TRENDS

GLOBAL ACCESS

REFERRAL SOURCES

TECHNOLOGY SMARTS RELATIONSHIPS

When Duane Morris attorneys partner with private equity businesses, you get the value of whole brain solutions that couple great lawyering with keen commercial sense in deal-making as well as intellectual property, employment, finance, real estate and tax law.

For more information, please contact: BRIAN P. KERWIN, Chair, Global Corporate Practice Group 312.499.6737 | bpkerwin@duanemorris.com RICHARD P. JAFFE, Head, Private Equity 215.979.1935 | rpjaffe@duanemorris.com www.duanemorris.com Duane Morris LLP – A Delaware limited liability partnership


MIDPOINTS JOHN GABBERT // Founder and CEO, PitchBook

Middle Market to Benefit from Large Chemical Deals

A

s huge M&A deals in the chemicals sector draw headlines— such as Dow Chemical/DuPont and Syngenta/ChemChina—we shouldn’t underestimate the effects on smaller producers of

continued consolidation at the top of the market. Larger players will be looking to divest non-core assets or divisions focused on specialty niches. They’ll be looking to restructure or meet the expectations of shareholders and boards, which, across the industry as a whole, have been pressuring companies to generate more value. On top of that, other busi-

BIO // As founder and CEO of PitchBook Data Ltd., John Gabbert brings more than 15 years of experience building comprehensive databases that cater to the private equity and venture capital industry. Gabbert is recognized as an industry leader. He built the PitchBook Platform from the ground up and grew the company into the foremost data and technology provider for the global PE and VC markets.

nesses within the middle market are looking to merge so they can scale and achieve more efficiencies. All these trends create opportunities for private equity buyers. PitchBook data reveal that many firms already have been seizing the chance, with 70 PE deals completed in the space last year alone, including highprofile transactions such as Golden Gate Capital’s $1.22 billion carve-out of ANGUS Chemical in February 2015. That deal in many ways represents a convergence of the trends mentioned above, as ANGUS focuses solely on the manufacture and distribution of nitroalkanes and their derivatives, products used in the pharmaceuticals industry. But it’s not just carve-outs or divestitures that PE firms can capitalize on; they can also roll up businesses in fragmented segments. Bidding by strategic buyers

Content sponsored by

will keep the biggest opportunities highly competitive, but that only renders the middle market more attractive. Low, unstable oil prices should also be considered a key driver of opportunities in the chemicals sector for PE firms. The depressed cost of oil has helped lower energy-intensive manufacturing of certain chemicals and raw material inputs for specialty chemicals, and has led to shifts in supply. In addition, even as the cost of petrochemicals drops, some chemical makers that have energy companies as major clients can lose business. While input costs may decline, some producers that either Continued on next page


MIDPOINTS JOHN GABBERT // Founder and CEO, PitchBook ABUNDANT OPPORTUNITY IN MIDDLE-MARKET CHEMICALS SECTOR

have had their own pricing and costs affected, or sell to customers hurt by low oil prices, will look for relief in M&A and potentially PE backing. There is a significant lag in timing for some of these processes, but PE firms should track them as they source in the space. Some can capitalize on fragmented segments and deploy a roll-up strategy before selling. Other, larger PE firms can target troubled divisions with exposure and/or operations and distribution in multiple countries and take advantage of growing demand for chemicals in emerging markets. Domestic producers based in countries abroad will be significant competitors, particularly in basic chemicals, but investors can gain advantages by looking to form joint ventures or partnerships, shore up key advantages in niche segments, hone operations for consistent offerings worldwide and more. Other ways to differentiate your appeal include emphasizing sustainability in certain areas, relocating key centers for R&D and adapting products to suit local tastes. There is no shortage of strategies to use if you’re looking to grow or kick off your investments. Overall, there remain plenty of opportunities within the middle-market chemicals space for potential PE buyers. //


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Growth MIDDLE MARKET

// JULY/AUGUST 2016

Photo by Eric Millette

FEATURES

Disrupting the Color Spectrum Madison Reed is making waves in the home hair color market. In response to the need for easy-to-apply dyes free of dangerous chemicals, the San Francisco-based business is rapidly gaining customers under CEO Amy Errett with the help of private capital. Read more.

“AMY SAW THIS REALLY INTERESTING POINT OF SELF-WORTH AND SELF-IDENTITY—YOUR HAIR AND YOUR LOOK.” // JON CALLAGHAN, TRUE VENTURES

Facing Facebook: Social Media’s Role in M&A Platforms like Facebook, Twitter and LinkedIn are gaining traction in dealmaking—helping companies appeal to potential investors and aiding due diligence. Read more.


TABLE OF CONTENTS

IN THIS ISSUE

PRESIDENT & CEO Gary LaBranche, FASAE, CAE glabranche@acg.org

Executive Summary

VICE PRESIDENT, COMMUNICATIONS & MARKETING

MidPoints by John Gabbert

Kristin Gomez kgomez@acg.org

Growth Economy Face-to-Face

EDITOR-IN-CHIEF

Quick Takes

Deborah L. Cohen dcohen@acg.org

B-Side The Ladder It’s the Small Things The Leadership

READ ONLINE // Read additional content on the MMG website.

DEPARTMENTS POLICY POINTS • Bill to Modernize Reporting Gets Support in D.C. • RGL’s Matt Morris on C.I.T. Study • ACG PERT Members Drive Change in Washington • Cybersecurity Best Practices Underway Read more.

THE ROUND • Minding the Gap—Research Into Owner Psychology • Striking a Balance in Environmental Due Diligence Read more.

A QUALIFIED OPINION Ben Scharff, Managing Director, Grace Matthews, Shares Insight on M&A in the Chemicals Sector. Read more. 2015 Folio Ozzie Digital Winner, Standalone Digital Magazine

ACG@WORK • ACG New York’s Van Hellemont Receives Honor

2014 Association TRENDS All-Media Silver Award, Monthly Trade Publication

• ACG University: Philly Offers M&A Education

2014 Folio Eddie Digital Winner, Standalone Digital Magazine

THE PORTFOLIO

2014 Apex Award, New Magazine, Journal & Tabloid

• Miami University Wins Cincinnati ACG Cup Read more.

The latest middle-market trends and thought leadership written exclusively by a team of expert ACG Global featured firms.. Read more.

DIRECTOR, COMMUNICATIONS & MARKETING Larry Guthrie lguthrie@acg.org

VICE PRESIDENT, EVENTS & PARTNERSHIPS Christine Melendes, CAE cmelendes@acg.org

DIRECTOR, STRATEGIC DEVELOPMENT Maggie Endres mendres@acg.org Custom media services provided by Network Media Partners, Inc.

Association for Corporate Growth 125 South Wacker Drive, Suite 3100 Chicago, IL 60606 ACG Membership: membership@acg.org www.acg.org Copyright 2016 Middle Market Growth®, InterGrowth® and the Association for Corporate Growth, Inc. All rights reserved.


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POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET

PUBLIC POLICY UPDATE POLICY POINT NEWS

1 2

Bill to Modernize Reporting Gets Strong Support in DC RGL’s Matt Morris on Results of Interest Deductibility Study

Bill to Modernize Reporting Gets Strong Support in DC New Law Would Reflect PE Model By Deborah Cohen A bipartisan bill to modernize longstanding reporting requirements for private equity firms received strong support in the U.S. House Financial

3 4

ACG PERT Members Drive Change in Washington Cybersecurity Best Practices Underway

Services Committee in mid-June, following its earlier introduction into Congress. Led by Reps. Robert Hurt, R-Va.; Juan Vargas, D-Calif.; Steve Stivers, R-Ohio; and Bill Foster, D-Ill., the Investment Advisers Modernization Act (H.R. 5424) would tailor requirements of the Investment Advisers Act of 1940 to reflect the private equity investor model, while also maintaining SEC oversight and investor protections. H.R. 5424 received a bipartisan vote of 47 to 12 in committee and was expected to move for consideration on the House floor. Continued on next page


POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET TESTIMONY // In Support of ACG, Joshua Cherry-Seto

The legislative action follows efforts by ACG Global and its Private Equity Regulatory Task Force, known as PERT, to support the bill. As a result of Dodd-Frank, advisers of private funds with $150 million or more in assets under management must register with the Securities and Exchange Commission and comply with the reporting and compliance standards of the IAA. The new bill updates antiquated rules enacted prior to the development of private equity funds. Among other changes, H.R. 5424 adjusts books and records requirements to provide advisers with a set of guidelines that can be easily interpreted, exempts them from some advertising restrictions and removes duplicate reporting requirements. The Association for Corporate Growth applauded the introduction of the bill. Earlier, it joined several other business organizations in a public letter of support. “Middle-market investment is vital to growth in the U.S. economy,” said Gary A. LaBranche, ACG Global’s president and CEO. “By passing this bipartisan product, Congress will help advisers to small and midsize funds better comply with reporting requirements under the IAA and enable them to focus on growing Main Street companies and the jobs that follow.” In mid-May, ACG PERT member Joshua Cherry-Seto, CFO of Blue Wolf Capital, testified before the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises in support of the bill. // If you have questions or comments, please contact Deborah Cohen, Middle Market Growth Editor.

READ ONLINE // Find updates and insight on policy issues on the MMG website.


POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET

Matthew Morris explains C.I.T. deduction.

