20130128-NEWS--17-NAT-CCI-CL_--
1/22/2013
1:13 PM
Page 1
20130128-NEWS--18-NAT-CCI-CL_--
1/22/2013
1:13 PM
Page 1
CORPORATE GROWTH & M&A
S-2 JANUARY 28 - FEBRUARY 3, 2013
Advertisement
LETTER FROM THE PRESIDENT
ACG: What’s in a name?
land include investment bankers,
corporate M&A officers, private
ften I am asked, “What
equity, “C” level corporate offidoes Association for
cers, senior asset based/corporate
Corporate Growth
lenders, junior/mezzanine lenders,
actually mean?” Whose
transaction attorneys, tax/assurgrowth? Is it the companies, the
ance accounting professionals and
corporate officers or the
other service providers.
financial professionals
Earlier this year ACG
who support businesses?
Cleveland was recognized
The short answer is yes,
as 2012 ACG Large Chapyes and yes.
ter of Year. We are proud
To be successful you
to be honored ahead of
must always be looking to
chapters in New York,
develop new relationships.
Chicago, Los Angeles,
A strategy to consistently
Boston and Dallas. This
connect with deal makers SEAN MCCAULEY achievement would not
ACG president
and shapers will always
have been possible withresult in new business opout the significant efforts
portunities. The mission of ACG is
of our current and past volunteer
to provide this critical networkboard members, our chapter
ing platform among participants
members, and the thousands of
in mergers and acquisitions and
professionals who support our
corporate finance. ACG Cleveevents each year.
land’s primary networking efforts
On Jan. 31, ACG Cleveland
are the 25 to 30 diverse and awardwill host its 17th Annual Deal
winning events hosted each year.
Maker Awards. This signature
Social media is important, but
event to recognize significant
building long-term relationships
merger and acquisition accomis done by getting out, rolling up
plishments attracts more than
your sleeves and talking to people
800 financial professionals from
face to face. No matter how big
Northeast Ohio and around the
or small the company, business
country. M&A financial profesgets done between individuals
sionals know that Cleveland is
and not solely through a web page
a deal-making town and an
or phone call.
important destination for netACG Cleveland has a 30-year
working. The event is a unique
tradition of connection and
experience complete with nonengagement in Northeast Ohio.
stop introductions and reconnecOur Cleveland chapter is one of
tions, past and future deal discus58 around the world, including
sions, and market observations
Asia, South America and Europe,
and frustrations.
and part of a 14,500-member
Our monthly breakfast meetACG global organization.
ings showcase Northeast Ohio’s
The 500 members of ACG Clevemost senior corporate and com-
By SEAN MCCAULEY
O
munity leaders. Twice a year,
ACG Cleveland hosts workshop
events that bring together a panel of industry experts to explore a
specific business trend, issue, industry or community project.
The Great Lakes ACG Capital
Connection is a two-day event
for capital providers and deal
makers that attracts more than
700 M&A professionals. ACG
Cleveland hosted the event in its
first two years and we supported
successful events in Indianapolis
and Detroit in 2011 and 2012.
Over the years ACG Cleveland
has evolved its programming and
expanded its mission to address
the needs of future leaders, connect with Ohio’s graduate business schools and engage in the
economic vibrancy of our region.
Our ACG Cup brings together
MBA student teams from the top
graduate business schools in
Northeast Ohio for a deal-specific
case study competition. Over the
last few years ACG Cleveland has
developed programming specific
to Women in Transactions (WIT)
and a Young ACG (YACG) initiative to develop the next generation of deal makers.
If you are serious about building or growing your own business network, I encourage you to
learn more about our organization. Attend an event, talk to
a chapter member, visit
www.acgcleveland.org or contact
me at 216-222-2847.
■
Sean McCauley is president of ACG
Cleveland and a vice president with
PNC Business Credit.
table of
contents
FILE PHOTO
S4 Sky’s the limit
Cleveland’s diverse business base and wealth
of service firms enhance private equity position.
S3 Buyer due diligence
S6 Purchase agreements
S7 80/20 rule
S7 Primary care revolution
S8 Earn-out contingent
consideration
S8 Acquisition advice
S9 Timing deals
S10 Tax considerations
for carve-out statements
S10 Corporate divestitures
S11 Managing M&A fees
“I work with Benesch because of their ability to
get to the core of an issue and then develop the
strategies to resolve it, whether an everyday
matter or something out of the ordinary.”
DAVID I. MANSBERY
President, Duck Creek Energy, Inc.
David considers himself a “serial entrepreneur”
and has relied on Benesch for a multitude of
business needs. From handling real estate,
leasing, litigation and general business matters
for Duck Creek Energy to navigating the
successful sale of a prior business and its
intellectual property to incorporating a new
venture, Benesch has the breadth and depth
to help David go wherever his ideas take him.
To learn more about our relationship with Duck
Creek Energy, visit beneschlaw.com/myteam
FEATURED ATTORNEYS (left-right): ROBERT A. ZIMMERMAN,
LORI H. WELKER, DAVID MANSBERY, JR., DAVID R. MAYO
AND JOSEPH G. TEGREENE
MY BENESCH MY TEAM
S12 Valuations
S13 Purchase accounting rules
S13 Sell-side due diligence
S14 What is your corporate
M.P.G.?
COVER PHOTO: The Veterans Memorial Bridge with 200 Public
Square, Terminal Tower and Carl B. Stokes U.S. Courthouse in the
background. Photo by Eureka Lott
DISCLAIMER
The articles in this section were prepared by the respective contributors for
general information purposes only and are not intended as legal, tax, accounting
or financial advice. Under no circumstances should any information contained in
any of these articles be used or considered as an offer or a solicitation of an offer
to participate in any particular transaction or strategy. Any reliance upon any such
information is solely and exclusively at your own risk. Please consult your own
counsel, accountant or other advisor regarding your specific situation. Any views
expressed in the article are those of the respective contributor and are subject to
change without notice due to market conditions and other factors.
YOUR MARKETS
MAY BE GLOBAL
BUT YOUR LEGAL
ISSUES ARE LOCAL
Cleveland • Columbus • Indianapolis • Philadelphia • Shanghai • White Plains • Wilmington • www.beneschlaw.com
© 2012 Benesch Friedlander Coplan & Aronoff LLP
S14 Prepare for selling family
held business
S15 Tale of M&A markets
S16 Combining ABL with
syndicated term loans
and high-yield bonds
S17 Noncorrelated
investments
S18 Lending alternatives
S19 Leverage buyout trends
S20 Global M&A
S20 Conflict minerals rule
S20 Private equity survey
S21 Judging a private equity
firm
S22 Transactional insurance
S23 Asset-based lending
S23 Deal Maker awards
squiresanders.com
Crain’s Cleveland Business Custom Publishing
With expertise encompassing business
law, regulatory matters and advocacy,
Squire Sanders lawyers have the skills
and in-depth industry knowledge to
provide the full range of legal counsel
needed to implement your strategy in
Cleveland, across the country and
around the world.
20130128-NEWS--19-NAT-CCI-CL_--
1/23/2013
1:26 PM
Page 1
CORPORATE GROWTH & M&A
Advertisement
JANUARY 28 - FEBRUARY 3, 2013
S-3
Best practices in financial due diligence
Target firm’s
earnings quality
key to crafting
solid transaction
By MARK BOBER
T
horough due diligence is
an important component
of a transaction that, if
done properly, provides
a prospective buyer with an
in-depth understanding of the
quality of earnings of the target
company. Knowing a target’s
quality of earnings can further
assist a buyer in establishing
pricing, deal structure and postacquisition planning. Generally,
it would not be disclosed in their
audited financial statements or a
confidential information memorandum, which is a description
of the business and its financial
performance.
While every situation is different, following
are typical focal
points of a quality of earnings
investigation:
ment of revenues and margins by
customer, product line and channel to assess the quality of such
revenue and the sustainability of
the revenue stream.
should be closely assessed to
determine the appropriateness of
such valuation given its direct
impact on reported earnings.
■ Accounting adjustments
impacting earnings: The
nature of activity within reserves
and accruals, such as allowance
for doubtful accounts, inventory
reserves, warranty reserves,
accrued liabilities, etc., should be
analyzed to determine potential
inflation of reported earnings.
■ Pro forma cost adjustments: Pro forma costs might include restructuring or financing
costs. These need to be carefully
analyzed in order to determine
the appropriateness of such
adjustments. This will require
assessment of both the qualitative and quantitative aspects of
these adjustments.
■ Inventory valuation: Capitalization of costs into inventory
Other due diligence areas to
consider include the following:
■ Scalability of the business,
depth of the management team,
adequacy of information systems
and related items
■ Debt and debt-like liabilities.
Items are often not recorded on
the balance sheet
■ Working capital requirements and thresholds
established in the purchase
agreement or letter of
intent
■ Capital expenditures,
both past and future
Acquisitions provide
tremendous opportunities,
but without adequate due
■ Revenue
recognition:
Revenues
should be recogMARK BOBER
nized in the
Bober Markey
proper period
Federovich
as well as costs
related to generating such revenues. Generally accepted accounting principles (GAAP) applied on a consistent basis would
be the standard that would govern
such treatment.
■ Normalization adjustments:
This would include validation
of seller discretionary items
including compensation in excess
of fair market value, perks, etc. It
would also include the appropriateness of other non-recurring
income and expenses that would
not be anticipated to impact
future earnings.
■ Quality of revenues: This
entails a comprehensive assess-
Crain’s Cleveland Business Custom Publishing
diligence, it’s buyer beware.
Mark Bober is a partner with Bober
Markey Federovich. Contact him at
330-255-2425 or email mbober@
bobermarkey.com.
■
20130128-NEWS--20-NAT-CCI-CL_--
1/22/2013
1:14 PM
Page 1
CORPORATE GROWTH & M&A
S-4 JANUARY 28 - FEBRUARY 3, 2013
Advertisement
Dealmakers elevate position
of private equity industry
Professional service firms augment burgeoning sector
By CHERYL HIGLEY
B
uilt on the shoulders of
visionaries such as Kirtland
Capital’s Jack Turben,
Linsalata Capital Partners’
Frank Linsalata, Morgenthaler’s
David Morgenthaler and
Primus Capital’s Loyal Wilson,
Cleveland has quietly and steadily
cemented itself as a private equity
powerhouse over the past 30
years.
There are no signs of wear on
the industry, as both established
and up-and-coming firms continue
to evolve to meet the changing
needs of their investors and portfolio companies with the same
“roll up your sleeves and get to
work” mentality for which
Northeast Ohio is famous.
“Private equity in Cleveland is
growing up. Firms are learning
from each other and from the
markets we’re in, and our
investors are refining how they
do business,” says Jim Marra,
director of business development
for Blue Point Capital Partners.
Despite the long legacy of
private equity in Cleveland, performance is still key — and it is
those companies that embrace
their history and work to build a
different future that continue to
thrive.
Tim Healy, senior vice president
of Linsalata Capital Partners,
says: “It’s a different world than
it was in 1984. To survive in any
industry, you have to be open
to change — or you will have a
limited life span. We are lucky
to have some really good, smart,
hard-working individuals who
have been successful and have
been able to evolve and adapt in
their thinking to continue to
perform well.”
AN EVOLUTION
The evolution of private equity
in Cleveland includes focused yet
flexible approach to getting deals
done:
More firms are taking a
more targeted approach to deals,
focusing on specific types of
deals, industries or ownership
styles — all important criteria to
consider given the competitive
market.
“With so many private equity
firms bidding for good businesses,
this has become a much more
efficient market today. As a seller,
it’s great — however, if you’re
buying, it is much more challenging,” Marra says.
Primus Capital Director Scott
We’re proud to be
right here!
And that’s why we’ve called Cleveland
home for over 20 years. To learn more
about Riverside’s strategies to grow
companies with $1 million - $30 million
in EBITDA, contact:
Seelbach says while many firms
get away with it. But as company
began (and some remain) as genvaluations have gotten more
eralists, a trend toward building
robust, if you don’t understand
expertise in certain sectors is
the competitive landscape facing
taking hold.
the target company, you can
“We find that
make serious
focusing on
mistakes. Getting
“By bringing financial and
specific industry
deeply familiar
intellectual capital to the
sectors where we
the industable and looking at different with
have had past
tries in which
ways to help companies
success and can
companies comcontinue to
grow, it opens a broad slate pete helps mitileverage a
gate our risk
of opportunities.”
segment specific
and adds more
– Stewart Kohl, The Riverside Co.
knowledge base
value to the
is imperative
deal.”
to generate favorable returns.
Stewart Kohl, co-CEO of The
Within health care specifically, a
Riverside Co., says multi-sector
constantly evolving regulatory
specialists can thrive — with
and reimbursement landscape
good due diligence: “We like the
requires a significant amount of
generalist approach; it’s in our
focus to properly assess investDNA. But we succeed because
ment risks.”
we’re big on comparison shopMarra agrees: “When compaping and choosing only those
nies were relatively cheap, you
companies that offer the best
could invest in companies you
risk-reward opportunities for our
didn’t know much about and
investors.”
Why Cleveland?
