ACG Wisconsin Mergers & Acquisitions

SEPTEMBER 12, 2014 | 13TH ANNUAL EDITION ADVERTISING SUPPLEMENT

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PROGRAMMING KEY TO VIBRANT LOCAL CHAPTER

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he Association for Corporate Growth Wisconsin comprises approximately 225 business leaders in corporations, private equity, finance, and professional service firms.

Our target members are the leaders of Wisconsin busi- TOM WALTON nesses and private equity President, firms who have the principal ACG Wisconsin responsibility for corporate growth initiatives within their organizations. We purposefully maintain a minimum membership level of 60 percent corporate/private equity members. However, we welcome members from other businesses provided they share our passion for enhancing and supporting the corporate growth initiatives of our members and our marketplace.

While we come from diverse backgrounds and industries, we are all focused on one thing - using corporate growth initiatives to build the enterprise value of our organizations. Our membership in ACG WI provides us ongoing access to corporate growth thought-leadership, emerging issues and trends, and best practices. Together, we share resources and ideas through our meeting forums and professional networking, in order to achieve a common goal of growing our companies and increasing their value.

It has been a banner year for ACG Wisconsin. We are proud to be the recipient of ACG’s Chapter of the Year award for a second time! Many thanks go to the ACG board of directors, committees, ACG staff, and our membership for continuously putting in the time and effort to make ACG Wisconsin the valuable organization that it is.

ACG Wisconsin is ranked second overall in member retention and fourth overall in chapter growth among ACG’s 56 chapters worldwide. Our chapter is continuously recognized and benchmarked for best practices by chapters across 14,000 member organization.

One of the key drivers of our organizations success is the superb programming that we deliver year in and year out. Our last year has been no exception. A particularly exciting new program slate offered over the last 12 months included the first annual Growth, Leadership and Human Capital Conference (GLHC) which featured noted business guru Ram Charan as the keynote speaker. The GLHC, in its coming second year, will be featuring Columbia Business School professor Rita McGrath, author of “The End of Competitive Advantage,” as

keynote, in addition with Doug Tatum, author of “No Man’s Land.”

Another key component of future growth is Young ACG (YACG), which just finished its inaugural year. YACG is our chapter’s way of involving young, high potential employees of member firms in our chapter, creating connectivity between them and with our organization.

ACG Wisconsin hosted 10 events loaded with quality content that enabled YACG members to absorb knowledge from senior business leaders. As an added benefit YACG members had the opportunity to build a strong business network among their peers, as well as begin to establish connections with more senior leaders.

There were 31 YACG participants sponsored by the following firms: Associated Bank, Bank Mutual, BDO USA, LLP, BMO Harris Bank, Brady Corporation, Caterpillar Global Mining, Charter Manufacturing, Cleary Gull, Inc., Clifton Larson Allen LLP, Davis & Kuelthau, s.c., Eisen Fox & Company, Emory & Co., LLC, Foley & Lardner LLP, Generation Growth Capital, Godfrey & Kahn, Grace Matthews, Grant Thornton, Johnson Controls, JP Morgan Chase Bank, N.A., Mason Wells, O’Neil, Cannon, Hollman, DeJong & Laing, PNC Bank, Quad/Graphics, Quarles & Brady LLP, Reinhart Boerner Van Deuren S.C., Rockwell Automation, Schenck SC, Strattec Security Corp, Tailored Label Products, The Private Bank and Wipfli LLP. The following events highlight our best in class programming for YACG: EVENT

ing, financial advisory and private equity. Each case study provides students with a unique opportunity to present valuation, capital markets and M&A strategic advice to a panel of seasoned M&A professionals from within the ACG community. The competition is carried out through a series of intra-school competitions culminating in a “final” competition between the academic institutions.

ACG Cup was a resounding success with the University of Wisconsin-Milwaukee being presented with top honors on Feb. 8, at the Milwaukee Athletic Club. As champions, the UWM team collected the $5,000 first place prize. Team members were Donnie Crego, Drew Konop and Brian Dayton. Participating schools this year included Marquette University, UW-Madison and UW-Milwaukee.

Again, a sincere thank you to all who have contributed to making ACG Wisconsin a success! We look forward to another great year for ACG Wisconsin. If you wish to find out more about our chapter please go to www.acg.org/wisconsin.

TOM WALTON President, ACG Wisconsin

HOST

YACG Kick-Off

PS Capital Partners

Finance Structures for Growth-Oriented Businesses

Reinhart, Boerner, Van Dueren s.c.

Sell Side M&A

Schenck M&A Solutions

Senior Debt Lending

BMO Institute for Learning

Considerations in International M&A

Foley & Lardner

M&A for a Strategic Buyer: Corporate Development Deal Process

Rockwell Automation

Capital Markets & Valuation

Cleary Gull

Legal Considerations in a Venture Capital Round

Godfrey & Kahn

Private Equity Investing

PS Capital Partners

Networking and Overview of the Program Year

Eisen Fox

Another hallmark event of the organization is the annual ACG Cup. The Wisconsin ACG Cup is a case study competition designed to give students from leading MBA programs real world experience and invaluable insights into mergers and acquisitions, investment bank-

Mergers and Acquisitions: A Corporate Development Supplement, is published by the Milwaukee Business Journal in conjunction with the Wisconsin Chapter of the Association for Corporate Growth. All articles herein are written by ACG Wisconsin members.

To contact ACG Wisconsin: Suzanne Fedie, Chapter Executive 262.532.2440 To contact Milwaukee Business Journal: Mark Sabljak, Publisher msabljak@bizjournals.com, 414.908.0555 Kira LaFond, Director of Advertising klafond@bizjournals.com, 414.908.0584 Dave Merk, Senior Account Executive dmerk@bizjournals.com, 414.908.0588

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Bridging the Valuation Gap: The Use of Earn-Outs in M&A Transactions

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eaching an agreement on the valuation of a business is one of the toughest issues to overcome in an acquisition transaction. This can be even more challenging when the seller’s business is in the early stages of RICHARD W. development or in a very SILVERTHORN high growth mode, or has hit Shareholder, a temporary slump in earn- Whyte Hirschboeck ings. When buyers and sell- Dudek s.c. ers are unable to reach an agreement on valuation, they often turn to earn-outs as a way to bridge this gap. Although earn-outs can serve as a useful tool in resolving differences over valuation, they also create complex issues that are not present in other M&A transactions. This article discusses various components of an earn-out and identifies certain key issues that should be addressed during the negotiation of the definitive purchase agreement.