RGL Study Explores C.I.T. By Deborah Cohen Matthew R. Morris, a partner with the accounting firm RGL Forensics, an ACG sponsor, discusses corporate interest tax deductibility and the middle market at InterGrowth 2016 in New Orleans in early May. An RGL study that he authored, produced in collaboration with ACG Global, found that the elimination of the corporate interest tax deduction, or CIT, would have “serious and farreaching implications for equity valuations, and the potential to adversely affect the growth and health of the U.S. middle market and the greater U.S. economy.” Click on the video to find out why. Most discussions about changing the CIT deduction are coupled with the notion of being “revenue neutral,” whereby other parts of the tax code would be adjusted so that total taxes paid would be roughly the same as under the current system. However, “revenue neutral” is not the same as “impact neutral” in terms of equity valuation or the impact it would have on economic growth in the middle market. //


POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET

ACG PERT Members Drive Change in Washington By Amber Landis It’s an exciting time for middle-market private equity in Washington, D.C. From the bipartisan introduction of the Investment Advisers Modernization Act of 2016 in the U.S. House to pending confirmation of the remaining two SEC commissioners, legislative and regulatory change is underway. A driving force behind those accomplishments is ACG’s Private Equity Regulatory Task Force, which has worked to foster relationships with Congressional members, their staff and federal regulators, including the Securities and Exchange Commission. Two dozen PERT members came together in Washington on June 7th and 8th for the group’s second-annual fly-in event, where they spoke with key regulators and legislators on priority issues including broker-dealer registration, disclosure of fees and expenses, cybersecurity and the need for a modernized regulatory framework. The agenda included meetings with SEC Commissioner Michael S. Piwowar, Marc Wyatt, director of the SEC Office of Compliance Inspections and Examinations, Richard Griffin, general counsel with the National Labor Relations Board, and a handful of regulatory staff with the SEC Division of Investment Management. The fly-in also included visits to Capitol Hill to meet with Congressional members. //


POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET

Cybersecurity Best Practices Underway ACG’s PERT is developing principles to guide midsize PE firms By Amber Landis When it comes to implementing cybersecurity policies, there’s a lot at stake for middlemarket private equity firms. It’s not just their reputation—which a breach or attack could severely compromise. They must also fulfill their fiduciary duty to their limited partners and adhere to SEC regulations and guidelines. Meanwhile, many lack the staff and expertise to design and implement a comprehensive cybersecurity program. To help firms navigate this highly technical area, ACG’s Private Equity Regulatory Task Force recently completed a preliminary survey on the topic to assess firms’ policies and practices. The assessment is part of PERT’s effort to develop a set of cybersecurity best practices—part of its PERT Principles—to guide middle-market PE firms. Fifty-one firms participated in the survey, providing PERT with detailed data about their internal technology policies and resources, cyber due diligence with limited partners, and audits by the Securities and Exchange Commission. The group plans to release the set of best practices later this year. //


2016 Florida ÂŽ

- Private Equity Firms - Commercial and Investment Bankers - Growth Oriented Companies - Professional Advisors

Your Deal Making November 15 & 16, 2016 Ritz-Carlton Amelia Island, FL

www.acgflorida.com


GROWTH ECONOMY THE IMPACT OF MIDDLE-MARKET PRIVATE EQUITY

OHIO // 1995-2013 Ohio has seen tremendous jobs and sales growth driven by private equity-backed middle-market businesses, including a jobs growth rate nearly seven times that of all businesses in the state between 1995 and 2013.

83.5% JOBS GROWTH IN PE-BACKED BUSINESSES

ACG CLEVELAND

12.1%

OH

JOBS GROWTH IN ALL BUSINESSES

+80+20T 79.4%

SALES GROWTH IN PE-BACKED BUSINESSES

ACG COLUMBUS

34,485

22.6% ACG CINCINNATI

JOBS CREATED BY PE-BACKED BUSINESSES

See the impact of middle-market private equity on your state at GrowthEconomy.org.

JOBS GROWTH % BY SEGMENT

SALES GROWTH % BY SEGMENT

27.3%

38.3% 15.6%

59.5% 0%

MM Seg 1: $10-50M in sales MM Seg 2: $50-100M in sales

8% 40.7%

KEY Small: Less than $10M in sales

5.2%

5.4%

0%

SALES GROWTH IN ALL BUSINESSES

MM Seg 3: $100M-1B in sales Large: More than $1B in sales

All stats are from PitchBook and the Business Dynamics Research Consortium at the University of Wisconsin-Extension.


FACE-TO-FACE CONNECT TO YOUR NEXT DEAL

Registration is now available through Oct. 14 at EuroGrowth.org.

Barcelona to Host EuroGrowth 2016 GLOBAL M&A DEAL FLOW. TWO DAYS. ONE EVENT. Private equity continues to be a major player in the current European financial landscape. In 2015 alone, private equity deal value totaled €381 billion in Europe, with €64 billion reported in the first quarter of 2016, according to PitchBook. Whether you’re looking to enter the market or expand business in the European Union, ACG’s upcoming EuroGrowth conference is fast becoming the go-to source for cross-border deal-makers. Now in its fourth year, EuroGrowth 2016 will bring together more than 200 private equity professionals, capital providers and others from all segments across Europe and the globe for two days of nonstop networking and deal flow. This year, the event is set for Oct. 20-21 at the Hotel Arts Barcelona in scenic Barcelona, Spain. ACG knows that for its members to connect to the right deals, it takes getting to know the right people, the right areas in which to invest and the best practices to bring it all together. Whether you’re looking to establish international joint ventures, enter emerging markets or secure add-on acquisitions, the EuroGrowth schedule is custom-built with a multitude of ways to network and make connections. And at the center of it all is EuroGrowth’s hallmark event—ACG Capital Connection®—providing delegates unparalleled access to private equity providers. //


FACE-TO-FACE CONNECT TO YOUR NEXT DEAL

CHAPTER EVENTS Get involved! This fall, ACG chapters across the globe will host hundreds of local events. Check out what’s happening at your local chapter, register and join in on valuable educational and networking opportunities.

2016 ACG Atlanta CFO Reception Left: Scott Jasinski, CFO of 2016 Georgia Fast 40 company GPS Hospitality, and Kip Plowman, managing partner of Cherry Bekaert. Right: Corporate development executives from Atlantabased top Fortune firms Global Payments, Turner Broadcasting, Newell Rubbermaid, NCR, The Home Depot, WestRock and Mohawk Industries.

ACG Barcelona Chapter

ACG Los Angeles Chapter

ACG Charlotte Chapter

ACG National Capital Chapter

ACG Chicago Chapter

ACG Philadelphia Chapter

ACG Dallas/Fort Worth Chapter

ACG Richmond Chapter

ACG Detroit Chapter

ACG Seattle Chapter

ACG Great Lakes Chapter

ACG Tampa Bay Chapter

ACG Indiana Chapter

ACG Toronto Chapter

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Had a newsworthy chapter event? Send a 150to 200-word summary and high-resolution photos to Editor Deborah Cohen.


Registration and Event Information: www.acg.org/richmond

Virginia Capital C O N F E R E N C E September 21-22

2016

• Private Equity Marketplace & Cafe • Investment Banking hosted beer tasting • Baseball Night at TJ’s • Networking-Deal FlowConnections

The Jefferson Hotel • Richmond, VA

GOLD SPONSORS

SILVER SPONSORS


THE ROUND NEWS THAT MATTERS

Striking a Balance in Environmental Due Diligence By Dennis Papa Congratulations—your M&A transaction went off without a hitch, and you’re now the proud owner of a specialty chemicals manufacturer. Included with your purchase are any inherited environmental liabilities of your new portfolio company—contaminated soil or groundwater on the property, underground storage tanks, or chemical releases, for example. To protect yourself as a buyer, a thorough investigation before the sale is essential. The Phase I environmental site assessment has become a useful due diligence tool to consider potential environmental liability during the M&A process. A key factor when conducting this assessment for acquisitions of complex properties, such as chemical plants and other heavy industry assets, is to be sure that the Phase I does what you need it to do. Performed by a certified environmental professional, a proper Phase I should help the buyer avoid liability for identified recognized environmental conditions and to qualify for the so-called “innocent landowner” defense provisions under the federal Superfund law—formally named the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA. Continued on next page


THE ROUND NEWS THAT MATTERS To provide a common standard for a proper Phase I, the U.S. Environmental Protection Agency issued the All Appropriate Inquiries Rule, which details a process for evaluating a property’s environmental conditions and the prospect of contamination. The EPA has also endorsed the assessment guidance developed by the American Society for Testing and Materials. The current ASTM Phase I standard, E1527-13, has largely become the benchmark for environmental due diligence. One of the complicating factors when assessing active industrial sites is that other laws apply in addition to CERCLA, including the Resource Conservation and Recovery Act, Clean Air Act, Occupational Safety and Health Act, and a host of others whose provisions are not necessarily considered in the All Appropriate Inquiries Rule. One option for a thorough assessment is more investigation, usually in the form of a Phase II ESA, but this can add time for sampling and analysis to the due diligence period. It may be overly intrusive or duplicative for the purposes of transactional due diligence at industrial plants that have already had investigations and regulatory compliance activity. Given these factors, how can environmental investigation be balanced to evaluate environmental risk and also determine whether to investigate further, negotiate a more favorable transaction or walk away?

Is There a Phase One and a Half? There are some methods whereby a prospective purchaser can use available resources to advance beyond what is required in a Phase I assessment and obtain the necessary information. • Beyond the data room. The environmental professional you engage to perform a Phase I assessment should not be limited to reviewing only existing reports provided by the facility or available in the data room. Researching information from state regulatory files, such as previous ESAs, permits and correspondence will shed light on environmental conditions. In fact, ASTM E1527-13 includes specific language addressing review of regulatory records. If the target property or adjoining property is identified in a government records search, then pertinent regulatory files associated with the listing should be reviewed, or the environmental professional must provide a justification as to why a review is not needed. • Due care requirements and transfer rules. Some states regulate how certain properties with hazardous materials or releases are handled after transfer. For example, Michigan due care laws regulate access and response activities related to contaminated sites. Other states, such as New Jersey and Indiana, have industrial property transfer laws with penalties for noncompliance. Due care obligations are not necessarily related to an owner or operator’s liability and can apply to nonliable parties. Be sure your environmental professional examines these requirements. Continued on next page


THE ROUND NEWS THAT MATTERS • Compliance audits and permits. Complex operating facilities may still need more indepth investigation, such as environmental health and safety audits or review of existing audits. This will ensure that proper permits are in place and the facility is in compliance with all applicable environmental laws. Another important transfer consideration for active permits is to determine if and when environmental permits can be transferred to the new owner or if they must be reissued. • Consider business environmental risk. This is defined by ASTM E1527 as “a risk which can have a material environmental or environmentally driven impact on the business associated with the current or planned use.” Items like asbestos, lead-based paint, radon, mold, historic resources, flood plains, and ecological resources such as wetlands and endangered species are specifically excluded from the standard Phase I scope, but they can still have a material effect on the asset and future operations. • Lender reliance letters. When financing is involved, lenders will undoubtedly ask to rely on the findings of your environmental consultant’s reports. The consultant should be made aware of this requirement early in the process so an agreement can be reached on language and limitations in the reliance letter, which assesses the conditions of a potential contamination site. This can become a contentious issue if thirdparty lenders insist on exact language and liability insurance limits in the reliance letter but consultants challenge such requirements. Avoid standoffs in the heat of closing and address reliance early in the process. • If contamination exists … Where past regulatory responses or cleanup actions were performed, the seller may have obtained formal regulatory approval, often termed a certificate of satisfactory completion or closure letter. Carefully review the closure language, as it may provide descriptions on limiting future liability, including reciprocal protection from federal regulators and deed restrictions on use. After the Phase I, it may still be necessary to perform a Phase II ESA, perhaps to provide a baseline condition before sale or as required by insurance underwriting. However, a few small steps beyond the typical Phase I will reduce the need for intrusive investigations and limit the new owner’s liability. // —Dennis Papa, PE, BCEE, is the founder and principal engineer of dpSTUDIO Environmental Consulting & Design LLC. Contact him at dp@dpstudioenvironmental.com.