What is it about Cleveland that
makes it a prime hub for private
equity deals? Cleveland private equity
insiders attribute it to three keys:
■ Diverse industries/
Fortune 500 history. While a
smaller number remain, a number of
Fortune 500-size corporations were
founded and headquartered in the region in the last century — giving root
to smaller support businesses. “Both
the large and small businesses have
developed a lot of management talent
Scott Gilbertson
Principal, Origination
sgilbertson@riversidecompany.com
that helped develop the private equity
community. There are resources that
were invested here decades ago that
continue to benefit the community
today,” says Tim Healy, senior vice
president of Linsalata Capital Partners.
Clusters of economic development and
manufacturing specialties in a variety
of company sizes (rubber, health
care, manufacturing, etc.) give Cleveland a competitive advantage, he says.
■ Midwest moxie. “Cleveland
and the Midwest in general are
CREATIVE
SOLUTIONS
THAT GET
DEALS DONE.
50 Public Square, 29th floor
20 offices
14 countries
4 continents
216.905.3350
Te r m i n a l To w e r, C l e v e l a n d , O H 4 4 1 1 3
r i v e r s i d e c o m p a n y. c o m
|
transactionalrisk.com
phone: +1 216 344 1040
STEVEN LEE, ESQ. ‡ JEFFERY PHILLIPS, CRM
Crain’s Cleveland Business Custom Publishing
20130128-NEWS--21-NAT-CCI-CL_--
1/22/2013
1:15 PM
Page 1
CORPORATE GROWTH & M&A
Advertisement
COMPLEMENTARY PLAYERS
FOTOLIA
DIFFERENT DEALS
Another key factor in the evolution of private equity in Northeast Ohio is that firms are taking
more interest in the operations of
the companies they are buying.
“Twenty years ago, we were
talking about how much to borrow from the bank to get a deal
done. Today, there is relatively
little talk on the financing side.
You have to do it well, obviously,
but now the question is ‘How are
we going to help the companies
we’ve invested in become more
profitable?’” Kohl says.
Tied to the operational focus is
that more owners are looking for
private equity partners not
because they want to sell and exit
the business but because they
want to grow.
“Recapitalization transactions
wouldn’t have been considered
10 to 15 years ago, but they can
be very profitable for both parties,”
hotbeds of lower middle market,
founder- and family-owned businesses,”
says Karen Tuleta, partner with
Morgenthaler Private Equity. “There
are a lot of high-value manufacturing
companies in Northeast Ohio, which
helps fuel the private equity deal flow.
They are deeply rooted in product
innovation and engineering talent.”
■ Organic growth. The
diverse, middle market company base
found in Cleveland keeps the deals
churning. “If you look at Detroit and
Marra says. “We’re seeing a lot of
older owners that are making a
decent living, love their company
but have their money wrapped up
in one asset. Recapitalizing the
business gives the founder deeper
pockets to invest back into the
company.”
Primus Capital’s Seelbach is
also seeing more minority deals
being consummated — taking
complete control and changing
management isn’t always the
order of the day.
“Some firms only want a
majority interest, but we’re seeing
success with tailored investment
structures where there is minority
control and the private equity
firm is adding more value at the
Board of Directors level with
growth strategies, leveraging contacts and evaluating acquisition
opportunities.”
Kohl says Riverside is seeing
more add-on acquisitions and
expects that trend to continue.
Pittsburgh, for example, those cities
are highly dependent on a narrow
slice of a particular industry. As those
companies became huge, they
dwarfed the abilities of local service
providers and went to New York City
to get capital,” says Stewart Kohl, coCEO of The Riverside Company. “In
Cleveland, the diverse middle market
and smaller Fortune 500 companies
are well-served by local providers. The
whole private equity ecosystem has
grown here and now people come to
Cleveland to pursue private equity.”
While deal structures and
targeted acquisitions continue to
evolve, a critical component of
private equity’s success in a given
geographic market — the presence
of complementary professional
service companies — has also
taken hold.
Attorneys, accountants, transactional advisory consultants,
investment bankers and commercial banking specialists all play
key roles in the deal-making
process — and Cleveland is
fortunate to have a robust cadre
of such specialists.
“The third-party private equity
resources within Northeast Ohio
are amazing and have helped
establish the region as a strong PE
community,” says Karen Tuleta,
partner with Morgenthaler Private
Equity.
Kohl says the growth of those
sectors has helped to keep Cleveland’s private equity hub thriving,
providing an economic boost to
the region.
“For a city our size, we are
blessed to have a rich pool of
human capital across all the
service firms. The private equity
network is a real economic engine
… we have a lot of smart people
making good investments and
creating wealth for our city.”
■
JANUARY 28 - FEBRUARY 3, 2013
S-5
Private equity
synergy at work
The synergistic relationships that exist in Cleveland’s
private equity world help set
it apart. Working together
to get a deal done, and
trends such as add-on
transactions taking hold,
makes PE hum:
Western Reserve
Partners introduces Morgenthaler
Private Equity to Avtron, an
Independence-based and family
owned business in November 2007.
Avtron operated three business units,
designing and manufacturing aerospace
test equipment, power generation test
equipment and high-end encoders and
drive systems for industrial automation.
After 53 years, the company’s family
owners were seeking liquidity and
assistance in management succession.
Morgenthaler transitioned a family owned
business to a PE-owned business, which
provided Avtron’s management team
with the framework to accelerate growth
initiatives while reducing costs and improving operational efficiency. At the time
of the recapitalization, creative transaction structuring facilitated the potential future divestiture of each business unit individually on a tax-efficient basis.
With Morgenthaler’s oversight, Avtron
made two successful add-on acquisitions. Avtron Loadbank, the power
generation test equipment business unit,
was sold in March 2012 to Emerson
Electric and Avtron Industrial Automation, the encoders and drive systems
business unit, was sold to Nidec in
September 2012. Both companies
plan to grow their respective Avtron
businesses in Independence.
Jones Day’s Cleveland office represented Morgenthaler on the initial acquisition and both sale processes.
KeyBanc and JP Morgan ChaseCleveland provided financing to Avtron
during the course of ownership.
Reason says:
M&A is the right
growth strategy.
Instinct says:
buying smart is the
right path to growth.
At Grant Thornton we specialize in
helping dynamic organizations execute
transactions successfully. We bring a
real, competitive advantage of a broad
perspective, senior staff attention and short
decision-making chains that our clients
truly value. To help unlock your potential,
visit GrantThornton.com/Deals.
Grant Thornton refers to Grant Thornton LLP, the U.S. member
firm of Grant Thornton International Ltd.
Crain’s Cleveland Business Custom Publishing
20130128-NEWS--22-NAT-CCI-CL_--
1/22/2013
1:16 PM
Page 1
CORPORATE GROWTH & M&A
S-6 JANUARY 28 - FEBRUARY 3, 2013
GETS THE DEAL DONE.
Will your purchase agreement
stop you from recovering losses?
EBITDA had been overstated by $1 million.
ou have just purYou think you must
chased XYZ Comhave a good claim
pany for a puragainst the seller to rechase price equal
cover your losses, since
to five times EBITDA
the purchase agreement
(Earnings Before Interest,
contains representations
Taxes, Depreciation and
that:
MICHAEL J.
Amortization). You
■ XYZ is in compliMEANEY
discover that XYZ is not
ance with all laws, and
McDonald
handicap compliant, and
■ The financial stateHopkins LLC
the required remedial
ments were accurately
work will shut down XYZ
prepared in accordance
for a week, resulting in lost profits. with generally accepted accountYou also discover that XYZ’s
ing principles.
By MICHAEL J. MEANEY
Y
Contact Mark Kiskorna at 216-222-8506 or
mark.kiskorna@pnc.com to find out how PNC
can get you the capital you need.
PNC and ACHIEVEMENT are registered marks of The PNC Financial Services Group, Inc. (“PNC”). PNC
Business Credit is the asset-based lending division of PNC Bank, National Association, a wholly owned
subsidiary of PNC. In Canada, PNC provides asset-based lending through PNC Bank Canada Branch.
In the U.K., loans are provided by PNC Financial Services UK Ltd., which is an indirectly wholly owned
subsidiary of PNC Bank, National Association. Lending products and services require credit approval.
*A portion of the financing provided by Steel Cit y Capital Funding, a division of PNC Bank N.A.
©2012 The PNC Financial Services Group, Inc. All rights reserved.
CIB PDF 1212-046-125205
I Am Private Capital
I was nervous when my
company was acquired by
private investors. But they
are putting their money to
work with new equipment
to add jobs and serve
more customers.
My job is the story of the
middle-market growth.
Private Capital drives middle market growth,
fuels job growth and builds communities.
Advertisement
Learn more at
WWW.MIDDLEMARKETGROWTH.ORG
Private Capital, Public Good.SM
Crain’s Cleveland Business Custom Publishing
Then you read in the back of
the purchase agreement that the
“losses” that you are able to recover
do not include “consequential
damages, lost profits or diminution in value.” Such disclaimers
are not unusual. According to a
recent study, 55% of private company deals contained a disclaimer
of the right to recover “consequential damages” and 17% of deals
contained a disclaimer of the right
to recover “diminution in value.”
The term “consequential damages” does not have a precise legal
definition but is commonly understood to mean those damages
that do not ordinarily result from
a breach of the contract and thus
were not reasonably foreseeable.
A court might conclude that the
profits lost during the week XYZ is
shut down for construction were
reasonably foreseeable and therefore, would not be considered
“consequential damages.” However,
depending upon how the term is
interpreted, the profits lost as a
result of the plant shutdown may
or may not be considered “consequential damages,” and therefore,
might not be recoverable.
Moreover, if the contract contained an exclusion from recovery
of “lost profits,” the buyer would
be out of luck. A buyer would
likely be very surprised that a purchase agreement would prevent
recovery of such clearly provable
losses that directly resulted from
the seller’s breach.
Turning to the $1 million overstatement of EBITDA, the buyer
may assume that he can recover
$5 million in damages – an
amount equal to the product of
the EBITDA overstatement ($1
million) times the EBITDA multiple (5) used to value the deal. Although this may seem to be the
best way of measuring buyer’s
loss, such recovery may be prevented by an exclusion for
“diminution in value” damages.
Thus, the buyer may be deprived
of any effective remedy for breach
of the most important representation in the entire purchase agreement – the accuracy of the financial statements.
The definition of “losses” is typically found deep in the fine print
of the purchase agreement. These
terms should be carefully reviewed
to make sure they do not defeat
the reasonable expectations of the
buyer.
■
Michael J. Meaney is co-chair,
Mergers and Acquisitions Practice, at
McDonald Hopkins LLC. Contact him
at 216-348-5411 or mmeaney@
mcdonaldhopkins.com.
20130128-NEWS--23-NAT-CCI-CL_--
1/22/2013
1:16 PM
Page 1
CORPORATE GROWTH & M&A
Advertisement
80/20 rule
applies in
deals, too
chase price was agreed upon? How are
accounts receivable and inventory to be
valued? What happens to obsolete or damaged inventory or past due or uncollectible
receivables?
Detail on payment terms other than
cash. If a seller note is “subordinated,”
what does that mean? When can buyer’s
lender stop seller from receiving note payments? Is the buyer credit worthy? Is there
any security for payment?
Rights of offset. Can the buyer stop
seller note payments if it “believes”
seller has breached the agreement, or should
the buyer be required to get the approval of a third party? If a party can
simply withhold payment to make
itself whole there is the potential
for unfair leverage in a dispute.
In that endless indemnity
provision, go right to the
“basket.” The dollar threshold for
making a claim and whether the
basket is a true “deductible” typiSTEVE ELLIS
cally have financial consequence
Tucker Ellis LLP
far more often than how long
representations survive or the
“cap” on total claims.
Focus on provisions
with financial impact
By STEVE ELLIS and JENNY BERLIN
T
he “80/20” rule appears in
business all the time.
Twenty percent of your
customers produce 80% of
your profit, 80% of your complaints, etc. You get the idea.
We believe something close to
the same ratio applies to most
acquisition agreements, at least in
terms of where clients might best
focus their attention. Your business lawyer needs to be an expert
on 100% of the deal documents,
and every provision has to be analyzed; but under the 80/20 rule, a
client should initially focus on the
key provisions that, in most instances, are likely to have the most
meaningful financial consequence.
3
4
5
Focus on the real money issues and
let your lawyer advise you on the
rest. Every deal has unique facts and
risk allocation issues, all of which
are important, but they also typiJENNY BERLIN
cally have a fairly standard set of
Tucker Ellis LLP
alternative solutions that any good
deal lawyer is well equipped to
Liabilities assumed. Paying the sellhandle. We suggest that you focus on the 20%
er’s bills (e.g., accounts payable and
that is likely to make the most difference. ■
accrued expenses) is the same as paying
cash. It all counts as purchase price.
Steve Ellis is a partner with Tucker Ellis LLP. Jenny
Adjustment for changes in working
Berlin is counsel with Tucker Ellis LLP. Contact Ellis
capital. What happens if the amount
at 216-696-2435 or stephen.ellis@tuckerellis.com.
of working capital at closing is less than
Contact Berlin at 216-696-5482 or
the amount that existed when the purjennifer.berlin@tuckerellis.com.