WHAT IS AN EARN-OUT AND WHEN SHOULD ONE BE USED? An earn-out is used in M&A transactions when part of the purchase price is calculated by reference to the performance of the seller’s company (the “target company”) over a period of time after closing. In short, an earn-out constitutes the additional purchase price paid after closing, but only if the target company achieves certain performance milestones during the earn-out period. The performance milestones used in structuring earn-outs can be financial targets or non-financial targets.

Disagreements over valuation often occur when the target company has (1) significant growth poten-

tial which is not yet reflected in their financial performance, (2) a new product or technology that may increase the target company’s value, or (3) a temporary drop in earnings, resulting in different views between a buyer and seller as to the fair value of the target company. From a seller’s perspective, an earn-out allows the seller to receive maximum value for his or her business if the performance milestones are achieved.

From a buyer’s perspective, earn-outs allow the buyer to avoid over- paying for a business that does not produce future operating results projected by the seller.

Although earn-outs can assist the parties in reaching an agreement on the potential value of the target company, they can also result in a high degree of post-closing disputes. Therefore, the parties must carefully consider the advantages and disadvantages of an earn-out before incorporating one into their deal.

STRUCTURING AN EARN-OUT Although earn-out structures can vary widely, there are several common issues that must be addressed with all earn-outs, including: (1) the performance milestones; (2) the earn-out period and related payment issues; (3) the operation of the target company during the earn-out period; and (4) whether there will be any security or other protection for the buyer’s payment obligations.

1. PERFORMANCE MILESTONES Most earn-outs include financial milestones such as revenue, net income, or EBITDA. Under certain circumstances, however, non-financial milestones are preferred and, in some cases, a combination of the two can be used. Regardless of what milestones are chosen, they must be clearly defined, objective, relatively easy to

Chart A

2008 DEALS

2010 DEALS

29% 62%

71%

Based on a recent American Bar Association study, earn-outs have been used in approximately 25% to 38% of deals between 2007 to 2013 (Chart A). The uncertainty in the M&A market during the recent recession resulted in the use of earn-outs at the high end of this range (38%) and, during more normal economic times, earnouts have been in approximately 25% to 29% of deals.

2012 DEALS 25%

38% 75%

measure, and compatible with the target company’s business. a. Financial Milestones When choosing among the different types of financial milestones, the buyer and seller usually have different preferences. Sellers generally prefer revenue-based continues on page 5

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Strategic Acquisition Searches Private company Sales corporate Divestitures M&A negotiations 126 N. Jeffer soN str eet, suite 330, Milwauk ee , w iscoNsi N 53202 • 414 . 4 3 4 . 7510

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milestones because they are easy to measure and difficult to manipulate. Revenue is often used as the financial milestone with high growth or early stage companies before there is a track record of positive earnings. Most buyers, on the other hand, prefer earnings-based milestones as they are viewed as a more accurate indicator of the target company’s performance. A financial milstone will almost always have a reference to GAAP and, since GAAP can be interpreted subjectively, the parties must agree on how GAAP will be applied to the earn-out.

Financial milestones also require an agreement on the accounting treatment for extraordinary events such as transaction expenses, the purchase or sale of a line of business or a product line, or the receipt of insurance proceeds from a catastrophic or unexpected loss. b. Non-Financial Milestones Although less common, in some instances (e.g., early stage companies) it may not make sense to use financial milestones due to the lack of historical financial information and the difficulty in establishing reasonable financial targets for gauging future performance.

In these circumstances, the parties can use operational targets (e.g., a new product launch, FDA approval, patent approval, etc.) for their earn-out milestones.

Chart B highlights the different earn-out metrics used in transactions that closed in 2012.

2. EARN-OUT PERIOD AND PAYMENT ISSUES All earn-outs require the parties to determine (1) the length of the earn-out period; (2) the timing of the earn-out payments; (3) whether the earn-out will be the obligation of the buyer or the target company operating as a subsidiary of the buyer; and (4) whether the earnout payment is proportional to the target company’s achievement of the performance milestones or whether it is an “all or nothing” proposition where no payment is made if a milestone is missed. Most earn-out periods are between one and four years. For short earn-out periods (one year or less), there is one payment at the end of the earn-out period. Earn-outs with multi-year payouts are payable at intervals throughout the earn-out period, usually annually. Multi-year payouts bring into play additional issues that should be considered, including: - What happens if the target company fails to achieve the earn-out in one period but makes up for it in a subsequent period? – i.e., does the seller lose the earn-out payment for the period in which it fails to achieve the earn-out milestone or is the seller allowed to make up any prior deficiency in the following periods?

- Is the buyer’s lender imposing any restrictions on the ability to make the earn-out payments (for example, loan covenants prohibiting or limiting the earn-out payments or subordinating them to the lender’s rights to receive payment of its loan)?

Issues can also arise if either the buyer or the target company is sold during the earn-out period (a “sale

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Chart B

PERIOD OF EARN-OUT Not Determinable 21% 48 months 12%

<12 months 6% 12 months 32%

36 months 9% >24 to <36 months 3% transaction”). In some cases, the new buyer may just assume the earn-out payment obligations; however, sellers prefer to have the remaining earn-out payments accelerated to avoid problems over the target company’s future operations or the creditworthiness of the new buyer. To address this issue, some earn-outs include a buyout option for the buyer or acceleration rights for the seller. A buyout option entitles the buyer to pay a specified amount to satisfy any remaining earn-out payment obligations, thereby relieving the buyer from having to work around any earn-out related covenants in the definitive purchase agreement that could impede the sale transaction. An acceleration right protects the seller by requiring that all future earn-out payments be paid upon the closing of the sale transaction. Under either scenario, the parties must address whether the remaining earn-out payments will be discounted to their net present value and the likelihood that the remaining performance milestones will in fact be achieved.