Dennis Papa


THE ROUND NEWS THAT MATTERS

Minding the Gap Research into owner psychology can prevent deal disconnect By Allie Harding, OrangeKiwi “The harder you work, the harder it is to surrender.” —Vince Lombardi M&A activity in 2015 reached an all-time high of $3.8 trillion, with the vast majority of transactions in the low to middle market—yet nearly $0.5 trillion in additional committed capital remained uninvested. Meanwhile, M&A intermediaries reported that 50 to 67 percent of salable businesses went unsold due, in part, to the owner’s psychology. This disconnect is expected to continue, leading to destruction of individual wealth and legacy, and a lost opportunity for the economy. Why does this market inefficiency exist? Based on academic and popular literature, as well as reports from M&A intermediaries and advisers, the owner’s psychology is a critical component in a successful private company transaction. Yet little actionable academic research has been applied to solve this market inefficiency. Through my doctoral research and my firm, OrangeKiwi, my co-founder and I are using existing knowledge to assess an owner’s psychology at points of transition. Our approach is similar to that of Steve Jobs’ development of the iPhone. Leveraging existing types of technology (phone, digital music, camera, Gorilla Glass, etc.) and assembling them in a new way, Jobs created an alternative to carrying multiple bulky, unattractive devices. Similarly, we’re using the vast body of existing academic research and translating it into actionable insights to increase exit success. Three important concepts provide insight into how and why owners respond the way they do with regard to exit: 1. The phases of exit 2. The common characteristics of successful entrepreneurs; and 3. The key behaviors related to exit success In order to make this information useful to deal professionals, we designed an assessment that provides critical insights about an owner’s behavioral inclination related to exit. Continued on next page


THE ROUND NEWS THAT MATTERS Phases of Exit The exploratory phase of exit is critical for entrepreneurs. Owners are wired to build their business, and selling their company goes against that natural inclination. The owner’s primary tasks during the exploratory phase are to examine his own identity apart from the business, identify what he wants for the company, and begin to establish a vision for the future. From a psychological standpoint we refer to this process as “meaning-making,” and it is critical. For many owners, the longer and harder they’ve worked to build the business, the more challenging it is to consider exiting. From a systemic perspective, skipping or minimizing the exploratory phase is a major factor in failed exits. It’s often overlooked in favor of the strategic and execution phases for three completely avoidable reasons: 1. Owners typically do not focus energy on exiting their business until they make the decision to sell, leaving inadequate time for robust exploration. 2. Professional advisers generally have skills that serve the strategic and execution phases of exit, but not the exploratory phase. 3. Buyers are understandably focused on the execution (e.g., transaction), and they often assume that all parties will be rational actors. This pervasive pattern leaves the owner vulnerable. It’s the single-largest contributing factor for why owner psychology is associated with deal failure.

Role-Identity Fusion To compound matters, exiting a business is an extremely emotional experience, and it’s especially daunting for owners with high role-identity fusion, or RIF. Entrepreneurs devote tremendous energy to achieving success, and the lines between an entrepreneur’s personal and professional identities can become blurred. RIF is a byproduct of the entrepreneurial strengths required for business success. Ironically, the longer and harder a person works, the more fused personal and professional identities can become. Practically speaking, exiting a business also means giving up a piece of the owner’s identity. The question becomes: “Who am I, if not the owner of my business?” The greater the degree of RIF, the more difficult that question is to answer. Once the extent of RIF is determined, skilled advisers can help owners build self-awareness, work-life balance and the post-exit resilience needed to attenuate RIF and allow business owners to leverage their strengths instead of sabotaging their exit. Continued on next page


THE ROUND NEWS THAT MATTERS THREE KEY CONCEPTS PROVIDE INSIGHT INTO OWNER BEHAVIOR CONCEPT

COMPONENTS • Exploratory

Phases of Exit

Allie Harding

• Strategic • Execution • Transition • Need for Goal Achievement

Common Characteristics

• Innovativeness

(Strengths) of Successful

• Tolerance for Ambiguity

Entrepreneurs

• Risk-Taking Propensity • Need for Control • Role-Identity Fusion

Behaviors Related

• Self-Awareness

to Exit Success

• Work-Life Balance • Post-Exit Resilience

Tool for Assessment Based on this foundational understanding, our research is designed to validate an instrument that can be delivered online in 12 minutes to assess an owner’s psychology and mindset before an exit. The psychometric is designed to deliver benefits for owners, their advisers and other third parties, including: • Developing a thorough understanding of the current state of owner psychology as it

relates to the exit life cycle. • Quickly and accurately identifying an individual owner’s inclination for exit. • Enabling advisers and buyers to invest their time and resources with those owners

most likely to follow through with an exit. • Increasing owner success and satisfaction post exit. • Helping close the gap between buyers and sellers using a proven instrument. //

—Allie Harding is a consultant and researcher currently completing her Ph.D. in business psychology. For more information, visit www.planfortransition.com or download her white paper.


THE ROUND NEWS THAT MATTERS

VERTICAL VIEW // WE’VE GOT CHEMISTRY 2014

The top investors in U.S. chemicals companies include New York-based Arsenal Capital Partners, which has made nine investments in the sector since 2013, and Boston-based Audax Group, which made seven investments in the same period.

2015 In one of the largest recent platform buyouts in the chemicals sector, The Carlyle Group in 2014 purchased Signode Industrial Group through a carve-out from Illinois Toolworks for $3.2 billion.

1

$

Internationally, deal flow in the chemicals space dropped dramatically in value between 2014 and 2015, to $10.8 billion from $27.56 billion.

BILLION American Securities’ $1 billion purchase of Emerald Performance Materials in 2014 tops the list of recent large middle-market specialty chemicals buyouts.

$73.29 BILLION

$14.63

The number of U.S. PE and M&A deals fell from 2014 to 2015—from 173 to 163—but capital invested rose sharply, from $14.63 billion to $73.29 billion.

Georgia-based chemicals companies have been targets in a number of recent middlemarket PE deals—including Zep, a consumable chemical packaged goods company, and Pinova Holdings, a manufacturer of natural and renewable specialty chemicals.

BILLION

Sigma-Aldrich was one of the most expensive M&A targets in the last few years. Merck bought the manufacturer of chemicals and biochemicals in November 2015 for $17 billion.

“Low oil prices are a bit of a double-edged sword—production costs are lower for chemical producers, but the people they sell to are affected by the price, so demand has dropped. (Chemical companies) can produce at a lower cost, but they have to sell at a lower price.” —Daniel Cook, senior data analyst, PitchBook

All stats are from PitchBook.


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TO DYE FOR// A New Approach to Hair Color

Disrupting the

Color Spectrum MADISON REED’S SALON ALTERNATIVE

BY S.A. SWANSON Photos by Eric Millette


MADISON REED // Business: Customized home hair color Disrupting: Off-the-shelf and salon-based color application Formulation: Free of harsh chemicals and ammonia Founder: Silicon Valley entrepreneur Amy Errett Website: www.madison-reed.com

“I

t smelled terrible, it’s a mess, the instructions were hard to understand, and you have absolutely no idea how it’s going to turn out.” That was Amy Errett’s experience with home hair color more than 20 years ago. Although she ultimately switched to the salon, Errett knew little had changed over the years for home hair dye. While heading the San Francisco office of venture capital firm Maveron, she noted friends’ discussions about battling gray and thought more about the burden of coloring. Errett was doing well at Maveron—but she had run several startups before and longed to build another business. When she discovered that about 108 million U.S. women color their hair each year, Errett saw a sizable opportunity to reinvent the at-home experience. With less torture and more luxury, she imagined a product that would appeal to long-time home users, as well as time-strapped salon-goers who eschew off-the-shelf color.


She shared this with former colleague Sabrina Riddle, who had worked at travel company Olivia when Errett was CEO. “I told her, you’re right. Why does it have to be such a crappy experience?” recalls Riddle, now Madison Reed’s CMO, remembering her mom’s foul-smelling DIY color. Riddle had only experienced salon coloring, but it too had shortcomings. “It’s expensive, the appointments take several hours, and if I had to cancel, I wouldn’t be able to get an appointment the next day.”  Together, Errett and Riddle founded Madison Reed—a company that primarily sells hair color directly to consumers with a formulation that eliminates several harsh chemicals and places an overriding emphasis on customer service. Since the business launched in February 2014, revenue has increased tenfold. In April, Madison Reed delivered its 500,000th shipment. Printed inside each box is a phrase that reflects the company’s ethos: “You deserve better.”


DISRUPTING THE SPECTRUM

“THERE WILL BE MISTAKES...YOU HAVE TO KEEP INSTILLING IN THE CUSTOMER THAT THEY COME FIRST.” Amy Errett, CEO, Madison Reed

In October 2012, Errett approached a venture capitalist she’d known for years, Jon Callaghan, a co-founder of True Ventures. The firm manages about $1.3 billion in capital and typically invests in 12 to 20 early-stage startups annually (it was the first investor in tech-focused companies such as Fitbit, MakerBot and WordPress). “Amy told me, ‘I have this kind of crazy idea,’” says Callaghan. He quickly realized her “crazy idea” belonged in True Ventures’ portfolio.  “Here is an entire group of customers who have a choice of buying a really nasty box of chemicals for $9.99 … or spending $200 and a few hours at the salon,” he says. “There’s not much in between.” With the U.S. market for hair color estimated at about $15 billion, Callaghan liked the potential for repeat sales; most women who dye their hair do so about every month.   Errett’s vision also included catnip for investors—the potential for market disruption. With consumers’ changing behavior, new web-based brands (think Dollar Shave Club) have the chance to unseat established consumer packaged goods brands, says Callaghan, who deems this trend “CPG 2.0.” For Madison Reed, that meant using technology to sell directly to consumers and provide better customer service than the hair color brands that dominated retail stores. 