1
2
JANUARY 28 - FEBRUARY 3, 2013
S-7
Primary care revolution leads
to market consolidation
By SEAN DORSEY
T
he passing of the Patient Protection
and Affordable Care Act of 2010
(PPACA), commonly known as
“Obamacare,” is accelerating healthcare provider consolidation, particularly
with respect to primary care physicians.
The reasons for this acceleration are complex, yet vital in understanding the expected wave of M&A activity.
An outcome of the PPACA has been the
formation of new delivery models, including
Accountable Care Organizations (ACOs).
These new models of care, in conjunction
with the shift from inpatient settings toward outpatient care, are underscoring the
role of primary care physicians as the clinical center of care. The economic value of
primary care physicians, therefore, is increasing. A typical primary care physician
provides approximately $1 million of
downstream referral revenue for hospitals
and controls just over $12 million of
healthcare expenditures for every 2,000
patients.
At the same time, primary care practices
are experiencing dramatic cost pressures,
because smaller independently owned
practices are often unable to keep pace with
increased regulation and challenging reimbursement trends. According to Accenture, 12
years ago 57% of all physicians owned their
own practices. Today, independent physicians account for less than 39% of the total.
As a result, acquiring primary care practices has become a critical strategic objective for hospitals and health systems. Potential buyers recognize that a well-
SEAN DORSEY
League Park
Advisors
aligned primary care network will provide
significant cost advantages across the continuum of care, as reimbursement models
evolve from historical fee-for-service schemes
to bundled payment models. Hospitals
lacking a strong primary care foundation
will be challenged to compete in the current environment of evolving risk sharing.
Increasingly, physician groups and hospitals are seeking the expertise of dedicated
health care investment bankers to help
navigate the acquisition process. These
transactions require a unique understanding
of the complexities associated with
Medicare and Medicaid reimbursement, fair
market valuation requirements and a rapidly
evolving regulatory environment.
With the re-election of President Obama,
health care reform is here to stay. The new
economic realities of the health care marketplace will drive a sustained period of
ongoing provider consolidation.
■
Sean Dorsey is founder and CEO of League Park
Advisors. Contact him at 216-455-9990 or email
sdorsey@leaguepark.com.
Announcing a merger between
FRQğGHQFHDQGYDOXH
M & A is one of the quickest paths to growth. But it’s not always the surest.
That’s why at PwC, we help you understand the risks in your transactions, so
\RXFDQEHFRQğGHQWWKDW\RXDUHPDNLQJLQIRUPHGVWUDWHJLFGHFLVLRQV)URP
your deal negotiations, to capturing synergies during integration, we help
FOLHQWVJDLQYDOXH$QGXOWLPDWHO\GHOLYHUWKLVYDOXHWRVWDNHKROGHUV/LNH
ZHłYHGRQHIRUWKHPDMRULW\RIWKHWRSJOREDOSULYDWHHTXLW\DQG)RUWXQH
FRPSDQLHV/HYHUDJHWKHH[SHULHQFHRIRXUJOREDOQHWZRUNRIğUPV
Learn how at pwc.com/us/deals
© 2012 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further
details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Crain’s Cleveland Business Custom Publishing
Physician groups
and hospitals are
seeking the
expertise of ...
health care investment bankers
to help navigate
the acquisition
process.
20130128-NEWS--24-NAT-CCI-CL_--
1/23/2013
9:45 AM
Page 1
CORPORATE GROWTH & M&A
S-8 JANUARY 28 - FEBRUARY 3, 2013
Advertisement
Advice for first-time buyers
Understand the complexities of completing a deal
their family and what they hope
to enjoy in retirement.
enry Ford famously said,
Successful transactions, there“Whether you think
fore, must meet the personal
you can or can’t, you’re
goals of sellers while protecting
right.” When it
the financial goals of
comes to buying a busibuyers.
ness, the ability to effecBuyers also tend to
tively run a business is a
underestimate how long
different skill set than
it will take to successfully
what is required to comclose a transaction. Not
plete an acquisition. As
only does it take a signifia result, many successful
cant amount of time to
companies and/or execufind the appropriate
tives underestimate
target company, but the
LLOYD BELL
the complexities
amount of time required
Meaden &
involved in closing a
to woo and then wed will
Moore LTD
transaction.
probably take longer than
By far the largest hurdle that
buyers anticipate, for a number
buyers need to understand is that
of reasons.
sellers don’t have to be rational.
If outside financing will be
Buyers can develop all sorts of
required, buyers may find that
financial models projecting cerbanks are a little more measured
tain rates of return on various
in their approach then they had
capital structures, but sellers
been a few years ago. If real estate
rarely care. Their internal rate of
is involved in the deal, the cast of
return is not calculated on a
characters now includes engispreadsheet, but rather by what
neers and appraisers who may
they’ve been able to provide for
not share in the sense of urgency.
By LLOYD BELL
H
Finally, while legal and
accounting advisers of buyers
will be quick to respond, advisers
for sellers, who will likely be
losing a client as a result of the
transaction, may find compelling
reasons why a deal just isn’t
right.
While the closing of acquisitions will likely veer from original plans, buyers must remember
to stick to the program as closely
as possible. If specific steps drag
on, it’s better to close later than
to take short-cuts on due diligence.
If the economics change either
because of performance issues
by sellers or the capital being
made available, buyers must stop
and make sure that they are
working to close a deal that still
makes sense, not just working
to close a deal.
■
Lloyd Bell is the director of the corporate
finance practice at Meaden & Moore.
Contact him at 216-241-3272 or email
lbell@meadenmoore.com.
WE ARE ROETZEL.
0VS$PSQPSBUFBOE#VTJOFTT4FSWJDFTBUUPSOFZTQSPWJEFFYQFSJFODFEDPVOTFMUPDMJFOUTUISPVHIPVU
BMMTUBHFTPGCVTJOFTTEFWFMPQNFOU8FBSFUSVTUFEBEWJTPSTXIPXPSLXJUIPVSDMJFOUTBOEJOIPVTF
DPVOTFMUPBEESFTTUIFDIBMMFOHFTBOEPQQPSUVOJUJFTBTTPDJBUFEXJUIUIFGPSNBUJPOPQFSBUJPOBOE
TUSBUFHJFTGPSHSPXUIPGBMMUZQFTPGPSHBOJ[BUJPOT8FEFWFMPQTUSPOHQBSUOFSTIJQTXJUIPVSDMJFOUT
UPVOEFSTUBOEUIFJSCVTJOFTTFTWJTJPOTBOEHPBMT8FBSF3PFU[FMBOEPVSFYQFSUTBSFKVTUBQIPOF
DBMMPSBDMJDLBXBZ
'PSNPSFJOGPSNBUJPODBMMVTBU216.623.0150
0SWJTJUVTBUralaw.com/business_services
/ & 8 : 0 3 , t $ ) * $ " ( 0 t C L E V E L A N D t 5 0 - & % 0 t " , 3 0 / t $ 0 - 6 . # 6 4 t $ * / $ * / / "5 *
8" 4 ) * / ( 50 / % $ t 5" - - " ) " 4 4 & & t 0 3 - " / % 0 t ' 0 3 5 . : & 3 4 t / " 1 - & 4 t ' 0 3 5 - "6 % & 3 %" - &
Addressing conflicts
through an earn-out
contingent consideration
multiple of the target company’s
historical EBITDA (earnings before
hen acquirers and
interest, taxes, depreciation and
sellers don’t agree on
amortization) of $10 million. The
the value of the tarseller, however, believes that the
get company, the gap
acquirer’s price significantly unis almost always based on
dervalues the company,
the parties’ differing exbecause the seller is cerpectations with respect to
tain it will land a major
the future earnings —
customer that will insellers being more opticrease its EBITDA by
mistic than acquirers.
$3 million. The acquirer is
One way to bridge the
not willing to pay for an
gap is through a continuncertain future revenue
gent consideration mechstream that it may have
MICHAEL TUCCI little control over. The
anism, the most popular
Mansour, Gavin seller, on the other hand,
being the “earn-out.”
Gerlack &
With an earn-out, the
wants to enjoy the upside
Manos Co. LPA
amount of some portion
on the resources it exof the purchase price is
pended in securing the
contingent on the future earnings
customer. This disparity can be
of the company or the achievealigned through an earn-out,
ment of certain milestones and
which would allow for the purbecomes payable at a specified fuchase price to be increased to reture date.
flect the new revenue if and
For example, say the acquirer
when it happens. This eliminates
has priced the target by using a
the acquirer’s risk if the target
By MICHAEL TUCCI
W
Wherever your journey may
lead, take along someone
who can provide a true
sense of direction.
In transactions, the goal is to maximize value and minimize risk.
Choosing the right professionals to perform quality of earnings/
due diligence is crucial to the success of your acquisition.
Led by Mark B. Bober, CPA/ABV, CFF, CVA, BMF’s Transaction
Services Group is a dedicated team of professionals that supports
private equity groups nationwide.
AKRON | CLEVELAND
mbober@bobermarkey.com s 330.225.2425
Crain’s Cleveland Business Custom Publishing
20130128-NEWS--25-NAT-CCI-CL_--
1/23/2013
1:25 PM
Page 1
CORPORATE GROWTH & M&A
Advertisement
JANUARY 28 - FEBRUARY 3, 2013
S-9
Controlling the uncontrollable
By TOM BECHTEL
M
aking an acquisition
or selling a company
is as much a game of
timing as it is anything else, and having the right
fit at the wrong time is particularly frustrating. Generally, poor timing boils down to one or more of
the following constraints:
■ Funding Advanced Notice:
While the credit freeze has started to thaw, it is difficult to rush a
transaction through. Proper due
diligence by the buyer and the
bank or equity source is critical,
especially when maximizing the
use of leverage in an acquisition.
isn’t really what they are
■ Seller Preparation:
looking for to achieve
Private companies can be
specific strategic objeccaught off guard by due
tives. From the seller’s
diligence. Without outperspective, there is too
side pressure, statements
much anticipated growth
may be prepared on anto sell now.
other accounting method
What to do when
not in accordance with
faced with the right deal
GAAP, interim reports can
TOM BECHTEL
at the wrong time?
be irregular and certain
Cohen & Co.
■ Be patient: Utilize
activities may be driven
quality advisers and give the othprimarily by tax benefits. Such
er side time to prepare for due
practices are fine for a private
diligence.
company but can lead to deals
■ Find solutions: If a seller
being delayed or halted due to
wants to keep milking the “cash
the lack of understanding of recow” for a few more years, offer
sults from the buyer’s perspective.
insight as to the potential down■ Strategic Priorities: From the
side implications, particularly if
buyer’s perspective, the deal just
customer isn’t landed and allows the
seller to realize the upside if it is.
Earn-outs, however, have risks.
A business litigator I know once
told me, “I’ve never met an earnout I didn’t like.” They are often
contested and end up in court for
resolution, which greatly helped
his revenue. To avoid problems at
payout time, the parties should
carefully craft an earn-out provision up front in the purchase
agreement keeping the following
in mind:
1
Earn-outs work best when the
seller stays involved with the
target company after the sale.
2
Keep the financial structure
simple. For example, a flat percentage of earnings or revenue is
easier to calculate and less likely to
lead to disputes than complicated
formulas.
3
Make milestones and metrics as
objective as possible. For example, gross earnings are a more
objective metric than net earnings, because net earnings provide
the opportunity to fight over how
expenses and write-offs are calculated and applied.
4
For a seller, it is important that
it has control over the contingencies that affect the goals, such
as making sure the acquirer has
and is willing to commit sufficient
resources. On the other hand, the
acquirer needs to protect its flexibility to change its overall business objectives.
5
Keep the earn-out period as
short as possible. Longer
periods provide more time for
disputes as well as diluting the
value of the target company as it
becomes more integrated into the
acquirer’s business, making payout calculations more difficult.
In short, earn-outs can provide
an effective way for acquirers and
sellers to bridge valuation gaps
provided that they are well crafted
and carefully documented up
front.
■
Michael R. Tucci is an attorney with
Mansour, Gavin Gerlack & Manos Co.,
LPA and counsels his clients on business
and intellectual property matters. Contact
him at 216-523-1500. More information
is available at www.mggmlpa.com.
Crain’s Cleveland Business Custom Publishing
the key owner does not have a
solid succession plan.
■ Be flexible: Not every buyer
or seller is going to fit with all
the desired criteria. If the ideal isn’t
there when wanted, don’t ignore
strategic priorities and take whatever is available.
The more prepared you are as
a seller and the more qualified
opportunities you have in your
pipeline as a buyer, the better positioned you are to hedge against the
timing issue that may hinder a
great potential opportunity.
■
Tom Bechtel is a CPA and director of
transaction services at Cohen & Co.
Contact him at tbechtel@cohencpa.com.
20130128-NEWS--26-NAT-CCI-CL_--
1/22/2013
1:18 PM
Page 1
CORPORATE GROWTH & M&A
S-10 JANUARY 28 - FEBRUARY 3, 2013
Tax considerations for
carve-out financial statements
the carved-out business. Identifying these assets upfront facilitates
s companies focus on core
allocating the deferred tax-related
strategies to sustain future
items associated with the assets to
growth, many are finding
be bifurcated. Further, careful examthe divestiture
ination of the legal entity
component of transacstructure helps identify
tions has grown in size
the particular jurisdicand complexity. Synthetions where the carve-out
sizing information relatbusiness will operate, proed to tax provisions is ofviding guidance as to the
ten one of the most
appropriate statutory tax
complex aspects of
rates and compliance
preparing carve-out fiwith applicable tax laws.