3. OPERATION OF THE TARGET COMPANY Because the seller’s ability to receive the earn-out payment depends on the future performance of the target company, the ability to control the operation of the target company during the earn-out period is critical in achieving the earn-out. Some of the issues that need to be addressed and negotiated when balancing the needs of the buyer and seller on this issue include: - Who will operate the target company during the earn-out period and what restrictions, if any, will be imposed on that party?

- Will the target company continue to operate as a separate legal entity? If not, how will the target company’s performance be measured if it is integrated with the buyer’s other businesses?

- Will the buyer have the right to allocate corporate overhead to the target company to reduce net income?

- What level of financial and operational support will the buyer provide during the earn-out period?

The post-closing operation of the target company’s business has been the subject of recent litigation. One issue that has been troublesome is whether the implied covenant of good faith and fair dealing requires the buyer to operate the target company’s business to maximize the likelihood of achieving the earn-out

24 months 18% milestones. While courts have differing views on this issue, the court decisions highlight the importance of including post-closing operational covenants in the definitive purchase agreement, especially if the buyer will be in charge of post-closing operations. Accordingly, the following covenants should be considered for inclusion in the definitive purchase agreement: - A covenant requiring the buyer to use its “best” efforts to achieve the earn-out.

- A covenant requiring the buyer to operate the target company consistent with how the seller operated the target company prior to closing or in accordance with an agreed upon business plan.

- A covenant requiring the buyer to maintain a minimum amount of working capital for the target company.

- A covenant restricting the buyer from disposing of any portion of the target company during the earn-out period.

- A covenant providing the seller with veto rights during the earn-out period over major decisions regarding the target company.

4. SECURITY FOR EARN-OUT PAYMENTS It is not unreasonable for a seller to require a form of security or other assurances that the buyer will be able to make the earn-out payments if and when they become due. This security can come in the form of (1) an escrow of the earn-out amount to ensure the funds are available if and when the seller satisfies the earn-out milestones; (2) a parent company guaranty if the buyer is a subsidiary of a larger company (this is particularly important if the buyer is a shell company created specifically for the acquisition); or (3) a security interest in the assets or equity of the target company to secure the buyer’s earn-out obligations. Sellers and their counsel need to take a close look at the financial strength of the buyer and decide if this is a legitimate concern and, if so, which form of security best suits the transaction at hand.

In summary, an earn-out can help parties reach an agreement on the value of a seller’s business and maximize the ultimate purchase price received by the seller if the target company achieves the agreed upon earn-out milestones.

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Sell-Side Due Diligence: Ensuring You Get The Most Out of Today’s Market

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t’s a seller’s market. Economic conditions continue to improve worldwide, and as a result, companies have become more productive and competitive. Balance sheets are strengthening, borrowing costs are low and capital in the hands of both strategic and financial buyers is abundant, creating a market primed for yearover-year increases in private equity and overall M&A activity.

Barring a major shock to the financial markets, private equity and M&A activity in 2014 should outperform that of 2013.

Strategic buyers have a record amount of cash on their balance sheets, and KEVIN DALLMAN according to PitchBook, the Partner, private equity industry has BDO USA more than $466 billion in capital overhang available to be invested within a limited time. This liquidity combined with a shortage of companies coming to market has led to a supply-demand imbalance in favor of sellers of companies.

But what is the key to successfully navigating and taking advantage of the favorable market environment?

Sell-side due diligence, which allows the seller to proactively address financial and tax risk areas of a deal, has become a key strategic component of the transaction process that both expedites timing and facilitates capitalizing on the current market environment.

HOW HAS THE MARKET CHANGED? Market dynamics have changed dramatically since the financial downturn began in late 2008. In 2009, equity markets were volatile and corporate confidence was low. That year, 56 percent of the private equity

Optimal transaction value

Lowered transaction risks

firms polled in the BDO Perspective Private Equity Study reported that more than 20 percent of their portfolio companies were performing below forecast or expectation. Furthermore, only 40 percent reported that they were receiving new commitments from limited partners.

Fast forward to 2014—equity markets have stabilized, valuations are up across the board and corporate confidence has continued to strengthen.

According to the 2014 iteration of the BDO Perspective Private Equity Study, only 20 percent of private equity firms reported that more than 20 percent of their portfolio companies are performing below forecast. Additionally, 14 percent reported that none of their portfolio companies are performing below forecast, compared to just 7 percent in 2009, an improved business performance and resulting economic stability.

Likewise, 61 percent of private equity firms reported that they are receiving new commitments from limited partners.

After years of slow to moderate deal flow and company growth, strategic buyers have capital on their balance sheet, but are struggling to grow organically, and financial buyers are eager to deploy their built-up dry powder to begin earning a return. Because buyers are ready and willing to invest, sellers now have the added luxury of running a non-exclusive deal process in which multiple parties can participate. Consequently, this has increased opportunities for first-time sellers, such as family-owned businesses and others typically termed “B” or “C” companies.

While sellers now have increased negotiating power, it remains crucial that companies looking to sell anticipate risks and issues that might arise and potentially disrupt, or lower the value of, a deal. One may argue that with higher valuations, there’s a need for even more thorough due diligence as sophisticated bidders

Increased negotiating power

Enhanced control & credibility

are likely to employ advisors to find any problems with the business.

THE BASICS OF DUE DILIGENCE While no two transactions are alike, there are a number of core financial points of every deal that will be assessed on the buyer’s end: • DEAL DRIVERS: Management team, geography, products and technology are all examples of attributes of the seller that contribute to sustainable earnings and cash flow for the buyer.