COLOR THEM CONVINCED In April 2013, Madison Reed raised $4 million in series A funding from True Ventures and Maveron. But some venture capitalists didn’t understand why women would buy hair color online. The most frequent comment Errett heard from those predominantly male VCs was, “Women color their hair at home?”


COLORFUL // Co-founders Amy Errett and Sabrina Riddle.

Norwest Managing Partner Jeff Crowe liked Madison Reed’s vision, but he knew his colleagues needed persuading. During the pitch, Crowe brought in six women from Norwest’s office support staff to provide feedback about their hair color experiences. The firm subsequently became the lead investor for Madison Reed’s $12 million series B funding in January 2014. Before they created the product, the founders researched customers’ needs by videotaping 50 women as they dyed their hair at home. “The big striking issue for me was, here is this thing you’re doing that’s about feeling and looking beautiful, but you’re being tortured during the process,” says Errett, the company’s CEO. That included tolerating noxious fumes from ammonia, which Madison Reed removed from its product. “What I love to do with people when I’m introducing the brand is take the bottle, continually encroach on their personal space—to the point where I finally have a bottle underneath their nose,” says Maureen Watson, chief product officer. “They can’t believe there isn’t a smell.”


The founders also succeeded in removing two other ingredients commonly found in hair color that have been linked to allergic reactions: paraphenylenediamine (PPD) and resorcinol. The formulation was completed in about six months, thanks to an Italian company that has produced salon hair color for decades. Madison Reed now has 42 shades with plans to have 49 by year-end. They cost $24.95 each or $19.95 if customers choose a subscription plan that delivers a box every few weeks. Forty percent of first-time buyers sign up for that plan, says Errett, along with another 20 percent who sign up after they try the product. A handful of other companies had already removed some harsh chemicals from their hair color products. But those products had problems with what Errett calls “componentry,” the stuff in the box that helps consumers dye their hair.

THE SMELL (OR LACK THEREOF) OF SUCCESS For those uninitiated in the finer points of home coloring, a typical box includes one pair of gloves at least two sizes too big for women’s hands, not ideal for a task that requires dexterity. When the founders studied the videos of women coloring at home, they noticed most people used their bare hands instead. To fix that, Madison Reed includes two sets of nonlatex gloves sized for women (the second pair is meant to be used when washing out the hair dye).  The founders were also betting a strong service component could help them lure salon-goers. That’s the role of the Color Crew, a team of 15 licensed cosmetologists who answer customers’ questions via phone, email, Facebook and online chat. They receive hundreds of queries each day, most along the lines of, “Which color is right for me?” It’s a complicated question, especially when “blonde” comes in 10 shades.

“(SALON COLOR IS) EXPENSIVE, THE APPOINTMENTS TAKE SEVERAL HOURS, AND IF I HAD TO CANCEL, I WOULDN’T BE ABLE TO GET AN APPOINTMENT THE NEXT DAY.” Sabrina Riddle, CMO, Madison Reed


“We highly encourage them to follow up with customers to see if the results look the way they want,” says Kristen Pollack, VP of customer care. Customers also email photos of themselves to help Color Crew members understand their hair color and texture. Chelsea Smith, a lead colorist, knows that some of those people have never dyed their hair at home before. “We want to give them the courage to be able to do that and cut back on the cost of going to the salon.” When interviewing a potential new hire, empathy is one of the most important qualities she looks for. “We have customers who call back and request specific stylists,” she says. “It’s become very clear to me what an emotional experience it can be (for customers). And the ingredients can be life-changing for people who haven’t been able to dye their hair due to allergic reactions.” Each week, the Color Crew has thousands of customer interactions, and the company founders say they read all of them. From each batch, Errett picks five or six dissatisfied customers to email. Maybe a package arrived late or someone wasn’t thrilled about the color choice. Errett lets them know she’s the CEO, provides her phone number and encourages

SERVICE // Eliminating the fear factor.


them to contact her directly. “I tell them, ‘I want you to know that this isn’t acceptable, and we are going to make it right for you,’” she says. One metric Errett values highly is the company’s Net Promoter Score, or NPS, which measures customers’ willingness to recommend a product or service to others. The higher the number, the better. Zappos, a company known for excellent customer service, had a recent NPS of 57. Errett says Madison Reed consistently scores between 60 and 64.  “I’ve had people say, ‘I got so pissed off, but because of how you treated me, I’m coming back,’” says Errett. “There will be mistakes…You have to keep instilling in the customer that they come first.”

THE COLOR OF MONEY

“IT’S BECOME VERY CLEAR TO ME WHAT AN EMOTIONAL EXPERIENCE IT CAN BE (FOR CUSTOMERS).” Chelsea Smith,

Lead Colorist, Madison Reed

In September 2015, Madison Reed raised $16.1 million in series C funding for an overall total of $32 million. That money is helping the company hire the right people—not just for the Color Crew, but also for the IT staff. Technology plays a vital role in how the company interacts with customers, whether on the website or the voice-activated iPhone app developed in-house. But most of that funding goes back into inventory. About 80 percent of revenue comes from hair color sales, including a surprising 10 percent from men. At the end of May, the company expanded its hair color options with several shades that provide more opaque coverage of gray hair, a move prompted by customer feedback. Other products include shampoo, conditioner and root touch-up powder in a compact that says “Hello Beautiful” above the mirror. Although Madison-Reed is a direct-to-consumer brand, its products are also sold in 315 Sephora cosmetics stores and on Sephora.com (www.sephora.com), as well as in about 100 U.S. salons, which mainly carry the root touchup powder. A handful of salons also use Madison Reed’s hair color.


SOLUTION // High-touch technology.

In April, the company began working with a sales channel that represents a significant milestone—QVC. With the new QVC partnership and distribution in more Sephora stores, Errett expects the revenue share from Madison Reed’s online sales will shift from 85 percent to 80 percent by year-end. For 2016 overall, she projects sales will increase threefold from the prior year. Long-term, the numbers remain encouraging. The company retains more than 50 percent of customers after 12 months, and its gross margin improved 10 percent between January and May of this year, says Errett, who isn’t currently seeking additional outside funding. By the second half of 2017, she expects that Madison Reed will be turning a profit. That’s good news for employees, investors and the many customers who now trust the company’s products. “Amy saw this really interesting point of self-worth and self-identity— your hair and your look,” Callaghan says. “Women weren’t being appropriately cared for. She really understood how dissatisfying the existing experience was. She thought she could do it better. And she was right.” // S.A. Swanson is a business writer based in the Chicago area who frequently writes about technology.


FOUR FUN FACTS

1. A  fter Madison Reed raised $4 million from True Ventures and Maveron in 2013, a tech-news site published a disparaging article. “It basically said, venture capital has totally lost its way—now they are investing in hair color,” says Jon Callaghan, founding partner of True Ventures. “I always say to my entrepreneurs, if they’re laughing at you, you know you’re onto something.” 2. W  hen Amy Errett and Sabrina Riddle began looking to create a formulation without harsh ingredients, they spoke with hair color experts at a trade show. “We told them what we wanted to do, and they said it would take two years,” says Riddle. With the help of an Italian firm, the formulation was completed in about six months. 3. In addition to testing the Madison Reed formulations on dozens of women with an array of hair textures and gray levels, the dye was also applied on swatches of yak hair (which absorbs color in a way that’s similar to human hair). The swatches were washed about 30 times to test how repeated shampooing affects dye.  4. T  o help keep the dye where it belongs (instead of on ears and other parts of the face), each box has a packet of barrier cream, which is applied along the hairline. Salons use barrier cream when they color clients’ hair, but it’s not included with other at-home hair color products.


facing acebook SOCIAL MEDIA’S GROWING ROLE IN M&A BY MYRA THOMAS


C Amy Forrestal Managing Director, Brookwood Associates

ompany leaders understand the obvious impact social media can have on their business. Twitter, Facebook, LinkedIn and even Instagram are increasingly used to publicize products and services, or position a company as an industry leader. Businesses are investing in social media analytics and closely tracking public posts, but they should also consider digital platforms in the context of a merger or acquisition. Surprising as it may seem, a good social media strategy will have implications for the due diligence process. Private equity investors and others involved in dealmaking often start their research by Googling a target company and looking at its social media. It’s a reflex today, says Amy Forrestal, managing director at investment banking firm Brookwood Associates. For middle-market companies, particularly those without a household name, first impressions online are essential for their brands. A company needn’t be on the Fortune 500 to establish a strong social media strategy, and it makes sense, given the stakes.

BRAND MANAGEMENT For franchises and consumer-facing businesses, managing their reputation online is especially critical, says Forrestal, who concentrates on restaurant deals. “The push to use social media is simply now a regular part of doing business,” she adds. That means devoting time to build an online presence, especially as the influence of online platforms continues to grow. An off-message Facebook post or errant tweet won’t go unnoticed by investors, she notes. Public opinion matters, too. A stream of negative comments about anything from the product itself to criticisms of management or service can raise a red flag. While it might not make or break a deal, such public feedback will lead investors to dig deeper, and what they find could trickle back to valuation. “The most obscure things can come up in financing,” Forrestal admits. It’s important for companies


PE & INVESTMENT BANKS OPT FOR SOCIAL MEDIA While the investing world faces stiff SEC regulation about what can and cannot be said online, that hasn’t stopped a growing number of private equity firms and investment banks from using social media. “A year or two ago, it was rare for private equity firms and investment banks to be active on social media,” says Bill Haynes, president and CEO of BackBay Communications, a strategic branding, marketing and public relations firm focused on financial services. “Soon it will be unusual for them not to be actively involved there.” But a good look-see from a PE firm’s compliance department or lawyers can go a long way in making sure the rules are followed, such as avoiding performance claims. Haynes says that the smarter PE and investment firms are using social media to position themselves as experts in particular segments in which they invest, which can be especially useful for attracting the attention of companies in those sectors. Social media is one of many complementary communications tools that are an important part of an integrated, content-driven marketing and communications program,” he says. However, it can be hard to cut through the noise, given all the competing content on social media, says Mark Gaffin, founder and president of the Gaffin Group, a middle-market strategy and M&A consulting firm. A firm has to provide much more than a listing of completed deals online to capture the attention and imagination of the business community. “You need to be a thought leader,” he adds. “Make sure to provide information and longer content with weight—not merely regurgitate industry news. There has to be some level of quality and frequency for people to follow you on social media.” Good in-house counsel can ensure social media posts and information on a firm’s website comply with SEC rules. At the end of the day, it takes time and money to develop a consistent methodology for social media.


to take the proverbial bull by the horns and make a positive statement of their own on social media, while also monitoring and responding to comments from the public, she says.