GIOVANNI F.
nancial statements in
Calculating and reportconjunction with a diing deferred tax assets
DI CENSO
vestiture. Among the spe- Deloitte Tax LLP
associated with the comcific tax areas to consider
pany’s attributes, such as
are the legal entity structure and denet operating losses and various
termination of tax attributes.
credits, poses distinct challenges
Accounting data used in tax rewhen preparing carve-out stateturns are prepared on a legal-entiments. A company should start by
ty basis. Consequently, determintracking the attributes and related
ing which legal entities comprise
deferred items associated with the
the business segments or divisions
legal entities that comprise the
to be carved out will help detercarve-out statements. These attribmine whether relevant tax inforutes may be adjusted for any acmation exists for these entities
counting push-down adjustments
and how to extract needed data.
that are recorded as part of the
Sometimes only a part of a legal
carve-out process.
entity’s net assets are included in
Further carve-out adjustments
By GIOVANNI F. DI CENSO
A
may be needed to
show how the
company would
look if operating on
a stand-alone basis. If the tax attributes recorded in the carve-out
financial statements are materially
different from those actually assigned to legal entities that comprise
the carve-out group, it may be necessary to add comments in the tax
footnote to explain the discrepancies.
Finally, the company should
determine the likelihood that the
carved-out operations will realize
deferred tax assets in the future
and assess the need for an appropriate valuation allowance.
For divestitures requiring carveout financial statements, companies should seek the upfront involvement of tax professionals to
address the key tax matters that
may ultimately increase the likelihood of a successful transaction. ■
Giovanni F. Di Censo is a principal in
M&A Transaction Services at Deloitte Tax
LLP. Contact him at 216-589-5150 or
email gdicenso@deloitte.com.
WEATHERING
A STORM?
WE’LL GET YOU BACK TO BUSINESS.
Advertisement
Four principles
can help guide
a successful
divestiture
B
uying or selling a
company is a complex
process, fraught with risk
and uncertainty. That’s
why buyers have historically used
due diligence to help reveal hidden risks or opportunities that
will help them negotiate a better
price.
The frenzied markets of the
past put the seller at an advantage, because heavy competition
for businesses hampered the
buyer’s due diligence process.
Now, in a tougher, post-Great
Recession deal market, the smaller
pool of likely buyers and increased
demands from banks heighten
the need for extensive buyer due
diligence and lengthen closing
time frames. Now more than
ever, the seller shoulders the burden of being prepared. You must
know what the buyer will need to
know or risk deal failure, missed
value targets or stumbling along a
protracted timeline.
While sellers may think they
know their divestiture target’s
operations inside and out, they
are usually too close to the business to look at it from a buyer’s
perspective, making it difficult to
clearly understand its value
and viability
on a stand-alone
basis.
This is particularly true when
the target is part
of a division or
a product line,
especially if the
business has
been ignored or is underperforming.
Failure to see the target through
the buyer’s lens increases the
odds that the buyer’s diligence
findings will derail the transac-
CLEVELAND’S BUSINESS DIVORCE LAWYERS
BUSINESS BREAK-UPS and PARTNERSHIP DISPUTES can be turbulent. It takes a specialized
law firm to help weather a storm. Ciano & Goldwasser - we’ll get you back to business.
Andy Goldwasser & Phil Ciano
Selected by their peers as two of the
“Top 50” Lawyers in Cleveland and “Top 100” Lawyers in Ohio.
cianogoldwasser.com/businessdivorce | 216-658-9900
Crain’s Cleveland Business Custom Publishing
tion, weakening the seller’s
hand at the negotiating table
and destroying value while
employees, customers and stakeholders jump ship and head for
safer ground.
A robust divestiture preparation process can help sellers successfully exit their businesses in a
shorter time frame, avoid sale
price erosion at the negotiating
table, minimize distractions to
the core business, and ultimately
derive the desired value from the
sale.
In a divestiture setting, one
way to avoid value erosion is
to design and implement a
process that supports rapid deal
completion. To accomplish this,
most successful sellers in today’s
market use a thorough process
that follows the four guiding
principles of successful divestitures:
1
Plan for all aspects of the
divestiture process
■ Establish scope, goals and
objectives of the transaction
■ Develop a divestiture project plan
■ Determine what’s left behind
2
Present
financial
information
tailored for
the deal
■ Evaluate
information
requirements and
articulate a “bridge”
■ Describe
the business in a
clear and cohesive manner
■ Address the potential need for
carve-out audited financial statements
See DIVESTITURE Page S11
20130128-NEWS--27-NAT-CCI-CL_--
1/23/2013
1:24 PM
Page 1
CORPORATE GROWTH & M&A
Advertisement
JANUARY 28 - FEBRUARY 3, 2013
S-11
M&A fees: How much will this trophy cost me?
Proper game
management
can keep costs
under control
By CHRISTOPHER REUSCHER
and SARAH BAKER
“Individual commitment to a group effort
– that is what makes a team work, a
company work, a society work, a civilization work.” — Vince Lombardi
I
f closing a transaction is akin
to winning the Super Bowl,
then all of the players need to
work as a team to keep legal
fees under the proverbial salary
cap.
HALFTIME:
due diligence
An essential part of a transaction for a buyer, due diligence also
presents the seller with an opportunity to keep legal fees in check.
The level of the client’s preparation for, and participation in, the
diligence process has a direct correlation to the amount of time
and fees saved during, for example, the preparation of the schedules to the purchase agreement.
SECOND HALF:
the definitive agreement
The other side cannot be fully
driven toward the ultimate goal.
Withholding information and
re-trading on issues is costly and
erodes trust between the parties.
Stay focused and keep attitudes in
check.
CHRISTOPHER
REUSCHER
Roetzel &
Andress
SARAH BAKER
Roetzel &
Andress
controlled; however, understanding
your opponent’s tendencies and
motivations avoids “reactive” and
inefficient negotiating. Furthermore, fair play keeps the players
VICTORY
TWO-MINUTE WARNING:
agreement to closing
With any luck, the teams have
avoided overtime for post-closing
issues. While both sides emerge
successful, the real winner will be
the team that followed the game
plan that was put in place early in
the process. Celebrate with a trip
to Disneyland, and get ready for
next season.
■
The agreement is signed, but
what conditions must be fulfilled
prior to closing? Again, preparation is key to keeping costs at or
below budget. Have a closing
agenda prepared and a twominute drill in place for any
last-minute obstacles.
Christopher Reuscher is a partner
at Roetzel & Andress. Contact
him at 330-762-7994 or email
creuscher@ralaw.com. Sarah Baker is
an associate at the firm. Contact her at
330-762-7985 or email
sbaker@ralaw.com.
PRESEASON:
engaging counsel
The first step in managing legal
fees is to engage experienced
counsel prior to drafting the letter
of intent. The likelihood of a successful transaction is exponentially higher and a seller’s leverage
typically strongest if counsel is involved at this juncture.
FIRST HALF:
communication and
fee structures
Candid communication is crucial to developing a game plan focused on client objectives, resources and expectations. All
players should consider alternative
fee structures such as fixed fees per
deliverable, capped fees, flat fees
per period (i.e. monthly or quarterly), and/or discounted hourly
rates with a performance-based
holdback. Legal fees generally escalate later in the game unless the
team has previously implemented
a strategy to manage such costs.
Divestiture
continued from Page S10
3
Prepare, prepare, prepare
■ Identify operational issues/opportunities and anticipate questions/requests
■ Plan for key terms in the purchase
agreement
■ Validate forecast assumptions and
bridge to historical results
■ Provide stand-alone cost estimates
4
Position for the exit
and execute
■ Managing the process
■ Drafting of transition service
agreements
■ Tax structuring
■ Maintaining a competitive process
A thorough preparation process
is crucial to a successful divestiture
in today’s market. Such process
arms a seller with the critical information needed to present the
business most effectively, address
deal issues early on, answer challenging questions and boost value
for the assets in play.
■
Brian Kelly is the PwC Cleveland Deals
partner. Contact him at 216-875-3121
or email brian.kelly@us.pwc.com.
Crain’s Cleveland Business Custom Publishing
20130128-NEWS--28-NAT-CCI-CL_--
1/23/2013
11:25 AM
Page 1
CORPORATE GROWTH & M&A
S-12 JANUARY 28 - FEBRUARY 3, 2013
Advertisement
>hWK/Ed W/d>WZdEZ^
ůƵĞWŽŝŶƚĂƉŝƚĂůWĂƌƚŶĞƌƐŚĂƐĂϮϮͲLJĞĂƌŚŝƐƚŽƌLJŽĨ
ƉĂƌƚŶĞƌŝŶŐǁŝƚŚĞŶƚƌĞƉƌĞŶĞƵƌƐĂŶĚŵĂŶĂŐĞŵĞŶƚ
ƚĞĂŵƐƚŽŝŶǀĞƐƚŝŶĂŶĚŐƌŽǁůŽǁĞƌŵŝĚĚůĞͲŵĂƌŬĞƚ
ĐŽŵƉĂŶŝĞƐŐĞŶĞƌĂƟŶŐΨϮϬŵŝůůŝŽŶƚŽΨϮϬϬŵŝůůŝŽŶ
ŝŶƌĞǀĞŶƵĞ͘dŚƌŽƵŐŚŝƚƐĚŽŵĞƐƟĐŽĸĐĞƐŝŶƚŚĞ
DŝĚǁĞƐƚ͕^ŽƵƚŚĞĂƐƚĂŶĚtĞƐƚŽĂƐƚ͕ůƵĞWŽŝŶƚ
ĞŵƉůŽLJƐĂƌĞŐŝŽŶĂůƐŽƵƌĐŝŶŐŵŽĚĞůĨŽĐƵƐĞĚŽŶ
х
ĐŽŵƉĂŶŝĞƐŝŶƚŚĞĨŽůůŽǁŝŶŐƐĞĐƚŽƌƐ͗
ŚĂƌůŽƚƚĞ
ůĞǀĞůĂŶĚ
^ĞĂƚƚůĞ
ͻEŝĐŚĞDĂŶƵĨĂĐƚƵƌŝŶŐ
^ŚĂŶŐŚĂŝ
ͻ/ŶĚƵƐƚƌŝĂůĂŶĚŽŵŵĞƌĐŝĂůƵƐŝŶĞƐƐ^ĞƌǀŝĐĞƐ
х
ͻsĂůƵĞͲĂĚĚĞĚŝƐƚƌŝďƵƟŽŶ
ůƵĞWŽŝŶƚ͛ƐŽƉĞƌĂƟŶŐŶĞƚǁŽƌŬĂŶĚĐĂƉĂďŝůŝƟĞƐŝŶ
ŚŝŶĂĞŶĂďůĞƚŚĞĮƌŵƚŽďƌŝŶŐĂŐůŽďĂůƉĞƌƐƉĞĐƟǀĞ
&ŽƌŵŽƌĞŝŶĨŽƌŵĂƚŝŽŶ͕ǀŝƐŝƚ
ǁǁǁ͘ďůƵĞƉŽŝŶƚĐĂƉŝƚĂů͘ĐŽŵ
ŽƌĐŽŶƚĂĐƚ
ŚŝƉŚĂŝŬŝŶϮϭϲ͘ϱϯϱ͘ϰϳϬϲ
WĂƌƚŶĞƌ
ĐĐŚĂŝŬŝŶΛďůƵĞƉŽŝŶƚĐĂƉŝƚĂů͘ĐŽŵ
ĂŶĚƵŶŝƋƵĞƌĞƐŽƵƌĐĞƐƚŽďĞĂƌ͕ŝŶĂĚĚŝƟŽŶƚŽĐĂƉŝƚĂů
:ŽŚŶ<ŝƌďLJϮϭϲ͘ϱϯϱ͘ϰϳϬϮ
WĂƌƚŶĞƌ
ĂŶĚƚƌĂŶƐĂĐƟŽŶĂůĞdžƉĞƌŝĞŶĐĞ͕ƚŽĨŽƐƚĞƌŐƌŽǁƚŚĂŶĚ
ũŬŝƌďLJΛďůƵĞƉŽŝŶƚĐĂƉŝƚĂů͘ĐŽŵ
:ŽŚŶ>ĞDĂLJϮϭϲ͘ϱϯϱ͘ϰϳϬϳ
WĂƌƚŶĞƌ
ĂĚĚǀĂůƵĞƚŽŝƚƐƉŽƌƞŽůŝŽĐŽŵƉĂŶŝĞƐ͘
ũůĞŵĂLJΛďůƵĞƉŽŝŶƚĐĂƉŝƚĂů͘ĐŽŵ
^ĞĂŶtĂƌĚϮϭϲ͘ϱϯϱ͘ϰϳϬϱ
WĂƌƚŶĞƌ
ŽŵƉůĞƚĞĚŽǀĞƌϭϬϬŝŶǀĞƐƚŵĞŶƚƐǁŝƚŚĂ
ƚŽƚĂůƚƌĂŶƐĂĐƟŽŶǀĂůƵĞŶŽƌƚŚŽĨΨϮďŝůůŝŽŶ͘
Sophisticated buyers on the hunt
By ANDREW K. PETRYK
Financial performance
B
Buyers seek stable and predictable revenue and cash flow —
a performance profile that indicates a company has outperformed its competition. Outperformance typically means a
resilient top line — a higher rate
of growth in strong markets or a
slower rate of decline in weak
markets — and a strong EBITDA
margin. Depending on the industry, the EBITDA margin threshold
for many buyers of manufacturing companies is
15% or higher. Companies with an accelerating
trend in margin performance receive significant
interest.