• QUALITY OF EARNINGS: Errors and timing issues with financial records are signals of unsustainable operations and earnings to a buyer.

• QUALITY OF ASSETS AND WORKING CAPITAL: Buyers will look to uncover the true value of assets being acquired as implications for purchase price adjustment.

Sophisticated bidders employ advisors to find any problems with the business; therefore, sell-side due diligence is a proactive response that gives a seller an in-depth look at their company from the perspective of the buyer in order to identify and prevent unwanted surprises. Sell-side due diligence allows the seller to address any areas that may be perceived as risks by the buyer prior to them being raised, thereby maximizing negotiating power and minimizing valuation discussions and post-sale disputes.

Accelerated closing

Speed & accuracy throughout

Alignment of buyer & seller

continues on page 7

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escrows. Moreover, sellers must review equity accounts and structure of instruments, such as options, warrants and preferred stock, and analyze the potential impact of the purchase agreement, closing statements and transaction.

• TAX: Prior to the transaction, sellers must identify tax risks, including federal, state and sales tax obligations, in order to minimize the impact of indemnifications and escrows in the purchase agreement.

Diligence should also drive the assessment for the optimal transaction structure of the seller with the understanding of the impact on potential buyers.

THE BENEFITS OF SELL-SIDE DUE DILIGENCE Well-executed sell-side due diligence includes a detailed evaluation of the financial health, operational, technological and human resources issues of a company. The goal is to address deal issues in an objective, transparent light and, where possible, take corrective action. When conducting sell-side due diligence, there are a number of areas on which to focus.

• REPORTING: Sellers must assess the quality of their financial and operational information. Quality of data is fundamental to providing the transparency needed for a successful sell side diligence. They must also consider significant accounting policies, with a focus on variances from Generally Accepted Accounting Principles (GAAP).

Additionally, sellers should analyze the consistency of interim financial statements and changes in accounting practices that could affect comparability of earnings, cash flow or working capital.

• QUALITY OF EARNINGS: Sell-side due diligence should be centered on an assessment of the quality of earnings, identifying any nonrecurring charges or credits that will impact the company’s value. Included in the scope should be the analysis of trends in revenue and EBITDA that substantiate the seller’s key business driv-

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ers. Inherent in this analysis should be the examination of monthly operating trends by business unit, product line and customers, reviewing allocated costs and misclassified expenses all with an eye toward threats to the sustainability of earnings and impact on value.

• BALANCE SHEET: Sellers need to evaluate monthly working capital trends—i.e., balances and turnover statistics—with a focus on elements directly attributable to operations. Developing a target working capital peg in advance of the purchase agreement will expedite the transaction and minimize current and post-closing working capital disputes. Sellers must also analyze the quality of assets to be sold and the completeness of liabilities that would be assumed, including contingencies and their impact on EBITDA and

CONCLUSION When conducting a transaction, both the seller and the buyer seek to optimize their agendas during the due diligence process. While the seller wants to negotiate for the highest possible price, the buyer’s goal is to use the discoveries in due diligence as negotiating leverage for a lower price. Sell-side due diligence requires a partner in the process that can bridge both perspectives. Sellers should look for a partner that can support the company’s compelling “story” and help them preserve valuation, eliminate surprises and provide support throughout the transaction in the form of insights, perspectives and recommendations.

Over $300,000,000 in commerical loans for two consecutive years. $20,000,000 Manufacturer – Transportation $20,000,000 Media Firm $10,000,000 Commercial Contractor $ 8,750,000 Manufacturer – Industrial Ovens $ 7,400,000 Retailer $ 6,400,000 Manufacturer – Recreation $ 5,800,000 Manufacturer – Machining $ 5,200,000 Manufacturer – Food

$ 5,000,000 Distributor – Industrial Apparel $ 4,500,000 Packaging Company $ 4,000,000 Distributor – Educational Apparel $ 3,500,000 Metal Fabricator $ 3,500,000 Contractor $ 2,500,000 Printer $ 2,500,000 Equipment Manufacturer $ 2,250,000 Manufacturer – Material Handling

Just a sample of our new commercial relationships. cash flow lending • acquisition financing • local decision making • $2.3 billion in assets

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MERGERS & ACQUISITIONS

BUSINESS OWNERS: What is your definition of success for the sale of your company?

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ach business owner has different goals when selling his or her business and each transaction has its unique features. No wonder: so many elements of an owner’s life are woven into his or her company and, therefore, its sale. Professional fulfillment, sense of purpose, personal lifestyle, family, philanthropy and community can all come into play during the sales process.

DOYLE That is why, well in advance BUTKIEWICZ of bringing your company Managing Director, to market, even if you are J.P. Morgan Private merely contemplating a sale, Bank you will want to ask some hard questions related to your expectations and hopes (See Chart A: “Address Important Questions Up Front).

GOALS At the macro level, proceeds from the sale of your

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Chart B: Strategize Well Certain structures can help make transfers to family more tax-efficient—while providing additional benefits.

Type of Structures Generation-skipping transfer trust (GST trust)

Enables you to maximize family wealth by sheltering asset(s) through a multi-generational trust; initial gift is subject to a gift tax (or can be covered by unified credit), but transfers to subsequent generations are free of transfer taxes.

Grantor retained annuity trust (GRAT)

Allows you to transfer future appreciation of asset(s) while retaining the use of the asset(s) for a period of time; grantor receives the value of the original principal in the form of an annuity.

Intentionally defective grantor trust (IDGT)

Grantor makes arm’s length sale of asset(s) to an irrevocable trust and receives a promissory note for the fair market value of the asset plus interest; after the note is paid, the remaining trust assets pass to heirs gift tax free.

Intra-family loan

Parent loans asset(s) or cash to the child and receives interest and principal payment stream; any appreciation using loan proceeds are excluded from parent’s estate.

company will generally go toward supporting your personal lifestyle, family, philanthropy and taxes.

While proper pre-transaction planning may help significantly reduce your taxes, it must begin well in advance of the sale to be effective. In most cases, more than a year’s advance planning is advisable.