PLAYING IT SAFE Not surprisingly, an increasing number of lawyers and other M&A advisers are telling their clients to be wary of what they post online. Jason McCaffrey, partner in the corporate and capital markets group at Brown Rudnick LLP, notes that while it is still unclear what impact social media can ultimately have on valuation, it makes sense to avoid sharing potential merger or acquisition plans online. He advises clients to expect that prospective investors will use social media outlets to investigate a company. Social media, as it turns out, offers a quick read on a company’s products, employees, clients and customers. “LinkedIn, for instance, is a good way to get a sense of major employees and management,” McCaffrey says. For instance, a quick look online through a senior executive’s contacts might give a sense of how well-connected and respected the management team is in the industry. So when it comes to something as critical as a merger, a company needs to consider every public profile out there, he says. He recommends establishing a social media policy to avoid gaffes by employees or other missteps in the company’s official posts. Employees should be warned about sharing any sensitive company financial or operational information online. If a business is actively using social media and is considering an acquisition or sale, it makes sense for legal advisers to take a close look at what is being posted.

Jason McCaffrey Partner, Brown Rudnick LLP


THE SHAPE OF THINGS TO COME

Klaas Baks Associate Professor of the Center for Alternative Investments, Emory University Goizueta Business School

Christopher Helmrath Managing Director for Audit, Tax and Consulting, SC&H Capital

The full impact of social media on the M&A process will likely come down the road, especially as the medium matures and evolves. For now, the investment banking and private equity world remains an industry dependent on relationships and the proverbial handshake. Klaas Baks, associate professor in the practice of finance and executive director of the Center for Alternative Investments at Emory University’s Goizueta Business School, says the M&A process remains a very high-touch business. It’s unclear if a proactive social media strategy or even online deal sourcing platforms have much influence on the transaction process, he believes. “Serious investors simply don’t find a tweet compelling,” he says. “If you’re sourcing bigger deals and need to sell, you’ll already be on the radar of someone like KKR.” But according to Christopher Helmrath, managing director for audit, tax and consulting firm SC&H Capital, a good social media strategy is integral to strategic positioning leading up to M&A. “Due diligence is not just about the numbers, and social media can be a part of differentiating the company’s products or services,” he says. For midsize businesses, it can help to be creative when it comes to positioning and marketing online presence by using more innovative and newer social media, such as Snapchat or Vine, to reach out to younger consumers. In due diligence, investors spend time verifying what makes a business stand out and whether or not it can maintain differentiation from competitors after the sale. Helmrath adds, “This is where social media can play a part. You have to position yourself to show what makes you unique. It’s about having the attributes that the buyer is looking for.”


WHEN COLLABORATION WORKS While middle-market companies come to grips with the best ways to use social media for driving brand awareness, they are just beginning to discover more sophisticated social networks for directly sourcing deals. Tony Hill, director of Intralinks Dealnexus, a deal sourcing platform, contends that his site provides deal-makers the opportunity to connect with companies and professionals they might otherwise not come across in the normal course of business. Due diligence also becomes a much more efficient process, he says, with parties and counterparties gaining access to a secure virtual repository of documents and information. Deal sourcing platforms are still in their infancy, and it remains to be seen just how receptive the industry will be. “Without a doubt, there will always be people who will be afraid of change,” Hill says. “But young associates and analysts understand the platform and it resonates with them. As they move up the ranks and get more decision-making authority, we’ll see more acceptance of online deal sourcing, particularly for the middle market.” Middle-market businesses in particular stand to benefit from the efficiency and low cost of connecting online, from sourcing deals to establishing a brand or validating an investment. As online deal sourcing platforms evolve and new means emerge for companies to tell their stories—through written posts, photos, video, even virtual reality—midsize firms will have new tools to compete with larger competitors, giving them an edge in M&A. But like any new technology, social media comes with its own risks, and firms that appreciate the opportunity but tread cautiously will benefit in the digital age. // Myra Thomas is a business writer based in northern New Jersey.

Tony Hill Director, Intralinks Dealnexus


P A R T N E R S I N D R I V I N G M I D D L E - M A R K E T G R O W T H .® To d a y ’s f a s t - p a c e d m a r k e t r e q u i r e s a n e d g e . A C G G l o b a l P a r t n e r s prov ide y o u wit h t h e e x pe r t is e a n d be s t pr a c t ic e s n e e de d t o c l o se t he d e a l .

L E A R N M O R E A B O U T A C G PA R T N E R S H I P S , V I S I T A C G . O R G / PA R T N E R S H I P S © 2016 Association for Corporate Growth. All Rights Reserved.


QUICK TAKES JAY C. JESTER // Managing Director, Audax Private Equity

Click here to find out why the chemicals sector is such a strong bet for the middle market.

BIO // Jay C. Jester is a managing director with Audax Private Equity, a middle-market PE firm focused on buying companies with proven management teams. Previously Jester was a general partner with Florida Capital Partners, a middle-market private equity firm; he also worked for Bowles Hollowell Conner & Company, an investment bank, where he focused on middle-market mergers and acquisitions. Jester was interviewed at InterGrowth 2016, where he spoke to MMG about chemicals deals and Audax’s role in shaping the market.

“Chemicals has been a great industry for us,” Jester told MMG. “It’s a core input to the economy—a lot less cyclical than many other businesses. I think there’s a great buyand-build opportunity. It’s a business that’s been around obviously for a very long time. There’s a real gap between the small niche players and the really big players at the top of the food chain.” Audax’s portfolio includes a variety of chemicals makers such as ColorMatrix, Gabriel Performance Products, Innovative Chemical and Koda Distribution Group, among others. // —DLC


P A R T N E R S I N D R I V I N G M I D D L E - M A R K E T G R O W T H .ÂŽ Yo u on

can all

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on

aspects

operations,

ACG of

Global

M&A

taxation,

Partners

transactions, regulatory

as

trusted

including issues

advisers financing,

and

more.

L E A R N M O R E A B O U T A C G PA R T N E R S H I P S , V I S I T A C G . O R G / PA R T N E R S H I P S Š 2016 Association for Corporate Growth. All Rights Reserved.


A QUALIFIED OPINION BEN SCHARFF // Managing Director, Grace Matthews

BIO //

S

charff works on mergers and acquisitions, leveraged transactions and recapitalizations at Grace Matthews, a middle-market investment bank focused on M&A advisory services. Over the course of his career, he has developed a knowledge base in a broad range of industries, including chemicals, paints and coatings, construction products and services, and general manufacturing. WHAT IS THE OUTLOOK FOR GROWTH IN THE CHEMICALS INDUSTRY AND WHAT ARE THE MEANINGFUL DRIVERS AND IMPEDIMENTS?

“THE (CHEMICALS) INDUSTRY IS A STRONG BAROMETER FOR THE HEALTH OF THE OVERALL U.S. ECONOMY.�

T

he chemicals market is obviously quite diverse, ranging from commodities to specialty products, and includes sectors such as plastics, paints and coatings, pharmaceuticals, personal

care products, agricultural chemicals, construction materials and the like. The chemicals value chain represents approximately 8 to 10 percent of U.S. GDP, but more importantly it touches virtually all industries and heavily impacts the U.S. M&A markets. The industry is a strong barometer for the health of the overall U.S. economy. Strength in the construction and auto markets, the lower cost of oil and its derivatives, and the continued pursuit of more sustainable, environmentally friendly products has buoyed the industry domestically. Somewhat of a counterbalance to this are the strength of the U.S. dollar and uncertainty in foreign markets, which have had a negative impact on U.S. chemicals manufacturers that rely heavily on international sales channels. Normal competitive pressures will continue to drive innovation in the chemicals sector while the regulatory environment remains a contributing factor toward consolidation in this space. The domestic regulatory environment, similar to that in Europe, benefits companies of scale. It can be crippling for a small company to try to navigate laws like the Sarbanes-Oxley Act, enacted in response to public accounting scandals, or REACH, a European law to assess and manage risks in the chemicals sector. Companies need to grow to leverage the costs of these programs over a larger organization.


A QUALIFIED OPINION BEN SCHARFF // Managing Director, Grace Matthews

WHAT ARE SOME OF THE RECENT TRANSACTIONS SHAPING THE CHEMICALS MARKET AND WHERE DO YOU SEE THE MOST OPPORTUNITY?

W

e are in the midst of a boom period for chemicals M&A (both for private equity and strategic buyers). However, a number of the strategic “mega-deals” have grabbed

headlines recently. There have been five deals announced within the past year in excess of $10 billion in transaction value, including Air Liquide/Airgas, ChemChina/Syngenta, Sherwin-Williams/Valspar, a potential Bayer/Monsanto transaction and, most notably, the merger of Dow Chemical and DuPont, which at a value of $142 billion is by far the largest chemicals transaction of all time. All of these deals will reshape the markets in which these companies compete. A few specific sectors that we anticipate will continue to generate a high level of M&A activity include agricultural chemicals (such as the Syngenta, Monsanto and the Dow/DuPont deals), paints and coatings (led by the new Big Three: Sherwin-Williams, PPG Industries and AkzoNobel) as well as construction materials (where we have seen a number of high-quality assets out in the market). I believe the real opportunity in the chemicals market right now is for private equity funds, especially those skilled at pursuing corporate carve-outs. We have noted a marked increase in carve-out activity. While private equity generally has to compete with strategic buyers in this space, a number of private equity groups have been very successful in pursuing carve-out transactions, especially when they have key management ready to step in or a platform business to leverage as part of the transaction. Earlier this year we announced multiple carve-out transactions. We represented 3M on the sale of its polyurethane foam adhesives business, and in another we helped BASF sell its global polyolefins catalyst business. One sold to a strategic buyer and the other to a private equity-backed strategic. With all the recently announced chemicals mega-deals, we expect this trend to continue. Large deals can generate carve-outs for regulatory and antitrust reasons, or they can be voluntary as companies look to shed assets and focus on their core competencies.