ƐǁĂƌĚΛďůƵĞƉŽŝŶƚĐĂƉŝƚĂů͘ĐŽŵ
Facebook.com/CrainsCleveland
JOIN THE CONVERSATION
Twitter.com/CrainsCleveland
SS&G is pleased to welcome
ROSS VOZAR.
Ross joins the transaction advisory services team as an
associate director focusing on advising private equity
and corporate clients with acquisition and divestiture
activity, including
■
■
■
■
■
Flight to quality
continuing into
the New Year
due diligence
integration planning and implementation
synergy identification and capture
valuation
divestiture planning
eauty is in the eye of the
beholder, and sophisticated
buyers know quality when
they see it. High quality
companies command the attention of buyers and lenders and
stir up a feeding frenzy when they
come to market, driving attractive
deal terms and premium valuations.
High quality companies possess
four common characteristics —
seasoned, forward-thinking management teams; a
culture of innovation;
strong financial performance and visible and
quantifiable growth
opportunities:
Leadership
ANDREW
K. PETRYK
Buyers are looking for
Buyers want companies
strong leadership at the
Brown Gibbons
that can substantiate prohelm and a deep bench of Lang & Co. LLC
jections with quantifiable
senior executives with a
growth opportunities.
global perspective. Quality manNew product launches, new cusagement teams have demonstrattomers under contract, detailed
ed the ability to navigate through
backlogs and completed cost redifferent business and economic
duction initiatives are some of
cycles and to identify, motivate,
the tangible improvements buyand retain top talent. They have
ers look for to support financial
invested in the necessary inforprojections. The more “real” fumation systems to measure and
ture growth looks and feels to buymonitor operating performance.
ers, the more aggressive they are
They are committed to the future
in the bidding process.
growth of business.
Culture of Innovation
SS&G TAS is growing to meet the increasing needs
of clients and the marketplace. To learn more,
please contact Scott McRill at 440-248-8787 or visit
www.SSandG.com/TAS.
www.SSandG.com
Visible and
quantifiable growth
Globalization has made attaining and maintaining a marketleading position increasingly
challenging. The ability to grow
market share through the introduction of new products and
services, market expansion and
customer diversification is essential. High quality companies routinely refresh product and service
offerings to remain relevant and
competitive. Innovation leaders
strive to have 25% or more of
annual revenues from products
and services that are less than
3 years old.
Crain’s Cleveland Business Custom Publishing
A finite number of high quality
companies are in the market today, so buyers are paying up to
win auctions. Strategic acquirers
have stockpiles of cash at the
ready, private equity firms have
billions in dry powder to deploy,
and lenders are supporting both
groups with aggressive debt packages. This confluence of available
capital will drive deal activity and
values well into 2013 and beyond
for high quality companies.
■
Andrew K. Petryk is managing director
and principal of Brown Gibbons Lang &
Co. LLC. Contact him at 216-920-6613
or apetryk@bglco.com.
20130128-NEWS--29-NAT-CCI-CL_--
Advertisement
1/22/2013
1:21 PM
Page 1
CORPORATE GROWTH & M&A
JANUARY 28 - FEBRUARY 3, 2013
S-13
Sell-side due diligence
Requirements of
becoming more common purchase accounting
fore going to market. Every company has its strengths, weaknesses,
hether it’s the single
risks and opportunities. When a
owner of a family busiseller identifies and confronts the
ness preparing for reissues ahead of time, it can better
tirement or a large cormanage the discussion around
poration pursuing strategic
these topics, present them to the
alternatives through the divestibuyers in a light that is most favorture of a business unit, the sale of a BRIAN LEONARD able to the company and focus the
business is a complex transaction
negotiations on the entity’s
Grant Thornton
filled with uncertainty. While acstrengths and opportunities.
LLP
quirers have traditionally engaged
The sell-side due diligence
an army of professional service providers
process can also help assemble
to perform due diligence, identify risks and
financial information that is complete and
strengthen their negotiating position, soaccurate. Financial information that is
phisticated sellers are increasingly engagtransparent and reconciles to the underlying
ing these advisers to perform sell-side due
financial records lends credibility to mandiligence prior to opening up the business
agement, minimizes surprises during buyfor sale.
side diligence and provides the seller
Sell-side due diligence involves the seller
with a dress rehearsal prior to its interactaking an objective look at the quality and
tions with the advisers of the potential
sustainability of its earnings, determining
buyer. This effort can expedite the sales
the reasonableness of its forecasts, underprocess by streamlining the buyer’s due
standing its historical working capital rediligence, thereby protecting shareholder
quirements and identifying potential tax
value.
exposures by standing in the shoes of
Sell-side due diligence is just one facet of
potential suitors. While nobody knows the
a transaction readiness strategy that many
business better than the business owner,
sophisticated sellers effectively employ. By
many sellers may be too close to the busiidentifying and getting ahead of the issues
ness to identify risk areas that may comearly in the process, sellers can proactively
promise valuation or certainty to close. Sellmanage the discussions and drive efficiency,
ers are increasingly looking outside in
certainty and value throughout the transperforming this critical assessment.
action.
■
Sell-side due diligence procedures assist
a seller in understanding financial and tax
Brian Leonard is director, Transaction Advisory
exposures and opportunities, and proacServices, with Grant Thornton LLP. Contact him at
tively addressing these identified issues be216-858-3539 or brian.leonard@us.gt.com.
By BRIAN LEONARD
W
By PAUL WOZNICKI
I
property, plant, and equipment are identified as part of a business combination,
they are measured as of the transaction
date at fair value in accordance with the
principles of ASC 820 — in essence, the
value that would be received in an armslength transaction.
n the U.S., whenever a company experiences a business combination or
event whereby the acquirer obtains
effective control of another business,
the acquirer is subject to generally accepted
accounting principles (GAAP) that require
the allocation of the purchase price under
Intangible asset valuations: The
the requirements of purchase accounting identification and subsequent valuation of
ASC 805 (formerly SFAS 141r).
intangible assets can be significantIn simplest terms, ASC 805 rely more complex and require the
quires all consideration transferred
use of a wide range of valuation
(i.e. “purchase price”) to be meamethods. When valuing intangible
sured at the acquisition date at fair
assets, the acquirer must consider
value. This includes any and all assets
asset characteristics such as separatransferred, liabilities assumed (inbility and/or contractual or legal
cluding contingent liability considright considerations. Typical intanerations), and if applicable, any equity
gible assets with finite lives might
PAUL WOZNICKI include trademarks, brand names,
interests issued by the acquirer.
SS&G
non-compete agreements, cusPurchase price allocation:
tomer lists, and patents.
Although a fairly complex process in pracThe application of purchase accounting
tice, the allocation of purchase price in its
with all its nuisance and ultimate determimost basic form generally involves three steps:
nation of value of purchased assets is a
Identifying and assigning a fair value
highly sophisticated process that requires a
to all tangible assets acquired
sound understanding of accounting princiIdentifying and assigning a fair value
ples. Companies often need the assistance
to all identifiable intangible assets
of professional accountants experienced in
with finite lives
valuation services to properly identify and
Determining the residual positive or
determine acquired-asset values.
■
negative “goodwill” associated with
the transaction
Paul Woznicki, CPA, is a director in the
Transaction Advisory Services department
Tangible asset valuations: Once tanof SS&G. Contact him at 330-668-9696 or
gible assets such as working capital or
email PWoznicki@SSandG.com.
1
2
3
is proud to join ACG in recognizing our longstanding client
and the other 2013 Deal Maker Award Winners.
We are honored to have been legal counsel to RPM for more than 40 years, including the
2011-2012 acquisitions of Synta, Inc., Kirker Enterprises, Inc., and Multicolor Specialties, Inc.
Calfee’s Corporate/M&A Group: Helping deal makers get deals done for 110 years.
Calfee, Halter & Griswold LLP
Calfee.com
216.622.8200
The Calfee Building, 1405 East Sixth Street, Cleveland, Ohio 44114
Crain’s Cleveland Business Custom Publishing
Cleveland | Columbus | Cincinnati
20130128-NEWS--30-NAT-CCI-CL_--
1/23/2013
11:52 AM
Page 1
CORPORATE GROWTH & M&A
S-14 JANUARY 28 - FEBRUARY 3, 2013
Advertisement
What is your corporate M.P.G.?
Indicators show
which firms get
better mileage
By MICHAEL F. PAPARELLA
C
orporate M.P.G., as
defined here, is different
from what might first
come to mind. It is not a
reference to the average miles per
gallon of your corporate fleet.
Instead it is a high level indication
of the quality of your company as
perceived by the marketplace.
In Corporate M.P.G., M denotes
management team, P indicates
past performance, and G repre-
sents growth
potential. Most
investors and
lenders look to
these attributes
when assessing
quality companies.
Quality of the
MICHAEL F.
management
PAPARELLA
team is most
Candlewood
important. In
Partners LLC
the ideal situation, each member of the management team is a strong performer
and each highly important position among the management roster
is occupied. The highly important
slots include the CEO, CFO, COO
and head of sales and marketing.
The quality of these performers
Most investors and
lenders look to (the M.P.G.)
attributes when assessing
quality companies.
can be assessed in the quality of P
and G, and it is rare that P and G
will be high without a strong
management team.
Past performance is the most
often cited attribute when assessing
an investment. It is natural to
infer that past performance indicates future results. However, we
all know that is not true. Nonetheless, understanding the company’s
past business plans and goals and
assessing the management team’s
See M.P.G. Page S16
Carefully prepare for selling family held businesses
By ALBERT D. MELCHIORRE
T
he sale of a business is a
once-in-a-lifetime endeavor
for most family held business owners. I would like
to offer some advice to the owners of family held businesses about
having a successful merger and
acquisition (M&A) sales process.
To begin, it is important that
you are prepared and have your
house in order. This preparation
starts first with the business. There are areas to
focus on that will result in
a smoother process and
help maximize the value
of the business. These
include improving operational efficiencies, complying with environmental laws and regulations,
having accurately prepared monthly and yearly
financials (review or audit),
ALBERT D.
MELCHIORRE
MelCap
Partners LLC
ensuring the right management personnel are
in the right positions,
and if retiring after the
sale, identifying your
successor.
The M&A process will
be a distraction to your
business as the process
can take between 6 to 12
months from the time
your investment banker
is hired. It is important
that you manage your business
through this process in order to
avoid negative surprises. You
want to make sure the business is
performing at optimal capacity
throughout the process.
Once you have your house in
order, and before you begin the
process, assemble a strong M&A
deal team. This will include an
experienced M&A attorney,
accountant, investment banker
and investment adviser. Based on
Crain’s Cleveland Business Custom Publishing
the input of this team, it is important to determine whether your
valuation goals and objectives can
be met given the current state of
the M&A market.
You will also need to make sure
you have thoroughly thought out
what you would like your role to
be post-closing. The following are
important questions to think
through carefully: Are you looking
to retire immediately after closing?
Do you have your successor in
place? Would you like to roll over
a small portion of your proceeds
to participate in the future growth
20130128-NEWS--31-NAT-CCI-CL_--
Advertisement
1/23/2013
1:23 PM
Page 1
CORPORATE GROWTH & M&A
JANUARY 28 - FEBRUARY 3, 2013
S-15
M&A outcome depends on company quality
By KEVIN WHITE
T
hroughout 2012 and into
2013, Western Reserve
Partners has seen “A Tale
of Two M&A Markets.” For
companies with good market positions, solid margins, strong management teams and steady performance through the recent
downturn, it has been the best of
times, with strong buyer interest
and high multiples paid.
For companies with elements of
weakness, such as succession issues,
high capital intensity, customer
concentration or exposure to recession-sensitive end markets, the
M&A market has been dramatically
different, with far less buyer interest and relatively low prices paid.
Buyers remain concerned
Strategic and financial buyers
about the strength and
have both been very
durability of the current
active. For the best comrecovery. Without confipanies, financial buyers
dence in a rising ecohave shown a willingness
nomic tide to lift all
to pay prices normally
ships, buyers are engagseen only from strategics.
ing in rigorous due diliIn instances where strategence. Target companies’
gic buyers are confident
results are being monithat they have found the
KEVIN WHITE
tored very carefully durright fit, they are willing
Western Reserve
ing the course of the deal
to outbid the financial
Partners
process to maintain asbuyers by paying the
surance that the business is
seller for a portion of the expected
performing to plan. Those that
synergies. But when the fit isn’t
don’t are being hit hard, with
quite right, they are quite conserdeals being re-cut or called off
vative, choosing instead to
due to relatively modest misses.
maintain their current large cash
balances.