This planning also should financially model how much you may need to achieve your future goals in the other categories. Professional advice, therefore, is critical—both on what is possible to achieve in a transaction and what you and your family need to accomplish.

For example, your professional advisers should model your current and future spending needs, given lifestyle aspirations, reasonable probabilities for asset growth, risk tolerance for investing, taxes, potential market fluctuations and inflation—to name a few of the elements involved in such an analysis.

Knowing the net proceeds you will need can provide your “walk away” number to facilitate negotiations. But

Chart A: Address Important Questions Up Front

Today

Pre-Transaction

Benefits

Business owners often delay answering critical questions until it is too late

How much is my business worth?

What can I do to increase the value of my company?

Do I want to sell? How do I prepare for a sale?

Are current market conditions favorable for a sale?

Intra-Transaction

What deal structure should I use?

What information is needed for buyer due diligence?

What should I consider prior to negotiations?

How do I make sure the deal closes?

Post-Transaction

What are my lifestyle goals?

How much do I want to provide for my heirs? For charity?

How do I manage my single stock exposure?

How do I invest the proceeds of my sale?

two notes of caution: 1. This number is only as good as the inputs and thoughts that go into creating it. Professional advice is critical in achieving both your transaction goals and your personal financial needs.

2. This number reflects “net proceeds”—not the sale price.

THE MEANING OF NUMBERS One of the biggest challenges business owners face is overcoming the feeling that the gross sale price for their company is a measure of all they have accomplished. This top-line, headline number is not the most important figure that determines their future well-being.

For this reason, it is important to have an experienced advisory team established early on in the pre-transaction planning.

It is the job of their advisory team to help keep business owners focused on the number that truly matters for them by informing them of potential tax mitigation strategies (including creating trust structures that help transfer wealth to family and charitable causes), as well as the opportunities for asset growth, given their realistic appetite for risk (See Chart B: “Strategize Well”).

Your advisory team should be carefully selected and include specialists in a variety of disciplines, such as law, wealth advisory, corporate finance, accounting, taxation and perhaps certain technical, environmental or other specialty areas that can facilitate your transaction.

Selling a business almost always is an emotionally charged and intellectually complicated process. But if you obtain the right results for you and your family, the effort is certainly worthwhile. In that way, selling your business can be like building it: a lot of hard work and deeply rewarding (See Case Study: “What’s next?” and Chart C: “Proper Planning will help you and your family achieve your goals” on page 9). continues on page 9

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continued from page 8

Chart C: Proper planning will help you and your family achieve your goals

• Determine objectives - Wealth transfer goals - Investment objectives - Other goals • Review current asset ownership - Modify/create wealth structures needed for family capital - Consider asset pooling vehicles • Consider valuation opportunities • Negotiate favorable deal provisions - Lock-up/purchase agreements • Develop portfolio construction and review asset allocation alternatives • Establish Day 1 cash execution plan and open accounts • Consider structures to avoid and/or postpone tax on gain - Trusts can benefit family and charity

A

POST - DEAL

• • • •

Confirm cash receipt Implement cash investment plan Reconcile Day 1 activities Segregate income tax reserve

• Invest appropriate funds for tax liability • Adopt liquidity or enhanced cash management for proceeds in the short-term • Create an investment policy statement for each legal entity • Finalize asset allocation for family members • If relevant, leverage philanthropic intent during a high tax year

• Construct and implement an investment portfolio for each legal entity • monitor and adjust portfolios on ongoing basis • Periodically re-evaluate estsate plans • Establish family meetings to review wealth plan

t 60 years old, Bill Smith is thinking about moving on to the next phase of his life.

assets, including company stock, in a Delaware Dynasty Trust that he set up for the benefit of his two children.

Married, he has two grown daughters and neither is currently involved in or interested in taking over his company, a regional distribution firm that he inherited from his father.

As the gifted shares were illiquid and represented a minority interest, the valuation of the gifted shares included discounts for lack of control and marketability.

The current estimated value for Mr. Smith’s business, which has annual profits of $5 million, is $30 million.

Because the children will continue to benefit from the company even after it is sold, Mr. Smith views the trust as an important part of maintaining a family legacy.

PRE-TRANSACTION PLANNING:

NEXT STEPS:

• To prepare his business—Mr. Smith explored taking his business to market several years ago, but buyers were concerned about it being too dependent on a single individual.

Now that he feels a sale of the business would meet his current and future liquidity needs, Mr. Smith plans to take his business to market within the next two years.

Recognizing that he would not end up with the net proceeds he desired, Mr. Smith pulled back and focused on developing a management team capable of running the company after he left.

POST-TRANSACTION:

Working with that team, he also developed a strategic plan to broaden the business’s geographical reach with a goal of pushing sales above the $50 million mark.

Mr. Smith recently promoted a key employee to the position of president within the company.

• To prepare his personal finances— Mr. Smith worked with his advisers to model his family’s spending needs and plans for the future, which include purchasing a vacation home and becoming residents of a state with lower taxes.

Once he felt comfortable that his needs would be met, Mr. Smith put some

Once Mr. Smith’s business is sold and he is no longer overseeing its operations, he plans to move to a lower-tax state. As Mrs. Smith grew up in Florida, the couple is considering moving there.

Anticipating a significant liquidity event following the sale, Mr. Smith intends to engage a financial services firm to help him invest to maintain his lifestyle and legacy. The firm will develop a balanced portfolio, designed to grow and preserve his assets. At this stage of their lives, the Smiths’ appetite for risk is minimal.

The Smiths have always been very philanthropic and plan to devote the next phase of their life both to their family and to engaging in education reform and community service projects. Some of the proceeds of the sale of their business will be put into a donor-advised fund, which offers the highest charitable tax deduction, demands no administration from donors and gives donors the opportunity to recommend grants to any qualified charitable recipient.

CASE STUDY: WHAT’S NEXT?