“I BELIEVE THE REAL OPPORTUNITY IN THE CHEMICALS MARKET RIGHT NOW IS FOR PRIVATE EQUITY FUNDS, ESPECIALLY THOSE SKILLED AT PURSUING CORPORATE CARVEOUTS.”


A QUALIFIED OPINION BEN SCHARFF // Managing Director, Grace Matthews WHAT IS THE IMPACT OF OIL PRICING ON THE NORTH AMERICAN CHEMICALS MARKET?

W

e have been dealing with low or falling oil prices for about 18 months now. Oil prices appear to have bottomed out in the first quarter of this year and have rebounded to almost $50 a barrel as of May. Over the past year and a half, a

lot of hand-wringing has occurred over what this means for chemicals, specifically for the large Gulf region petrochemical plants established when the price of oil was closer to $100 a barrel. There has been the specter of overcapacity and a real concern that these new plants would not earn enough to provide a decent return on investment. Meanwhile, cheaper oil means lower feedstock prices for petrochemical producers; however, these are commodity businesses, and any material cost advantages are likely to be fleeting. We believed the beneficiaries of low prices would be specialty chemical manufacturers, which are typically under less pressure to cut prices when raw material costs drop, and to an extent this appears to be the case.

LARGE DEALS CAN GENERATE CARVE-OUTS FOR REGULATORY AND ANTITRUST REASONS OR THEY CAN BE VOLUNTARY AS COMPANIES LOOK TO SHED ASSETS AND FOCUS ON CORE COMPETANCIES.

We now know that domestic petrochemical producers have seen some of their margins eroded by foreign competitors, but not by as much as we feared. Some projects have been canceled and others delayed or scaled back, but many more are moving ahead. Above $40 a barrel, many oil producers are profitable, and more balanced supply should lead to more stable pricing. Over the long term, U.S. petrochemicals should remain competitive due to growing demand and widening margins.


A QUALIFIED OPINION BEN SCHARFF // Managing Director, Grace Matthews

WHAT KIND OF VALUATIONS ARE YOU SEEING FOR DEALS IN THE CHEMICALS SECTOR?

F

ueled by significant capital availability, pressure to grow and high trading multiples, valuations in the chemicals sector remain near historic highs. We track EBITDA multiples for

publicly traded chemical firms, and valuations peaked for our chemical index at almost 13.5 times EBITDA last June (up from a low of approximately six times in April 2009). These multiples have since backed off a bit but are still north of 10 times—well above historical norms. For most private middle-market chemical companies, we are still seeing transaction valuations in the seven times to more than 10 times range depending on the company, growth prospects and its end markets. For strategic buyers, balance sheets remain strong and low-cost debt is still available. Private equity has become increasingly aggressive in chemicals, as can be seen by the number of PE firms successfully executing roll-up strategies in various chemical end markets. As has always been the case, quality and defensibility continue to command a premium when selling a company. //

“...WE ARE STILL SEEING TRANSACTION VALUATIONS IN THE SEVEN TO 10 TIMES RANGE...”


P A R T N E R S I N D R I V I N G M I D D L E - M A R K E T G R O W T H .ÂŽ ACG

Global

network,

Partners

providing

help

valuable

expand

your

connections

middle-market with

corporate

clients and a consistent source of deals for capital providers.

L E A R N M O R E A B O U T A C G PA R T N E R S H I P S , V I S I T A C G . O R G / PA R T N E R S H I P S Š 2016 Association for Corporate Growth. All Rights Reserved.


ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

CINCINNATI

NEW YORK PHILADELPHIA

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ACG NEW YORK

ACG New York’s Van Hellemont Honored with Leadership Award ACG New York is proud to host the 6th Annual Champion’s Awards, which honors outstanding firms and individual deal-makers and transactions in New York’s middle market. This year the committee expanded its signature awards, which include the Peter J. Hilton Award and the New York Chapter Leadership Award, to recognize the significant contribution made by women. The inaugural recipient of the first Women of Leadership Award is Michelle Van Hellemont of Accordion Partners. As a result of a six-year strategic initiative, today more than 40 percent of the ACG New York board comprises women and minority members. As part of this effort, ACG New York pioneered the Women of Leadership program, with Van Hellemont as chairwoman for the past eight years. The WOL committee has built the Women of Leadership Summit, now an annual event attended by more than 200 industry professionals. Continued on next page


ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE Van Hellemont co-chairs the event along with Nanette Heide, a partner with Duane Morris. The WOL program is also supported by other networking events throughout the year. “Because of the efforts of the Women of Leadership Committee and Michelle’s dedication, the New York chapter boasts the largest number of female members of any ACG chapter. It is consistently recognized as an innovator for creative industry programming,” said Heidi Deiner, president of ACG New York. “Under Michelle’s direction, Women of Leadership has helped pave the way for women to take on chapter leadership roles, and as the first female president of ACG New York, I am a direct beneficiary of these efforts.” The ACG New York 6th Annual Champion’s Awards event was held at the Metropolitan Club on June 16, 2016. //

Michelle Van Hellemont Accordion Partners


ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

ACG CINCINNATI

Miami University Named Cincinnati ACG Cup Winner Not unlike a 2016 election primary debate, ACG Cincinnati’s Case Study Finals on Feb. 24 featured tough questions, head-to-head competition and an appearance by GOP presidential frontrunner Donald J. Trump. The team from Miami University emerged as the ACG Cincinnati Cup winner in the MBA competition, now in its ninth year. A panel of experts judged the competition, during which three participating teams of graduate students presented their approach to the competition’s case study. Highlights included the University of Cincinnati team’s proposed “reverse triangular merger,” snappy one-liners from the Xavier University group and well-articulated liquidity implications from the Miami University team, ultimately named the contest winner. Presidential hopeful and businessman Donald Trump made an unexpected appearance, in the form of an impersonator, to give his take on the case study. A sold-out crowd attended the live event at Cincinnati’s University Club. An online event engagement tool, KiwiLive, allowed virtual participants to provide immediate feedback on the teams’ presentations. //


ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

ACG PHILADELPHIA

ACG University: Philadelphia Chapter Offers M&A Education Young deal-makers looking to improve their understanding of the M&A life cycle need look no further than ACG University, a seven-week education program hosted by ACG’s Philadelphia chapter. In April, 42 junior deal professionals completed the course, which is offered annually to immerse participants in the various stages of an M&A transaction, including sourcing, valuing, financing, negotiating, structuring and closing a deal. Each of the course’s seven classes was taught by a team of the region’s experienced deal-makers. Comprehensive sessions included pre-reading, expert level instruction and practitioner panel discussions designed to offer real-world insights. Team-based case work and group presentations allowed students to share their views on deals and to learn from classmates. Now in its sixth year, ACG University will accept applications for 2017 starting in August. Visit ACG Philadelphia’s website to learn more. //


P A R T N E R S I N D R I V I N G M I D D L E - M A R K E T G R O W T H .ÂŽ F r o m c o n s u l t a n t s t o C PA s a n d a h o s t o f o t h e r a d v i s e r s a n d specialists, ACG Global Partners guide the success of more than 90,000 professionals in the middle market worldwide.

L E A R N M O R E A B O U T A C G PA R T N E R S H I P S , V I S I T A C G . O R G / PA R T N E R S H I P S Š 2016 Association for Corporate Growth. All Rights Reserved.


THE PORTFOLIO INSIGHT FROM THE EXPERTS

SOUND DECISIONS

MID-MARKET TRENDS

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IN THIS ISSUE MID-MARKET TRENDS Even as deal flow overall is on the decline in 2016, M&A in the chemicals sector is booming—from mega-deals to middle-market transactions, activity is on the rise due to three key factors.

SOUND DECISIONS Culture is an essential ingredient for M&A success. From how a business addresses internal merger concerns to how decision-makers evaluate cultural compatibility, culture is an element of the deal that can’t be ignored. The devil is in the details during due diligence, and a thorough analysis of a target business is essential for determining its true value.

COMING SOON Check out the Portfolio section of the September/October issue for more on the latest middlemarket trends, written exclusively by our team of expert ACG Global featured firms. To learn more about contributing to this section, please contact Maggie Endres, (312) 957-4257. These articles are brought to you by ACG’s Global Partners.


THE PORTFOLIO MID-MARKET TRENDS // Richard A. Martin, Jr., Senior Director, Merrill Corporation

MID-MARKET TRENDS

SOUND DECISIONS

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The Chemicals Industry Is Booming and Here’s Why

F

or the majority of industries, 2016 is turning into a bust when it comes to M&A activity. However, the chemicals sector is singing a different tune and is actually experiencing a boon.

Chemicals are on track to produce some of the year’s biggest deals.

In general, deal volume and value are

ity at the top is spurring activity down-

down year over year. From January

stream, opening the spigot for additional

through April 2016, $175.8 billion was

transactions to flow.

transacted in 1,003 deals globally, versus

Excluding mega-deals, there remains

$294.3 billion and 1,473 deals during the

plenty of activity in the chemicals sector.

same period the prior year. When evaluat-

As of April 2016, 200 deals, representing

ing the broader picture, it’s no surprise

$16.2 billion in value, had been completed

there is a global slowdown in transactions.

globally, with 51 deals and $6.2 billion

Companies are operating in a global land-

transacted domestically.

scape where the Eurozone remains unstable, Chinese markets are a cause for con-

Here are a few factors influencing this trend:

cern, and U.S. equity markets have been on a rollercoaster ride since the beginning of

Buying Growth and Innovation

the year.

The Dow-DuPont deal is a game changer,

The chemicals sector outlook is dif-

and for others to compete they will need to

ferent. With a series of pending mega-

join forces. Because many chemicals busi-

mergers, such as Dow Chemical Co.’s

nesses have become commoditized, creat-

acquisition of DuPont ($130 billion),

ing scale is imperative. It’s not just about

ChemChina’s takeover of Syngenta ($43

buying growth—it’s also about buying in-

billion), and Bayer’s recent offer for

novation. Similar to what has happened to

Monsanto Co. ($62 billion), the sector

Big Pharma, large companies are finding it

will likely produce some of the largest

easier (less costly) to purchase innovative,

deals of the year. In fact, the Dow-DuPont

smaller players as opposed to investing

transaction will set records with respect

millions of dollars and man-hours at-

to its size. But that’s not all: Robust activ-

tempting to incubate new ideas in-house.