Financial sponsors have also
become more active sellers of
businesses over the past year,
with the healthy M&A environment, relatively strong portfolio
company financial performance
and impending tax changes
making this a good time to sell.
Nonetheless, a significant portion of those sell-sides have been
to other financial sponsors,
implying ongoing caution on
the part of corporate acquirers.
While expected changes in the
tax environment helped spur a
significant portion of 2012’s
M&A activity, tax remains funda-
of the business in order to get a
“second bite of the apple?”
Finally, try to keep an open
mind. You do need to keep your eyes
focused on the end game of
achieving your goals and objectives
and need to treat each interested
buyer as if they are “the one.” With
that being said, make sure you perform your own due diligence on the
buyer to ensure it is a good fit. ■
Albert D. Melchiorre is president and
founder of MelCap Partners, LLC, a middle
market investment banking firm. Contact
him at 330-239-1990 or al@melcap.co.
Crain’s Cleveland Business Custom Publishing
mentally a secondary driver. Other
drivers, such as owner retirement
and the need to realize returns
for private equity investors, continue to bring new supply to the
market regardless of the tax environment. Western Reserve expects
2013 to be no different in this
regard. Based on current pitch
activity and new deal generation,
we are optimistic that 2013 will
be another solid — if not strong —
year in the M&A market.
■
Kevin White is a director with Western
Reserve Partners. Contact him at
216-589-9536 or email kwhite@
wesrespartners.com.
20130128-NEWS--32-NAT-CCI-CL_--
1/22/2013
1:23 PM
Page 1
CORPORATE GROWTH & M&A
S-16 JANUARY 28 - FEBRUARY 3, 2013
Advertisement
Benefits of combining
asset-based lending
and syndicated
financing for M&A
M.P.G.
continued from Page S14
By LAURIE MULLER-GIRARD
and AMY CARLSON
T
he combination of historically low interest rates and
waning enthusiasm for
waiting out the sluggish
economy could mean increased
merger and acquisition activity
in 2013. Prospective buyers, with
asset-rich balance sheets, may
wish to consider financing strategies that combine an asset-based
working capital revolver with
longer term debt via the syndicated
term loan or high-yield bond
market.
Asset-based loans (ABL) are
offered on a revolving basis and
are collateralized by a company’s
assets, including accounts receivable and inventory. A syndicated
loan is typically structured and
priced by a lead arranger or agent
who then sells portions of the
credit to other lenders or investors
under terms negotiated by the
agent. Today’s more diverse
investor base often requires that a
loan be structured to meet the
needs of the market.
Syndicating asset-based deals
requires a particular set of skills —
a combination of expertise in both
asset valuation and syndication.
Borrowers should look for lenders
who understand their industry
and business strategy and offer
integrated asset-based lending,
LAURIE MULLERGIRARD
KeyBank
Business Capital
AMY K. CARLSON
KeyBanc
Capital Markets
debt capital market offerings and
sector expertise.
In some cases, a borrower could
rely on ABL only. Larger transactions may require a different
approach. For example, a wellknown retail company considering expansion may benefit by
using an ABL collateralized by its
receivables and inventory as well
as the brand name’s appraised
value. The ABL facility offers low
pricing and flexibility.
If the business requires more
debt financing than is available
through a standard ABL, it may
need to layer in another form
of debt such as subordinated or
mezzanine debt, institutional term
loans or high-yield bonds.
Financing through subordinated
or mezzanine debt could fill a hole
in the capital structure and is less
expensive than equity. An institutional term loan with a second
lien on working capital assets and
a first lien on property and equipment could also bridge the gap.
This financing has variable rates
and can be pre-paid, sometimes
with minimal cost. If the business
generates strong excess cash flow,
this option enables the business
owner to reduce debt quickly.
A high-yield bond offering may
be the best option for a borrower
that needs more than $150 million in additional financing. The
offering could be unsecured or
have the previously described second lien structure. High-yield bonds
are fixed rate, offer long tenors
and no amoritization; however,
they require public debt ratings
and can be expensive to prepay.
Regardless of the final financing
solution, combining ABL and
syndicated term loans or high
yield bonds gives borrowers additional flexibility to make deals in
both the highs and lows of the
economic cycle.
■
This article is designed to provide
general information only. Before
entering into any financing arrangement, please consult your own
competent professional financial,
tax and legal advisors.
KeyBanc Capital Markets Inc.,
Member NYSE/FINRA/SIPC, and
KeyBank National Association
(KeyBank N.A.) are separate but affiliated companies. Securities products
and services are offered by KeyBanc
Capital Markets Inc. and its licensed
securities representatives. Banking
products and services are offered
by KeyBank N.A. Member FDIC
and Equal Housing Lender. Credit
products are subject to credit
approval.
Laurie Muller-Girard is national director
of KeyBank Business Capital. Contact
her at 216-689-7941 or laurie.mullergirard@keybank.com. Amy K. Carlson is
head of Debt Capital Markets, KeyBanc
Capital Markets, Inc. Contact her at
216-689-4227 or acarlson@key.com.
ability to perform over a 3- to 10year period can give some comfort
that the performance was not a
random occurrence and should,
with reasonable expectation,
continue into the future.
The growth prospects provide
the “sizzle.” It seems that most
middle market companies lack a
well articulated, implementable
and measurable 3-year growth
plan. Investors and lenders take
comfort in, and will generally
attach value to, a sound, well
thought out plan that can serve
as the roadmap to get from
current revenue and profitability
to projected revenue and profitability.
Ideally, this plan should allow
for revenue and profits to grow
at 10% per year or more.
Whatever the projected growth
rate, it must be supportable to be
believable.
In the best case, the M will have
the P to support the G. When this
comes together, investors and
lenders get excited about the
opportunities that lie ahead of
such a well-managed business.
Sellers and borrowers get excited
because the “market” is eager to
invest alongside the team and
their vision.
Ultimately, companies with
good past performance, offering a
good “plug-and-play” growth
strategy, and managed by a high
performing team (i.e. high M.P.G.)
are in high demand in good economic times and bad.
■
Michael F. Paparella is managing
director for Candlewood Partners, LLC.
Contact him at 216-472-6640 or email
mfp@candlewoodpartners.com.
Innovative solutions
Throughout the
M&A lifecycle
Deloitte’s step-by-step services are designed to provide assistance to
you through every phase of the deal. From strategy to post-merger
integration and divestitures, we can help you in your efforts to get
through each critical juncture of the transaction process. We are the
only professional services organization with world-class capabilities
across the entire M&A deal cycle and on either side of a transaction.
Congratulations to ACG Deal Maker Award
winners and our clients:
We provide global resources and capabilities, yet our presence is
local — with a deep understanding of the way that our Northeast
Ohio clients do business.
— US Endoscopy
— STERIS Corporation
— Blue Point Capital Partners
Contact us today for local connections to a world of service.
Kevin M. Murphy
Director | M&A Transaction Services
Deloitte & Touche LLP
+1 216 589 1471
kevinmurphy@deloitte.com
Giovanni F. Di Censo
Principal | M&A Transaction Services
Deloitte Tax LLP
+1 216 589 5150
gdicenso@deloitte.com
John Stipkovich
Director | M&A Transaction Services
Deloitte & Touche LLP
+1 216 589 1408
jstipkovich@deloitte.com
Our attorneys work with deal makers to design and implement
WUDQVDFWLRQVWUXFWXUHVWD[HI¿FLHQFLHVULVNPDQDJHPHQW
measures and negotiating strategies. We bring together tax,
antitrust, environmental, international, real estate, employee
EHQH¿WVHPSOR\PHQWH[HFXWLYHFRPSHQVDWLRQLQWHOOHFWXDO
property, technology and litigation lawyers to provide the
necessary breadth and depth of representation.
For more information, visit deloitte.com/us/malibrary.
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its
network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about
for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.
Chicago Cincinnati Cleveland Columbus Costa Mesa Denver
Houston Los Angeles New York Orlando Washington, DC
Copyright © 2012 Deloitte Development LLC. All rights reserved.
Member of Deloitte Touche Tohmatsu Limited
www.bakerlaw.com
© 2012 Baker & Hostetler LLP
Crain’s Cleveland Business Custom Publishing
20130128-NEWS--33-NAT-CCI-CL_--
1/23/2013
11:46 AM
Page 1
CORPORATE GROWTH & M&A
Advertisement
JANUARY 28 - FEBRUARY 3, 2013
S-17
Noncorrelated investments:
narwhal or unicorn?
drive financial markets. With
noncorrelated investments, the
oth the narwhal and the
risks for which investors are
unicorn are fantastical
compensated are dissimilar to elsecreatures — one real and
where in their portfolios. Examone mythical. In the case
ples of noncorrelated investments
of noncorrelated investments,
include reinsurance, water rights,
one must ask the question, “Is it
film rights, pharmaceutical copossible to find that rare investdevelopment and intellectual
ment with returns independent
property. There are other options,
of the factors that move
but the markets for many
publicly traded debt,
of them are too immature
equity and real estate
or the risks too difficult to
markets?” The answer is
quantify.
yes … and no.
There are numerous
Most publicly traded
reasons to seek noncorreinvestments are in some
lated investments, even
way dependent on ecoif, like fantastical creanomic conditions. Equity
tures, they are hard to
returns are contingent on LINDA M.
find. These investments
a business’s prospects
can be highly beneficial
OLEJKO
and profitability, and real Glenmede
to portfolios since they
estate values depend on
provide a great deal of
such factors as employment levels
diversification for the dollar. An
and the buildup of available inacademic using the risk/return
ventory. From time to time, some
profile of these investments in
investments are negatively correa portfolio optimization program
lated with economic conditions.
may wish to take an extra
In a recessionary environment,
helping.
for instance, an investment with
Noncorrelated investments
a fixed payment, such as Treasury
have earned a place in sophistibonds, may increase in value as
cated investment portfolios, but
the values of equity securities
as in the cases of the fantastical
decline. This inverse correlation,
narwhal and unicorn, careful
however, may not persist as marstudy is required to separate the
ket conditions change – for examreal from the mythological.
■
ple, if the economy improves.
Linda M. Olejko is a managing director at
When flipping a coin and calling
Glenmede. Contact her at 216-514-7876
heads or tails, the result is obvior email Linda.olejko@glenmede.com.
ously unrelated to the factors that
By LINDA OLEJKO
B
OUR ROSTER OF STAR TALENT
CONTINUES TO GROW.
from left to right: Jeffrey Fickes, Bob Loesch, Jen Roth, Peter Igel, Brian O’Neill, Jenny Berlin, Steve Bittence, Chris Hewitt
Adding talent and depth to serve your business transaction needs.
925 Euclid Avenue, Suite 1150 | Cleveland, Ohio 44115 | 216.592.5000 | tuckerellis.com
Crain’s Cleveland Business Custom Publishing
20130128-NEWS--34-NAT-CCI-CL_--
1/23/2013
2:05 PM
Page 1
CORPORATE GROWTH & M&A
S-18 JANUARY 28 - FEBRUARY 3, 2013
Advertisement
Obtaining
credit through
conventional
cash flow
methods
Expertise Pays Off
For more than 80 years, we have helped middle
THYRL[JVTWHUPLZHJOPL]LÄUHUJPHSZ\JJLZZ
Seek an
alternative
through
asset-based
lending
-PUHUJPHS[H_0;HUKVYNHUPaH[PVUHSK\LKPSPNLUJL
7\YJOHZLHJJV\U[PUNJVUZ\S[H[PVU
;H_Z[Y\J[\YPUN
+ Risk assessment/risk mitigation
(\KP[[H_HUKHK]PZVY`ZLY]PJLZ
3L[V\YRUV^SLKNLL_WLYPLUJLHUKL_WLY[PZLILHU
HZZL[[V`V\YJVTWHU`»ZVWLYH[PVUZTHUHNLTLU[
HUKZOHYLOVSKLYZ
Cleveland | 216.363.0100
Canton | 330.966.9400
Elyria | 440.323.3200
Business Advisors and
Certified Public Accountants
maloneynovotny.com
HE TOPICS O.
T
N
O
D
E
S
U
C
EDITORIAL FO MOST TO NORTHEAST OHI
THAT MATTER
CrainsCleveland.com/editorialCalendar
You’re not just
OUR PRINCIPLES
Value-Added
Proposition
Expectation
Management
Honesty & Integrity
a number.
At MelCap Partners, LLC, our goal is to show you,
our valued client, that you are not just a number
to us. We strive to provide high quality and
innovative investment-banking services to middle
market companies. We are here to fight for you
Innovation & Quality
Experience
and you can rest assured that our interests will
always be aligned with your goals and objectives.
We are creating the most significant liquidity
event in the history of our clients’ lives…and we
take that responsibility very seriously.
1684 Medina Road, Suite 102 / Medina, Ohio 44256
p 330-239-1990 / f 330-239-1991 / www.melcap.co
Securities offered through Burch & Company, Inc. Member FINRA/SIPC.
MelCap and BurchCo are not affiliated entities.