BEFORE YOUR BUSINESS IS SOLD

10

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LEVERAGED LOAN MARKET PUSHES ON

t remains a great time to be a borrower in the leveraged loan market.

Despite increased scrutiny from bank regulators on leveraged lending guidelines, the market continues to soar with aggressive borrowing terms available for companies across the spectrum of credit quality. Strong rhetoric from banking regulators has started to impact the market but it has yet to significantly slow down the leveraged loan machine given the backdrop of a benign credit environment, historically low interest rates and an accommodative Federal Reserve.

$1,200

LEVERAGED LOAN VOLUME ($ in billions)

$1,000 $800 $600 $400 $200

JIM ENGEL SVP Corporate Banking, Associated Bank

$0

$400 $350

2007 2

008

2009 2

010

2011

2012 2

013

2014

2012 2

013

2014

2012 2

013

2014

COVENANT LIFE LOAN VOLUME ($ in billions)

$300 $250 $200 $150 $100 $50 $0

$50

The Fed remains at the JOSEPH forefront of the market’s KLEINWACHTER mind. To help the economy Managing Director through the financial crisis, Associated Bank the Fed quickly exhausted rate cuts and had to move on to extraordinary measures to boost market liquidity. These measures featured multiple rounds of quantitative easing (open market securities purchases) that resulted in the balance sheet of the Fed quintupling from circa $850 billion pre-crisis to more than $4.3 trillion today. The Fed started taking steps last December to taper the most recent iteration of easing (“QE3”) by cutting monthly bond buying activity and has continued to reduce its bond purchases in a measured fashion during 2014. Five separate $10 billion cuts through June have reduced purchases of Treasuries and mortgage-backed securities to $35 billion per month.

With this easing in mind, the consensus view to start the year was that rates would steadily rise throughout 2014; however, the reverse has happened so far and the 10-year Treasury rate has dropped from roughly 3.0% on Jan. 1 to 2.6% in June. Meanwhile, short-term rates remain at record low levels and are expected to stay low for the foreseeable future as the wind down of QE3 is viewed as a first step before actual tightening (i.e. increases to Fed Funds rate).

Layering solid corporate credit quality and historically low default rates over robust liquidity and low rates has put a spotlight on the leveraged loan market

2006

2006

2007 2

008

2009 2

010

2011

SECOND LIEN LOAN VOLUME ($ in billions)

$40 $30 $20 $10 $0

2006

2007 2

008

2009 2

010

2011

Source: Thomson Reuters LPC

for cash-laden investors that are desperately searching for yield. With short-term rates near zero, many investors were particularly drawn to the market because leveraged loans are secured, floating rate instruments that should perform well in a rising rate environment. Retail investors have accessed the market via new avenues such as loan-focused mutual funds and exchange traded funds. These vehicles experienced 95 straight weeks of fund inflows through April until the market became more skeptical about when rates might actually start to rise.

All told these loan mutual funds and ETFs have roughly $170 billion in total assets under management. CLOs have also been churning along with solid new issuance despite regulatory headwinds around risk retention and pressure on bank’s ability to invest in the senior tranches. 2014 YTD CLO issuance is in excess of $50 billion compared to roughly $40 billion at the same point last year, and current CLO assets under management total just less than $330 billion. Borrowers have been major beneficiaries of this significant institutional liquidity searching out deals in the market.

Meanwhile, bank regulators issued new leveraged lending guidance in March 2013 for the first time in more than a dozen years due in part to perceived frothiness in the credit markets. This guidance focused on the critical components of underwriting, including leverage levels, borrower’s ability to repay debt and covenant structures. This guidance leaves some room for interpretation, particularly when it comes to varying norms across different industries, but generally deals start to be considered leveraged at 3.0x senior cash flow leverage or 4.0x total cash flow leverage. While banks are permitted to make loans above these thresholds within reason, deals over 6.0x total cash flow leverage are considered off limits and would generally be classified as criticized. Careful focus is also being paid to the deal’s covenant structure as well as the borrower’s ability to repay all of its senior debt or half of its total debt over 5-7 years.

The market has been slow to adjust to these changes as strong demand continues to press aggressive pricing continues on page 11

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MEET THE ACG COMMITTEE

continued from page 10

and structures. The marketâ&#x20AC;&#x2122;s response is complex and due to several factors including the aforementioned robust appetite for leveraged loans from non-bank investors and strong competition among lead arrangers to secure lucrative mandates in the space. Several volume records were set in the leveraged loan market during 2013. Per Thomson Reuters LPC (source volume data herein), overall leveraged loan issuance set a new record with $1.14 trillion completed in 2013. Although volumes were high, actual new money issuance only represented one-third of the total as refinancing and repricing activity dominated. Overall leveraged issuance in 2014 is behind the pace of 2013 with $466 billion completed versus $549 billion at this point last year.

The market also witnessed a noteworthy return of more aggressive lending structures like covenant lite and second lien. Covenant lite issuance easily set a new record in 2013 with volume of $381 billion. Although lagging behind the record pace of 2013 ($193 billion through May), volume has been strong so far in 2014 with $155 billion completed. Second lien volume in 2013 was the highest on record since 2007 at $37.6 billion, and year-to-date 2014 volume has outpaced 2013 levels with $19.1 billion done versus $16.5 billion over the same window last year. In keeping with the theme that new money opportunities were hard to find, dividend recap issuance set a new record also in 2013 ($50 billion) as sponsors took advantage of strong credit markets to take some money off the table. While the balance between supply and demand has improved a bit in 2014 thanks to a slightly higher supply of new money opportunities related to more M&A activity, overall borrowing conditions still favor the borrower.