THE PORTFOLIO MID-MARKET TRENDS // Richard A. Martin, Jr., Senior Director, Merrill Corporation

MID-MARKET TRENDS

SOUND DECISIONS

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Activist Shareholders

Richard A. Martin, Jr.

While the overall M&A sector has ex-

Activist shareholders have had a big influ-

perienced a rocky 2016, chemicals show

ence on chemicals deals, working to create

no signs of slowing down. Although

more shareholder value. They are not only

acquiring companies may experience

influencing acquisitions but also divesti-

short-term pressure on their stock, and

tures. According to a report by Deloitte,

imminent job losses are usually unavoid-

“Spinoffs are becoming more prevalent as

able, the longer-term outlook is optimis-

a means to realign portfolios in the global

tic. The American Chemistry Council

chemical industry, as corporate strategy

predicts that U.S. chemical production

continues to drive divestitures of non-core

will continue to expand over the next

or underperforming assets.” Divesting as-

several years, outpacing overall growth

sets is also being used a tax strategy.

of the American economy and driving long-term economic prosperity. In short,

Agriculture’s Down Cycle The decline in U.S. farming income is put-

this is most definitely a sector to watch. For more information on global trends

ting purchasing decisions under scrutiny,

in the chemicals industry, please down-

further reducing potential buyers’ willing-

load the May Monthly Insider from Mer-

ness to pay for certain ag-related products

rill Corporation and Mergermarket. //

and chemicals. In order to remain buoyant, companies are joining forces to help

Richard A. Martin, Jr. is a senior director

provide competitive pricing.

at Merrill Corporation, responsible for Merrill DataSite’s global marketing group. Nearly two decades of marketing experience working and residing in the United States, the United Kingdom and Europe has developed Martin’s understanding of disparate corporate cultures and the global financial industry, evidenced by a successful record of growing businesses.


THE PORTFOLIO SOUND DECISIONS // Chelsea Wood, Middle Market Organizational Consultant, Insperity

MID-MARKET TRENDS

SOUND DECISIONS

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Inviting Culture to the M&A Table

A

s you look to maximize your investments, keep in mind that each organization’s culture plays an integral role in the success of a transaction. And it can’t be an afterthought. Culture must become a major player at the M&A table with finance, legal and human resources.

An unhealthy culture can erode a company’s value.

Begin During Due Diligence

How Culture Relates to M&A

Each company’s culture should be as-

Culture is a broad and nebulous concept.

sessed during due diligence as a critical

It’s the outcome of all the business deci-

piece of the financial puzzle.

sions that you make. It’s a byproduct of

Imagine that you’re looking to buy a

your practices, policies, communications

classic car. You find one that looks like it’ll

and values. Most decisions made in the

be a good investment—nice to drive for

early stages of a transaction will impact

a while and then sell for a profit. It looks

the future culture.

great from the outside. But you know it’s

For example, the way you communi-

the mechanics—the inner workings—that

cate with employees about the transaction

will affect the value.

shows how you value them. Do you trickle

To relate that to your dealmaking, your

information, or do you share as much as

acquisition is that collectible car and in-

possible while adhering to the legal re-

cluded under the hood are the business’s

quirements?

workforce and company culture. If those

While these may be operational deci-

are out of whack, you may only be getting

sions, they will most certainly have cul-

an overpriced shell of a company.

tural implications. Keep in mind that it’s

An unhealthy culture, paired with an

easier to be proactive when planning your

immature infrastructure, can degrade a

messaging than it is to repair the damage

company’s value, becoming a money pit

once it’s delivered. How you choose to han-

filled with unplanned costs that weren’t

dle this can be the litmus test on cultural

part of the initial financial model.

alignment among the parties involved.


THE PORTFOLIO SOUND DECISIONS // Chelsea Wood, Middle Market Organizational Consultant, Insperity

MID-MARKET TRENDS

SOUND DECISIONS

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Chelsea Wood

Addressing Merger Concerns

historical success of the business. What

Turnover and productivity are big con-

are the must-haves moving forward? Then

cerns during mergers and acquisitions.

create an agreement about what the cul-

Culture is a strong driver of satisfaction,

ture of the future organization needs to be

engagement and, ultimately, retention.

in order to deliver on what you’re promis-

Maintaining institutional knowledge is often important during times of transition. A culture that recognizes the value

ing your customers. Anticipate potential barriers and address them. Once the transaction closes, convey the

of the workforce is a good hedge against

changes while maintaining open lines of

losing that knowledge.

communication with your employees and

Productivity can be impacted by a disorganized integration process. By planning for culture early in your M&A process—in

customers. Make sure there are ways to receive feedback in a timely fashion. We’ve all seen deals go south. And they

the same way you address the financial

do so for many reasons. But it’s been dem-

analysis—you can develop an integration

onstrated time after time the critical role

plan and minimize disruptions. Typically,

that culture plays in the long-term success

integration begins at close, but integration

of a merger or acquisition. The transaction

planning starts at the beginning.

prerequisite that you put into place may

Investing more resources in the early stages of a transaction will protect the

just make the difference in your next deal. Learn how to structure a human capi-

long-term investment. The goal is to have

tal framework to navigate the historically

a smooth transition that provides clear

nebulous concept of culture at insperity.

expectations to all stakeholders.

com/acg. //

Moving Forward

Chelsea Wood (M.A. I-O Psych) is a middle-

During your initial planning stages, con-

market organizational consultant at Insperity,

sider cultural compatibility in your target

an employee services firm. For over a decade,

criteria. Build a framework for under-

Wood has partnered with leadership teams

standing what cultural fit means and how

to identify and address business challenges

to evaluate it.

related to operational performance, strategy,

In the pre-close phase, identify the cultural requirements needed to continue the

business development and human capital.


THE PORTFOLIO SOUND DECISIONS // Matt Klauser, Director, BKD LLP

MID-MARKET TRENDS

SOUND DECISIONS

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Does Your Deal Have a Devil in the Details?

I

occasionally hear business owners describe a company they’re planning to sell as a simple and straightforward business. I’m a little skeptical when I hear these statements based on high-level assessments of the company, rather than a deep dive into the details of what truly drives the underlying business operations.

The right data can help you analyze company margins.

Throughout the life cycle of a due dili-

work with can’t track labor costs by prod-

gence project, buyers often ask sellers for

uct, project or service.

information. The more difficult requests

To better understand why it’s difficult to

include gross margins by product, service

evaluate a business without getting down

or customer. When buyers initially receive

to the nitty-gritty of a transaction, consid-

pushback from a seller on a due diligence

er BKD’s recent due diligence project. BKD

project, they often pivot the conversa-

represented the buyer’s side; the seller was

tion and ask if they can sit down with the

a consulting company that had more than

seller’s IT personnel to extract detailed

doubled revenue during the last two years

source-level information (e.g., sales invoic-

and significantly increased its profit mar-

ing and purchasing detail, bill of materi-

gins. The seller’s primary cost was labor

als expense, payroll detail and time sheet

expense, but it couldn’t provide labor costs

records for labor expense.)

by project, much like the webinar respon-

Once the buyers extract this information and combine the output, they can

dents mentioned above. BKD’s transaction services team dug

build a margin analysis by product or

into the specifics and extracted the in-

service and customer that wasn’t readily

voicing and payroll detail and time sheet

available from the seller. Such analysis

records. By combining the information

requires much more than a high-level

from these data sets, the engagement team

business assessment. Unfortunately, not all

was able to calculate revenue and margins

buyers and sellers engage in this advanced

by location, project, customer and project

discussion. Based on polling results from

type. BKD professionals were able to ex-

a recent webinar I delivered, 54 percent

plain not only the growth in revenue but

of respondents indicated companies they

also in profit margins—primarily result-


THE PORTFOLIO SOUND DECISIONS // Matt Klauser, Director, BKD LLP

MID-MARKET TRENDS

SOUND DECISIONS

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Matt Klauser

ing from opening an overseas location

Matt Klauser is a director at BKD LLP, a na-

with lower per-hour labor costs and a high

tional CPA and advisory firm, where he focus-

margin on a recently completed significant

es on key performance indicators and helping

project. The seller indicated the project

his clients learn about the fundamentals of the

included a bonus for a short turnaround

business they are evaluating, while analyzing

and it would be difficult to replicate this

historical results during due diligence in com-

project margin on a recurring basis.

parison to his client’s investment thesis.

BKD’s findings gave the buyer a clearer picture of the target’s true value, providing potential leverage in the negotiations if the buyer decided to pursue a lower purchase price. How will a similar finding affect your next transaction? After reviewing the above case study with the webinar attendees, I asked them how they’d expect to handle a significant project; 88 percent of the respondents indicated the buyer should at least consider renegotiating the purchase price. The results are clear: If you aren’t scrutinizing a target company, you may be missing a devil—or angel—in the details. //


R E G I S T R A T I O N

I S

N O W

O P E N .

W W W . E U R O G R O W T H . O R G

# E U R O G R O W T H


B-SIDE CHRISTOPHER CHILDRES // Founder and Managing Partner, Edgewater Capital Partners

STRATEGIC FOCUS… “We really only chase businesses in which we have real expertise and experience; we operate in the size range where you can really make a difference from a strategic and operational perspective.”

CHRISTOPHER CHILDRES // a member of ACG Cleveland, founded Edgewater Capital Partners in 1998, drawing on 20 years of experience in private equity investing. The Clevelandbased firm focuses on lower middle-market performance materials businesses, including niche manufacturers of specialty chemicals, pharmaceuticals, engineered substances and material science-based components.

LEAVING THE LAW… “I worked as an M&A attorney for a few years and was not, from a personality perspective, very suited to being an attorney. I was much better as a principal focusing on the big picture and problem solving than I was on the details of corporate law.”

“WHAT I LIKE MOST IS WORKING WITH PEOPLE AND DEVELOPING PEOPLE THROUGH CLOSING DIFFICULT ACQUISITIONS AND BUILDING GOOD COMPANIES....”

INDUSTRY DYNAMICS… “The specialty chemical space is fairly fractured, and it’s a very dynamic industry. There’s a lot of M&A going on, particularly among larger entities, which leads to smaller businesses being spun off as a result of those larger transactions.”

RECOMMENDED READING… “‘Catch-22.’ I also like Tibor Fischer a lot, but he hasn’t put anything out in a long time. I don’t read a lot of business books anymore—I think that reading outside of work should focus on expanding your mind, knowledge and thought proceses.” ANALYZING IP… “We evaluate a company’s IP, but that intellectual property can be art, or it can be a matter of nonpatented IP—production knowledge or formulaic knowledge, which is not necessarily protected by patents, but is still very difficult to duplicate.”