Lending alternative:
How companies can
use assets to finance
strategic growth
By DOUG WINGET
F
or many companies,
obtaining credit through
conventional cash flow
lending arrangements can
be difficult. They may be having
operational problems, undergoing rapid growth, dealing with an
acquisition or their borrowing
needs might reflect their cyclical
or seasonal industries.
For those companies, assetbased lending, also known as
ABL, provides an alternative to
the traditional lending model.
Asset-based lenders specialize in
providing secured financing to
customers with limited access to
capital.
Asset-based
lending is
senior secured
lending that
allows borrowers
to leverage
their receivables, inventory,
equipment
DOUG WINGET
and real estate.
FirstMerit Bank
Advances are
based upon eli- Business Credit
gible collateral,
with formulas against receivables,
inventory, equipment and real
estate. The working capital line of
credit is financed against eligible
receivables and inventory. Typically, ABL has fewer covenants
than a cash flow structure and
more availability from the assets.
It also may not need a personal
guarantee from the owner.
Companies that have sufficient
receivables and inventory can
leverage their working capital and
receive higher advance rates.
They can use this for working
capital financing, seasonal
working capital borrowing needs,
leveraged recaps, mergers and
acquisition financing and turnaround financing.
If the company is looking for
more availability from its working
capital, that profile fits ABL,
Crain’s Cleveland Business Custom Publishing
which offers advance rates that
are higher against accounts
receivable and inventory, providing
more availability than a traditional
middle market cash flow structure. Companies that have a
strong EBITDA and earnings
profile relative to working capital
will likely have more availability
from a cash flow product, but
companies that are more assetintensive will benefit from an
asset-based structure.
There are several differences
between a cash flow structure and
an asset-based structure. For
example, ABL structures generally
require cash dominion. This
means a controlled account
agreement is in place that
requires the cash
Asset-based receipts of a
company to flow
lending
into a lockbox.
provides an The funds then
alternative are swept from
the lockbox
to the
and are used to
traditional pay down the
lending
revolving debt.
This is the most
model.
efficient treasury
management
structure to reduce leverage.
ABL covenant structures are
generally not as leverage focused
compared with cash flow structures. Typically, a cash flow structure may have three or four financial covenants and an ABL
structure will have only one
financial covenant. ABL groups
are typically collateral focused,
not leverage focused.
In summary, for companies
with exposure to cyclical
industries and markets, ABL can
be a more patient financing
solution since ABL groups will
typically work with a borrower
given sufficient availability and
liquidity.
■
Doug Winget is president of FirstMerit Bank
Business Credit. Contact him at 330-3847448 or email doug.winget@firstmerit.com.
20130128-NEWS--35-NAT-CCI-CL_--
1/22/2013
1:27 PM
Page 1
CORPORATE GROWTH & M&A
Advertisement
JANUARY 28 - FEBRUARY 3, 2013
S-19
2013 looks promising
for leveraged buyouts
Equity overhang,
deal creativity
should widen
deal pipeline
companies.
Limited partners have become
far more scrutinizing of the cohesion of the private equity fund
team, the operational abilities of
at least some of that team versus
financial capabilities, and have
dissected the reasons for success
behind large cash-on-cash returns
By JIM HILL
in certain sale transactions.
With the re-election of Presiooking ahead to what 2013
dent Obama, the dialogue of taxing
will bring, there are a
the carried interest as ordinary
number of trends that will
income versus capital gains has
impact the private equity
once again become a hot topic.
industry and leveraged buyouts
Despite these challenges, there
(LBO) in particular. First, the
is a good deal of encouraging
challenges:
news:
There is a $200 billion equity
■ LBO funds in 2012
overhang in private equity
raised 24% more funds as
worldwide that must
new funds than in 2011,
get spent in next 12
despite a downturn in
months or be returned
deal activity.
to investors. General part■ Many pension plans
ners of funds will not
and endowments have
receive their 2% asset
largely abandoned venmanagement fee on
ture capital investing due
capital that is returned
to the dismal returns of
JIM HILL
since it is not committed.
the top 100 venture
Benesch
In 2007, private equity
funds over the last
consisted of 35% of total dollar
decade. This has allowed private
volume of transactions in the U.S.
equity funds to gain a larger alloIn 2012, it consisted of approxication of asset employment.
mately 15% of total dollar volume
■ Private equity has become
of transactions.
more creative in generating deal
Worldwide, the level of transacflow through proprietary relationtional activity in 2012 was 50%
ships, regional investment bankers
what it was in 2007.
(almost brokers) and utilizing buy
There was a dearth of transacside investment bankers. Many
tions in the U.S. in 2012 — down
funds now have dedicated “busi15% in transactional dollar volness development partners” who
ume from 2011. The rush to the
participate in the carried interest
exits to avoid higher capital gains
and are key to deal flow.
rates did not really happen. The
■ Despite the current lack of
primary reason was uncertainty
classic auction deal flow, private
of earnings and potential sellers’
equity firms are anticipating 2013
performance during the sales
will become a more seller-friendly
process.
environment as the fiscal cliff,
There was also hope on the part
while somewhat resolved, will not
of some sellers that earnings
create huge automatic cutbacks in
would be higher in 2013, which
government spending. Approxicaused them to hold off. With
mately 67% of private equity
sparse inventory, cash on stratefirms’ U.S. portfolio companies
gics’ balance sheets and private
have been owned for more than
equity overhang, multiples for
6½ years, with the average fund
high performing sellers were
having a 10-year life. Obviously,
staggering — even higher than in
delayed exits mean there have
2007 for comparably performing
to be more exits in 2013 to get
L
Proudly Congratulates
Deal Maker Award Recipient
Blue Point
Capital Partners
Your success is inspiring to us all!
cohencpa.com
limited partners ready to invest in
their next fund.
■ Few private equity funds still
call themselves “agnostic” as to
industry choices with funds specializing in certain industries and
having advisers who are heavily
networked in those industries.
The most popular sectors today
are energy services (albeit, it is
somewhat slipping), business
services (asset light), niche manufacturing requiring little capital
expenditures annually, health care
services and devices, consumer
products, business-to-business
distribution and logistics.
■ Leverage remains quite available for buyouts with equity
residing on deals over $10 million
of EBITDA between 33% and 43%,
and rates remain very low. This
tends to drive up multiples for
pricing purposes but also allows
private equity firms to be in the
hunt against strategic acquirers.
Given the low rates of returns
on both public securities investment in the past several years
and in many alternative private
asset investments, many pension
plans and endowments are now
allocating a greater percentage of
their assets to the private equity
world.
■
Jim Hill is executive chairman of
Benesch, chair of the firm’s Private
Equity Group and an active and
practicing member of its Corporate &
Securities Practice Group. Contact him
at 216-363-4444 or email jhill@
beneschlaw.com.
ACCESS
BEGINS WITH A CAPITAL “G”.
At Glenmede, we believe the best way to serve our clients is to
give them direct access to our experts and best thinking — with
no barriers or bureaucracy. Our low client-to-staff ratio means
you’ll always have our full attention.
www.glenmede.com
Glenmede’s services are best suited for those with $3 million or more to invest.
To learn more, please call Linda Olejko for a personal conversation at 216-514-7876.
˜˜2˜˜˜˜2˜˜˜˜˜2˜˜
˜˜2˜˜˜˜2˜˜
WE SHARE YOUR
OBJECTIVES OF GROWTH
AND BUSINESS SUCCESS.
Each day, we collaborate with private equity funds, subordinated debt funds and a
variety of companies to open new doors and move business forward. Through the
tailored management of sophisticated mergers and acquisitions and corporate finance
transactions, our performance enhances the value of your deals. For more information
about our M&A and Corporate Finance practice areas, visit us at www.icemiller.com.
Chicago ∙ Cleveland ∙ Columbus ∙ DuPage County, Ill. ∙ Indianapolis ∙ Washington, D.C.
Crain’s Cleveland Business Custom Publishing
20130128-NEWS--36-NAT-CCI-CL_--
1/22/2013
1:30 PM
Page 1
CORPORATE GROWTH & M&A
S-20 JANUARY 28 - FEBRUARY 3, 2013
Advertisement
Shrinking world
expands global
opportunities for
private equity
Conflict minerals rule impacts M&A
Consider implications during acquisition due diligence
determine whether and
to the extent it is covn Aug. 22, 2012,
ered by the rule. And rethe SEC issued
member, you will need
its long-awaited
to consider all activities
Conflict Minerals
and revenue sources of the
Rule. The rule does not
target, not just those reprohibit the use of conlating to U.S. operations.
flict minerals in products, DYNDA A.
■ What is the target’s
but it does require public
product? Consider any
THOMAS
disclosure of how conflict Squire Sanders
business activity that inminerals are used by the
troduces a product into
LLP
reporting company. More
the stream of commerce.
specifically, the rule requires any
For example, do not simply conreporting company to determine
clude that the target is generally
if it has conflict minerals that are
in a service industry but consider
necessary to the functionality or
any commercial activity, no matproduction of a product it manuter how small, and determine
factures or contracts to be manuwhether a “product” is involved.
factured. If it does, it must file a
■ What is the financial model
specialized report with the SEC.
impact of the rule? Consider the
A company would be wise to
impact of your own conflict
take the conflict minerals rule
minerals policy on the target’s
into account when considering
materials costs, procurement and
an acquisition. The following are
sourcing and include those conseveral key questions a company
clusions in your financial model.
should ask about any target:
■ How might the acquiring company’s
■ Is the target covered by the rule?
conflict minerals policy change?
Undertake a detailed review of the
Customer requirements and sharebusiness activities of the target,
holders’ reactions to conflict
its affiliates and its subsidiaries to
minerals disclosures could lead to
By DYNDA A. THOMAS
O
changes in policies and procurement activities. Consider any consequences of these changes in your
financial planning and modeling.
The good news is that if a company that was not previously required to file any conflict minerals
disclosure reports is acquired by a
reporting company, the acquiring
company is given a short grace
period before it is required to
undertake and complete conflict
minerals diligence and disclosure
about the acquired company.
Visit the conflict minerals page
on the Squire Sanders website:
www.squiresanders.com/
conflict_minerals/ and the
firm’s conflict minerals blog at
www.conflictmineralslaw.com
to learn more about due diligence
and to view sample representations
and warranties. We also invite
you to experience our interactive
flowchart tool to help you in your
conflict minerals analysis.
■
Dynda A. Thomas is a partner with
Squire Sanders (US) LLP. Contact her
at 216-479-8583 or email
dynda.thomas@squiresanders.com.
beneficial to both the private
equity industry and economies
or years now, we’ve heard
around the world. As private
about the globalization of
equity matures, firms have
world economies
become savvier about
and certainly felt
capturing opportunities
plenty of effects from it. It
wherever they may be,
may come as a surprise to
then growing them
hear that the private equity
using global resources
industry has largely lagged
and connections.
on that trend, but that has
For Riverside, globalbeen changing rapidly in
ization means more
recent years.
than investing and runWhen the Riverside Co.
ning offices on four conSTEWART KOHL
launched a European fund Riverside Co.
tinents. It means using
in the 1990s, we were one
teams staffed with locals
of only a handful of firms working
to source deals and operate comin Europe. Regulations and the
panies in various regions while
immaturity of the industry in
applying talent and know-how to
Europe meant that few firms did
open new markets and maximize
private equity deals there, but
value for each company in our
that changed quickly.
portfolio.
We’ve seen the same shift in
The effects of these efforts on
the Asia-Pacific region, where prithe small companies in which
vate equity was virtually nonexisRiverside typically invests can
tent in many countries just a
be profound. Riverside owns a
handful of years ago. Now, we’re
small company in Georgia that
seeing dramatically increased acmanufactures products that make
tivity overall and some of our
animal feed safer. Riverside
best opportunities as a firm.
has used its Hong Kong-based
These trends are healthy and
Asian Strategy office to help that
By STEWART KOHL
F
Private equity survey reveals
best investment practices
By MARK BRANDT
CreatingValue.
R
ecently, McGladrey
teamed with PitchBook to conduct a
survey of seniorlevel executives who lead
private equity firms
focused on the middle
market. More than 95%
MARK BRANDT
McGladrey
the 109 private equity
firms surveyed reported
that the management
team was a primary
driver of both successful
and unsuccessful portfolio investments.
One of the reasons
management is so
important is the intimate
Meaden & Moore’s
Transaction Advisory
Services include:
Acquisitions and
Divestitures
What do
You Value?
Our Transaction Advisory Service professionals
deliver quality, accuracy and speed in a complex
Due Diligence
Business Valuations
Ownership Transition
Tax Consulting
and Structuring
mergers and acquisition market.