Although the market is still digesting the new regulatory guidelines more than a year after being released, it has become clear that regulators are expected to aggressively govern lenders in 2014 portfolio reviews and market behavior is starting to adjust at the fringes. The guidance and reviews have been a consistent theme in market dialogue and media reports have focused on the increased potential for fines to banks that are out of compliance. As for market behavior, banks have started to balk on the most liberal structures, and recently big news was made when several core banks of private equity firm KKR opted out of an underwriting assignment that they allegedly felt would not pass regulatory review. Will all of this regulatory focus inspire more broad-based changes in market behavior or will it simply create an uneven regulatory landscape that creates opportunity for non-regulated firms to do the most challenging deals? The answer will unfold over time but it is clear that there continues to be investor demand to do deals up to and beyond the thresholds established by bank regulators, and offsetting that market dynamic will be a challenge as long as credit and liquidity fundamentals remain healthy.

11

The Organizing Committee of this 13th annual M&A Supplement would like to acknowledge and express our sincere appreciation to the contributing authors and advertisers for their continuing support of our efforts to bring this publication to the Wisconsin M&A community.

Pictured from left: Mark Wierman, Tim Reardon, Vicki Fox, and Ann Hanna

Bridging the Gap Between Valuation and Accounting Concepts Providing a valuation that makes sense to all stakeholders.

A successful engagement starts with knowledge of the company, its industry, and the subsequent application of the right valuation tools. Some valuation professionals try to fit your business into a model; we seek to understand your business and adjust our model to the unique facts and circumstances of the business. The result is an outcome that makes sense to all stakeholders. VRC has been providing valuations for nearly 40 years. Our services include the following: Valuations for Financial and Tax Reporting Portfolio Valuations Fairness and Solvency Opinions Equity Compensation Bankruptcy and Restructuring Services Fixed Asset/Real Estate Valuations Valuations for Financing For more information, contact Bryan Browning at 414-221-6249 or bbrowning@valuationresearch.com.

U.S. Offices

Boston Chicago Cincinnati Milwaukee New York

VRG Member Firms

Argentina Australia Brazil Canada China Germany Luxembourg Mexico Spain United Kingdom

Princeton San Francisco Tampa

valuationresearch.com

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PRIVATE EQUITY SOURCE OF CAPITAL WHY IT MATTERS TO A SELLER

P

rivate equity funding comes from a variety of sources, ranging from insurance companies and pensions to high net worth individuals, with each source having its unique characteristics. It is very important that you, as a seller, understand how and where the money originates.

The source of your investor’s funding will influence the terms of your deal, the speed and certainty of the deal process, and the conditions of your post-close scenario.

ANN HANNA Managing Director, Schenck M&A Solutions

Private equity funding can come from a variety of resources: • Pension funds • Insurance companies • Foundations • Banking/wealth management • Endowment • Funds of funds • Government • Corporate • Individual wealth • Other On a national basis, according to Preqin, pension funds and insurance companies make up 52 percent of the aggregate capital invested in private equity, as shown in Chart A. In Wisconsin, funding differs considerably by firm. Larger funds such as Mason Wells source significant funding from institutional investors, while the smaller funds rely on private wealth sources. High net worth individuals and family office investments are the most commonly used source of funds. More than 90 percent of Wisconsin-based private equity groups report using some form of individual wealth.

OPTIONS In addition to the wide variety of sources, funds can either be committed or uncommitted. Pensions, insurance companies, foundations, banks, fund of funds, corporation and government funds tend to be committed.

High net worth individuals may or may not be committed. Family office funds are a different structure with their own distinctive features.

COMMITTED FUNDING Investors in committed funds are obligated via a contractual agreement to contribute money to the fund when called. Most private equity firms will manage a series of distinct funds and will raise a new fund every 3 to 5 years as capital from the previous fund is fully invested.

One advantage of a committed fund is the belief that committed capital helps ensure transaction completion.

As Joe Cesarz of Lakeview Equity Partners, LLC shares, “The capital is ready to invest in new growth opportunities or acquisitions providing certainty to close with no equity financing contingencies.” Adds Steve Peterson of Brass Ring Capital, Inc., “There are tradeoffs to working

through the inevitable rough patches when capital is scarce. The private equity firm’s ability to contractually call capital provides added comfort to transaction partners, such as banks, in lending to deals.”

Large middle-market deals often need the bandwidth available only through institutional investors. Greg Myers of Mason Wells, Inc. explained, “we have a committed pool of capital, and have the flexibility to structure a transaction that meets an owner’s particular needs.”

Dave Pelisek further describes “among Baird Capital’s key competitive advantages is the global nature of the platform, offering extensive operating resources and sector expertise to assist Company owners in building and growing their business.”

Chart A BREAKDOWN OF AGGREGATE CAPITAL CURRENTLY INVESTED IN PRIVATE EQUITY

BY INVESTOR TYPE (EXCLUDING FUNDS OF FUNDS AND ASSET MANAGERS) Superannuation schemes1% Corporate investors 1% Investment companies 3% Government agencies 5% Banks & Investment Banks 6%

Public pension funds 28% Private sector pension funds funds14% Insurance companies 10% Sovereign wealth funds 10% Endowment plans 8%

Foundations 7%

with traditional committed capital funds vs. other structures that are important for sellers and managers to understand. Unfunded groups may offer more flexibility in areas like investment hold period, whereas a committed capital fund structure insures funds are available both for the initial transaction and to support companies

Some funds have multiple mandates from their committed investor base, which appeals to a seller. “Our principal investors have a strong interest in seeing small businesses grow and add employment in our target market of Wisconsin and other upper Midwest states. continues on page 13

MERGERS & ACQUISITIONS

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13

continued from page 12

This fact often syncs very well with sellers who are concerned about the legacy of their companies,” shared John Reinke of Generation Growth Capital, Inc. “FCF Partners is fully committed to investing in upper Midwest companies . . . and in helping our management teams build better companies that can compete globally,” explains Paul Raab. Additionally many investment banking firms prefer to work with funds who are committed or whose general partners have shown a track record of sourcing the funds to complete a deal.

UNCOMMITTED FUNDING Uncommitted funds find investment money on a deal by deal basis. They include groups who access capital from proprietary investor networks, use pledge funds, search funds, or are fundless (or “independent”) sponsors. While uncommitted funds have been around for some time, the growth in this segment of the private equity community over the last several years has been dramatic. It has been fueled by younger professionals departing legacy private equity firms and seeking greater flexibility, coupled with enormous amounts of investment capital seeking to be deployed, in addition to the challenges of raising and deploying a traditional committed capital fund.