IF I WEREN’T IN PE… “I’d probably be a teacher or a coach. My best talents are in developing and leading teams to a specific goal set.”


ACG INTRODUCES THE

G U I D E T O P RIVATE EQ U I TY RE GULATORY C OMP LIA NCE When the SEC examines your private equity firm, what will they find? Many private equity firms are at risk of SEC enforcement actions because they overlook—or misinterpret— recent rule changes that dramatically affect the ability to raise capital, interact with investors and meet all-new reporting and disclosure requirements. The Guide covers a broad range of regulatory issues including: •

Fees and expenses

Cybersecurity

Portfolio company valuations

And much, much more!

PRE-ORDER YOUR COPY NOW AT WWW.THOMPSON.COM/EQUITY

Published in partnership with

© 2016 Association for Corporate Growth. All Rights Reserved.


THE LADDER ACG MEMBERS ON THE MOVE

Blythe McAulay

Paul Patterson

Blythe McAulay, a member of

Daryl Yap, a member of ACG

ACG Charlotte, has joined pub-

New York, has joined American

lic accounting firm DHG, where

Industrial Partners as a partner

she’ll aid the private equity prac-

to augment the firm’s dedicated

tice as chief of staff. McAulay will

deal-sourcing efforts. Yap previ-

help develop and lead strategic

Daryl Yap

ously spent almost six years at

growth, and will assist with the

Bregal Investments, an AIP lim-

delivery of private equity servic-

ited partner, where he was a vice

es. She joins DHG from Crescent

president and a member of a

Communities, where she served

six-person team managing a $3

as director of corporate finance

billion global private equity fund

and investor relations.

and co-investment portfolio.

Paul Patterson, a member of

Chaitan Fahnestock, a

ACG Dallas/Fort Worth, has

member of ACG Dallas/Fort

joined Aventine Hill Partners, a

Worth, was recently promoted to

Texas-based professional ser-

president and COO of Riveron

vices firm, as managing partner

Consulting, a Dallas-based firm

in the firm’s Dallas office where he will lead the firm’s efforts in

Chaitan Fahnestock

specializing in serving a diverse set of middle-market private

the local market. Prior to joining

equity funds, and growing public

Aventine, Patterson led a nation-

and private companies. Fahne-

al CFO and accounting consul-

stock has been with Riveron

tancy for several years and later

since 2006 and most recently

took over a national business

served as managing director of

unit for a publicly traded system

new markets. In his new role,

integration firm. He is a past

he will oversee strategic direc-

president of the ACG Dallas/Fort

tion and operations for all of the

Worth chapter.

firm’s markets, including Atlanta, Chicago, Dallas, Denver, Houston, Minneapolis and Washington, D.C.


THE LADDER ACG MEMBERS ON THE MOVE

Kurt C. (“KC”) Beuker

Kurt C. (“KC”) Beuker, a mem-

Gavin Fielden was recently

ber of ACG Chicago, has joined

promoted to managing director

TCF Capital Funding, a national

of TriVista, a global management

cash flow and asset-based lend-

consulting firm focused on op-

er to lower middle-market busi-

erations advisory to the middle

nesses, as senior vice president.

Gavin Fielden

market. In his new role, Fielden

Beuker’s responsibilities include

will continue to focus on TriVis-

new business generation, port-

ta’s transaction advisory services

folio administration and under-

by formally assuming leadership

writing with specific coverage

of the firm’s Quality of Op-

of the great New York City mar-

erations due diligence practice.

ket. Prior to joining TCF, Beuker

Fielden joined TriVista in 2015 as

served as senior vice president

vice president.

in the structured finance group Brian Miner has joined Fried,

at Fifth Third Bank.

Frank, Harris, Shriver & JacobSteven C. Pierson has joined

son LLP in the law firm’s Wash-

Lovell Minnick Partners, a private

ington, D.C., office as a partner

equity firm specializing in finan-

in the mergers and acquisitions

cial and related business serSteven C. Pierson

Brian Miner

and private equity practice.

vices companies, as president

Previously at Reed Smith LLP,

and partner. Pierson was previ-

Miner brings experience in a

ously with UBS, where he served

wide range of transactional mat-

as head of financial institutional

ters, including cross-border and

group investment banking Amer-

domestic mergers, acquisitions

icas and global head of financial

and divestitures involving public

technology & services.

and private companies.

To submit your promotions, job changes and other accomplishments, please send details and a high-resolution color photo to Editor Deborah Cohen at dcohen@acg.org.


I T ’ S

Y O U R

D E A L .

W W W . I N T E R G R O W T H . O R G

# I N T E R G R O W T H


IT’S THE SMALL THINGS CHEMICAL & PLASTICS INDUSTRY TRENDS // Feeling Some Strong Chemistry Here

1

2

THIS INDUSTRY IS FAN-PLASTIC! The plastics industry is the third-largest manufacturing industry in the United States, employing more than 885,000 and creating more than $380 billion in shipments annually.

5

U.S. demand for adhesives and sealants is forecast to increase 2.8% per year to 6.4 billion pounds in 2019, valued at $12.8 billion.

OIL PRICES GUM UP THE WHEELS OF PLASTIC RECYCLING

6

M&A + P&P = $&¢

7

Recycling is a $100-billion-a-year business. But when the price of oil drops, using recycled plastic can actually be more expensive than producing fresh plastic.

3

4

2015 was a banner year for M&A in the plastics and packaging sectors and related segments. Global deal values in 2015 topped the record books, surpassing the all-time annual record of $4.1 trillion set in 2007.

COLOR ME CONFIDENT

The food additive market is projected to grow at a CAGR of 5.6% to reach $52.2 billion by 2020. The North American region dominated in 2014, with the United States representing roughly 78% market share. Europe is projected to grow steadily while the Asia-Pacific region will grow at the highest CAGR.

INCREASING DEMAND STUCK LIKE GLUE TO INDUSTRY

2016 IS LOOKING ESPECIALLY GOOD FOR CHEMICALS

The outlook for specialty chemicals in 2016 is bright. The American Chemistry Council expects specialties production to rise 3.9% globally in 2016 after a 3.8% increase in 2015.

WHAT’S GOOD FOR THE GOOSE ISN’T GOOD FOR THE GANDER The FDA allows many ingredients in the United States that have been banned in other countries. Check out this list, which includes certain food dyes and the infamous fat substitute olestra.

8

—Larry Guthrie, manager, communications and marketing, ACG Global

NOW THAT’S A CHEMICAL REACTION!

The business of chemistry is one of America’s largest, an $801 billion enterprise that creates hundreds of thousands of jobs. Plus, more than 96% of all manufactured goods are directly touched by chemistry.


FIND YOUR IDEAL

CANDIDATE WITHOUT SORTING THROUGH HUNDREDS THAT AREN’T.

P O S T Y O U R J O B O P E N I N G T O D A Y. J O B S O U R C E . A C G . O R G

© 2016 Association for Corporate Growth. All Rights Reserved.


THE LEADERSHIP ACG DIRECTORS ACG BOARD OF DIRECTORS //

CHAPTER REPRESENTATIVE DIRECTORS //

DIRECTORS AT LARGE //

Chairman Richard Jaffe* Duane Morris LLP ACG Philadelphia Term expires 8/31/2016

Brent Baxter Clayton Capital Partners ACG St. Louis Term expires 8/31/2017

Jason Byrd Charter Capital Partners ACG Western Michigan Term expires 8/31/2017

Robert Brighton Shutts & Bowen LLP ACG South Florida Term expires 8/31/2017

Ramsey Goodrich Carter Morse & Mathias ACG Connecticut Term expires 8/31/2016

Steve Castino Vestal & Wiler CPAs ACG Orlando Term expires 8/31/2018

Mark Hollis Centerfield Capital Partners ACG Indiana Term expires 8/31/2016

Karen Grexa KeyBank Business Capital ACG New Jersey Term expires 8/31/2017

Jay Jester Audax Group ACG Boston Term expires 8/31/2018

Jay Hansen O2 Investment Partners ACG Detroit Term expires 8/31/2017

Scott Linch Dixon Hughes Goodman ACG Charlotte Term expires 8/31/2018

Karin Kovacic Alcentra Capital ACG Connecticut Term expires 8/31/2018

Don Lipari McGladrey ACG New York Term expires 8/31/2017

Mark Lehman Parsons Behle & Latimer ACG Utah Term expires 8/31/2018

Cassandra Mott Thompson & Knight LLP ACG Houston Term expires 8/31/2016

Aric Hassel BB&T ACG Cincinnati Term expires 8/31/2018

Martin Okner SHM Corporate Navigators ACG New York Term expires 8/31/2018

Walter O’Haire Valuation Research ACG San Francisco Term expires 8/31/2017

Gretchen Perkins Huron Capital Partners ACG Detroit Term expires 8/31/2016

Titus Schurink HPE Growth Capital ACG Holland Term expires 8/31/2018

Karen Tuleta Morgenthaler ACG Cleveland Term expires 8/31/2017

Mitch Woolery Kutak Rock LLP ACG Kansas City Term expires 8/31/2018

Thomas Turmell TMT Capital Partners LLC ACG Chicago Term expires 8/31/2018

Vice Chairman Jason Brown* Victory Park Capital ACG Los Angeles Term expires 8/31/2016 President & Chief Executive Officer Gary A. LaBranche, FASAE, CAE* ACG Global Chairman of Finance Angie MacPhee* RGL Forensics ACG Denver Term expires 8/31/2016 Secretary J.B. Dollison* Crutchfield Capital Corporation ACG Houston Term expires 8/31/2016 Immediate Past Chairman Doug Tatum* Newport Board Group ACG Atlanta Term expires 8/31/2016

ACG HONORARY DIRECTORS // Robert G. Coffey Alan B. Gelband *denotes member of Executive Committee


ACG NEAR YOU ACG CHAPTERS ACG 101 Corridor acg.org/101

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ACG National Capital acgcapital.org

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ACG Wisconsin acg.org/wisconsin

ACG Detroit acg.org/detroit

ACG Orange County acg.org/occ


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Middle Market Growth - July/ August 2016  

The official publication of the Association for Corporate Growth (ACG)

Middle Market Growth - July/ August 2016  

The official publication of the Association for Corporate Growth (ACG)