Serving the legal needs of Ohio businesses for 50 years
MGGM continues to display the same high standards,
commitment to excellence and professionalism that have served
as our benchmarks since 1954. We are committed to providing
our clients with the best in legal representation in the areas of:
• Mergers and Acquisitions
• Corporate and Business Services
• General Civil Litigation
• Real Estate and Land Use
• Labor and Employment
• Wealth Management and Estate Planning
• Environmental, Health and Safety
• Intellectual Property
To reach our Cleveland Office call 216.241.3272 or visit www.meadenmoore.com
Crain’s Cleveland Business Custom Publishing
55 PUBLIC SQUARE, SUITE 2150
CLEVELAND, OHIO 44113-1994
TEL (216) 523-1500 FAX (216) 523-1705
WWW.MGGMLPA.COM
20130128-NEWS--37-NAT-CCI-CL_--
1/23/2013
1:22 PM
Page 1
CORPORATE GROWTH & M&A
Advertisement
We expect
globalization to be
a valuable tool in
opening markets.
company navigate the complex
regulations and relationships of
China, allowing the company to
sell its products in the fastestgrowing livestock feed market in
the world. Meanwhile, Riverside’s
teams in Europe have helped
navigate regulatory hurdles there,
helping maintain access to another
huge market.
This is just one example among
thousands of small and large steps
that private equity firms are
taking as the industry becomes
truly global. Ultimately, it’s about
finding the best opportunities for
growth and using every tool possible — everywhere possible — to
accelerate that growth in a sustainable manner. The financial
world has been “shrinking” for
decades. As private equity catches
up, we expect globalization to be a
valuable tool in opening markets
and helping companies thrive for
years to come.
■
Stewart Kohl is co-CEO of The Riverside
Co., a global private equity firm focused
on acquiring growing enterprises valued
at up to $200 million. Contact him
at 216-344-1040 or skohl@
riversidecompany.com.
role these executives play in
formulating the performance
improvement plan and developing
the overall strategy at portfolio
companies.
Understanding external influences, implementing performance improvement strategies
and establishing detailed progress
tracking for each portfolio investment will be essential to generating
strong investment returns and
maximizing profitability:
External factors
Influencing deal making
While private equity firms
would prefer to have control
over all aspects of their businesses,
taxes provide a high level of
uncertainty. Firms are now
concentrating their attention
on tax-efficient structures that
provide future benefits through
the use of a step-up in tax basis,
the deductibility of interest
expense and similar strategies.
Only 17% of firms say the looming
threat of a hike in the tax rate for
carried interest will affect how
they invest and operate their
portfolio.
Creating performance
improvement
Performance improvement
plans have long been a standard
for most private equity firms
when making new portfolio
investments. More than half
of the firms surveyed reported
the utilization of plans laying out
clear short- and long-term game
plans.
Interestingly, the management
JANUARY 28 - FEBRUARY 3, 2013
How to judge a PE firm
Making firms
better a common
industry goal
the challenge of working with
good managers to help their companies grow. The professionals in
our firm are gratified that we
could help the managers of QSR, a
Twinsburg-based manufacturer of
silicon products, grow their busiBy CHIP CHAIKIN
ness both in the medical industry
and in China by more than four
hanks to the recent electimes.
tion, for the first time in
We are proud that we could
my professional career
help the managers of PSSI, a
when asked,
Twinsburg-based cleaning
“What do you do for a
services provider, grow
living?” I can answer
revenues by 150%.
“private equity,” using
We are energized by
the same number of syllathe fact that we have
bles as a dermatologist,
helped the managers of
trial attorney or offensive
AWP, a Kent-based traffic
line coach. No longer
safety company, double
do private equity
their business. We are far
professionals require a
CHIP CHAIKIN
from alone — one of
30-minute treatise on
Blue Point
Cleveland’s jewels is the
Adam Smith and BarbarCapital Partners size and professionalism
ians at the Gate to
of its private equity
explain what we do.
industry, which is recognized
The flip side of that notoriety is
nationally.
that now the conversation often
At its best, private equity can
goes directly to questions about
provide company managers with
job creation or tax rates.
growth capital and a knowledgeWhile these are certainly imporable, active partner. Whether or
tant questions, they have overnot we are truly playing the latter
whelmed the most salient quesrole is how we should be judged.
tion about our industry, the
one that gets at the heart of
whether we succeed at our most
basic undertaking: Do we help
make better companies?
The days of relying on leverage
or buying undervalued assets for
success in private equity are in the
past. For most in the industry,
that is fine. We come to work for
T
One of Cleveland’s
jewels is the size and
professionalism of its
private equity industry,
which is recognized
nationally.
If we are, we help create stronger
companies that serve customers
better, provide attractive platforms
for employees, and, yes, create
strong returns for investors. If we
are not, then someone else will.
Capital is highly liquid and
relentless in its search for a
productive home.
Fortunately, the most productive home is often a fast-growing
business, with all of the benefits
that brings to employees, customers and cities. So the next time
you see a private equity professional at a party, ask if he or she
helps build better businesses. It is
a far more enjoyable topic than
our tax rates.
■
Chip Chaikin is a partner at Blue Point
Capital Partners. Contact him at
216-535-4706 or email
cchaikin@bluepointcapital.com.
Management determines
the success or failure of
portfolio investments.
team takes on the primary responsibility for designing the performance improvement plan in
roughly three out of every five
cases. When the management
team does not take the reins, a
fund-level executive or member
of the deal-making team typically
takes control, underscoring the
high premium placed on these
plans and the intimate company
and industry knowledge they
require. There is an array of challenges during the implement of
improvement plans, primarily
centered on the establishment of
internal systems and operating
metrics.
Implementing performance
improvement plans
Most firms place a high priority
on establishing robust financial
reporting systems and requiring
much more detailed data, with
daily, weekly and monthly operating statistics. IT systems were
regularly found to be insufficient
as well.
To download the complete survey
report, go to www.mcgladrey.
com/peg. If you are interested in
participating in the 2013 private equity
survey, please contact Mark Brandt
at Mark.Brandt@mcgladrey.com or
216-522-1124.
Crain’s Cleveland Business Custom Publishing
S-21
GET DAILY NEWS ALERTS
FROM CRAIN’S !
Register for free e-mail alerts and
receive:
■ The Morning Roundup: The
day’s business news from Ohio’s
daily papers
■ Breaking news alerts
■ Daily headlines: Crain’sproduced news and blog items
from the day
■ Small Business Report
■ Dealmaker Alert
■ Real Estate Report
■ Ohio Energy
■ Work Force Report
SIGN UP NOW AT:
CrainsCleveland.com/register
■ Crain’s on Twitter:
@CrainsCleveland
■ Crain’s on Facebook:
Facebook.com/CrainsCleveland
20130128-NEWS--38-NAT-CCI-CL_--
1/23/2013
2:02 PM
Page 1
CORPORATE GROWTH & M&A
S-22 JANUARY 28 - FEBRUARY 3, 2013
Power comes from being understood.
SM
When you trust the advice you’re getting, you know your next move is the right move.
That’s what you can expect from McGladrey—a partner with the in-depth experience to help
private equity firms and strategic buyers optimize their portfolios. And one that can bring your
organization global capabilities with a local touch. That’s the power of being understood.
To learn more, contact Mark Brandt at 216.522.1124
or visit www.mcgladrey.com.
Advertisement
Transaction
insurance
demand surges
Policies can help risk-averse
deal makers overcome obstacles
insuring off the remaining tail
liabilities for all of the portfolio
eal makers are increascompanies in a particular fund,
ingly turning to transacenabling an earlier distribution or
tional insurance prodredeployment of fund proceeds.
ucts as risk mitigation
Several other factors are contools in mergers and acquisitions.
tributing to the growth in deIn the first six months of 2012,
mand for transaction insurance.
the total policy limits for transacIn general, deal makers are more
tional insurance policies purrisk averse today than they were
chased increased by 35% over the
prior to the global financial crisis.
same period in 2011, as
In addition, the terms of
reported by Marsh.
the insurance products
While successful prithemselves have imvate equity buyers have
proved significantly since
been using representathey were first introduced
tions and warranties
to the market. The coverinsurance to distinguish
age has improved, there
their bids in auctions for
are fewer standard exclumany years, a growing
sions, the pricing has
STEVEN C. LEE
percentage of policies
come down, and the
placed worldwide in 2012 Transactional
underwriting process has
were for corporate buyers. Risk Advisors
been expedited.
Corporate acquirers are
Technology and a
typically more cautious than their
higher level of sophistication are
private equity counterparts on
enabling the insurers to complete
the amount of warranty protectheir underwriting and be in a
tion they require in a transaction
position to issue a policy within
and often lose out on a deal bethe time frame of the overall deal
cause of this aversion to risk.
negotiations. This process is comThrough the use of transaction
monly completed in two to three
insurance, corporate buyers are
weeks. Finally, a history of suchaving more success in winning
cessful claims under these policies
sought-after assets, especially
has eliminated the early skeptioverseas targets, while at the
cism expressed by some parties.
same time satisfying their board’s
While representations and
requirements for risk mitigation
warranties insurance is most comin the deal.
monly used, contingent liability
The surge in popularity is also
insurance, tax liability insurance
being fueled by sellers who are
and litigation buyout insurance
increasingly building representaare increasingly being used to
tions and warranties insurance
overcome specific deal obstacles
into the M&A process from the
the parties are unable to resolve
beginning in order to minimize
through traditional contractual
their post-closing exposure, while
indemnification.
■
maximizing purchase price.
Steven C. Lee, Esq., is a principal with
Strategic private equity sponTransactional Risk Advisors. Contact
sors are using transaction insurhim at 216-905-3350 or email
ance policies to maximize the efslee@transactionalrisk.com.
ficiency of capital structures, and
By STEVEN C. LEE
© 2012 McGladrey LLP. All Rights Reserved.
GET MORE BOOK OF LISTS – print issue: $44.95
Excel file - $249 – more data, Including contact info. CrainsCleveland.com/BookofLists
Northern Ohio TMA President John Lane presenting the 2012 Lifetime
Achievement Award winner Larry Goddard, Managing Director, of SS&G
Parkland Consulting, LLC.
We thank Larry for his leadership and the many contributions that he has
made both in the turnaround industry and in our community.
D
Reading this section?
Let us know and be entered in a drawing to win one of two $100 gift cards.
Simply email your contact information to admin@acgcleveland.com with the
header “M&A Section.”
Crain’s Cleveland Business Custom Publishing
20130128-NEWS--39-NAT-CCI-CL_--
Advertisement
1/23/2013
1:27 PM
Page 1
CORPORATE GROWTH & M&A
JANUARY 28 - FEBRUARY 3, 2013
S-23
Asset-based lending option can work in private equity
By MARK KISKORNA
A
sset Based Lending (ABL),
often referred to as Commercial Credit or Business
Credit, has been a financing
option for decades. Over the
last 10 years, however, ABL has
become an increasingly important
financing strategy for middle
market and large companies across
a wide range of industries.
ABL structures can accommodate
major cyclical or seasonal swings,
commodity dependent industries,
growth capital and companies
in the midst of a turnaround or
restructuring.
ABL provides creative and flexi-
Creative credit structures offer financing flexibility
ble credit structures,
monitoring and reporting
with fewer financial
requirements, it is less
covenants, and in some
sensitive to the ebbs and
instances the ability to
flows of a company’s
have springing financial
income statement. ABL
covenants based on availstructures can be emability. In some situaployed in both stable and
tions, ABL lenders can
volatile markets (and ABL
lend beyond the asset
units often do not transformulas and have higher MARK KISKORNA fer troubled deals to a
PNC Business
credit holds, which can
workout group).
Credit
eliminate or reduce the
Over the last few years,
need for syndication.
M&A-focused strategic
Finally, because ABL lending
and financial buyers have befocuses heavily on collateral and
come comfortable choosing an
has more stringent and detailed
ABL structure knowing that these
structures support more aggressive purchase price multiples.
Almost half of the PNC Business
Credit deals sourced in 2012 were
from private equity groups.
Corporate deal makers also
recognize the versatility of ABL in
addressing gaps in a transaction’s
capital structure or in combining
with junior capital. For example,
PNC Business Credit, through its
access to junior lender Steel City
Capital Funding, both divisions
of PNC Bank, National Association, can provide a seamless one
stop, cash flow solution.
TOP DEAL MAKERS
The winners of the 17th Annual ACG
Cleveland Deal Maker Awards will
be recognized on Thursday,
January 31, 2013, at the Marriott at
Key Center.
RPM INTERNATIONAL
INC.
RPM closed nine acquisitions during
the last 18 months, including five
outside the U.S., adding more than
$400 million to annual revenues.
BLUE POINT
CAPITAL PARTNERS
Blue Point Capital
Partners recently
completed four
platform acquisitions, three
add-ons, and
a significant
plant expansion. It also
made three divestitures that
returned more than $300 million
with an average in excess of four
times cost.
STERIS CORPORATION
Over the last 24 months, Steris has
engaged in more than $425 million
of M&A activity, most notably its
acquisition of US Endoscopy.
US ENDOSCOPY INC.
Privately held US Endoscopy,
founded in 1991, sold its business
to Steris in a $270 million all-cash
transaction last year.
Crain’s Cleveland Business Custom Publishing
Corporate deal makers also
recognize the versatility
of ABL in addressing gaps
in a transaction’s capital
structure or in combining
with junior capital.
If your current capital structure
isn’t providing the flexibility you
need to manage and grow your
business, it may be time to look
into ABL.
■
Mark Kiskorna is senior vice president
& regional manager-Midwest Region,
PNC Business Credit. Contact him at
216-222-8506 or visit pnc.com/abl.