Richard Ruffo of Progress Capital Group, LLC explains, “as a fundless sponsor, we are not constrained by typical restrictions found in fund documents regarding industries, investment horizons, equity position, etc.

the ability to be both patient and flexible.

PRIVATE WEALTH FUNDING

We have flexibility in seeking opportunities and structuring deals.” Often, this type of sponsor brings operational talent and industry expertise to the table through a targeted selection of co-investors. “Our source of funds is made up of successful, local business and professional people in Wisconsin and the Midwest, and can provide additional value over and above their money in the form of network, knowledge, and business experience,” says Steve Balistreri of Blackthorne Partners, Ltd. Robert Klug, RSA Capital, LLC further clarifies that we use “experienced investors (who are) accessible for deep strategic insight. We have available ‘arms and legs’ to support management post-closing.”

An additional advantage as discussed by Richard Armbrust, Sparta Capital Partners, LLC is the ability to have 100 percent investor alignment as investors get to pick and choose their investment. He also explains that “the lack of a fund places a significant pressure to close the transaction because there is no fund to cover wasted due diligence costs.” Curtis Burgess of The Mendota Group recaps that an uncommitted fund has

High net worth individuals invest in both committed funds and uncommitted deals and are a significant source of capital for Wisconsin-based private equity. Dedicated investment, flexibility and a steady long-term return on capital strategy are at the core of this type of investor. “The critical combination of access to patient capital through the Investor Network and long-term outlook, allows PS Capital Partners, LLC to invest in and help build middle market businesses without the pressure of a predetermined timeframe for exiting,” explains Paul Stewart. Jeff Beischel, Wing Capital Group, agrees: “(We access) true long-term growth-oriented capital for the next generation using no institutional money.”

Additionally, Steve Peterson points out that high net worth investors are much more flexible in time horizon and style of investment than other types of investors.

Family offices are a captive and proprietary form of private wealth investment. Funds used are coming from a single source, consequently, there can be tremendous flexibility depending on the office mandate.

“Dealing directly with the wealth holders eliminates the confusion that comes with multiple financing sources. It simplifies the process and directly aligns the interests of the investors with the management team,” expresses Vince Shiely of Lubar & Co. Jake Hansen, Jacsten Holdings, LLC adds that “a long-term view means that valued employees (oftentimes family members) can expect to be treated in a manner consistent with past practices and not worry about being back on the selling block in a few years.” Chris Nolte, Marcus Investments, LLC adds that in addition to dedicated long-term capital a “family business orientation and continues on page 14

HISTORY OF PRIVATE EQUITY FUNDING Investors have been acquiring privately held companies since the dawn of the industrial revolution. With few exceptions, private equity in the first half of the 20th century was the domain of wealthy individuals and families.

A significant change occurred with the passage of the Small Business Investment Act of 1958. The 1958 Act allowed the licensing of private “Small Business Investment Companies” (SBICs) to help the financing and management of small entrepreneurial businesses. SBICs’ unique partnership between the public and private sectors brought a significant inflow of fund availability and served as the professional training ground for the emerging private equity industry.

The 1980s saw the loosening of ERISA restrictions and relaxation by insurance industry regulators producing

a significant inflow of pension and insurance money to venture capital and LBO firms. The State of Wisconsin Investment Board (SWIB) was a leader in this movement. SWIB is responsible for managing the assets of the Wisconsin Retirement System (WRS), the State Investment Fund (SIF) and other state trust funds. SWIB and Northwestern Mutual Life were in the forefront of this national movement towards private equity investing and limited partnership accounting. Today, according to Pitchbook statistics, pension funds and insurance companies make up 62.7% of funding nationally (by count) to private equity.

Commitments to Private Equity were $0.2 billion in 1980 swelling to more than $200 billion in 2007. Capital raised by 2013 totaled an aggregate $454 billion, according to the 2014 Preqin Global Private Equity Report

14

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continued from page 13

• Will your transaction require tremendous flexibility to close?

• Is your company better served with a concentrated or dispersed ownership group?

• Do you want to retain some ownership and what is your time frame for the second exit?

• Do you prefer an investor group who incorporates a positive community agenda?

• How critical is industry expertise and contacts to the Company’s future?

passionate investors and operators” distinguish their family operation.

WHICH OPTION IS RIGHT FOR YOU? There are a number of considerations in the sale process. It is helpful to know your options, understand the environment, and ask a lot of questions. Below are issues to consider: • How critical is the timing of your transaction?

• Will you need additional acquisition or expansion capital?

• Does the future strategy involve an industry roll-up?

• What is the anticipated dollar value of your transaction?

Ultimately however, despite hours of thoughtful consideration and diligent preparation, the fact is that oftentimes the choice of buyers is like the decision to sell. It is often driven by personal circumstances, comfort levels and your own intuitive guidance.

Chart B: Wisconsin Private Equity CAPITAL SOURCE

ACQUISITION CUMULATIVE # OF PORTFOLIO AMOUNT OF CAPITAL TARGET ENTEPRISE VALUE INVESTED COMPANIES

COMMITTED FUND FUND SIZE

CONTACT INFO Randy Mehl: 414.765.3818 Dave Pelisek: 414.765.7348 www.rwbaird.com

Baird Capital, US Private Equity

Undisclosed

16

$360,000,000

$25-126 million

Yes Undisclosed

Blackthorne Partners

100% High Net Worth Individual

4

$8,300,000

$4-9 million

No

Steve Balistreri: 262.786.4700 John Syburg: 262.786.5100 www.blackthornepartners.com

Brass Ring Capital, Inc.

100% High Net Worth Individual

3

$7,675,000

$5-25 million

Yes $13.8MM Fund I (2004) $29.5MM Fund II (2011) $43.3MM Total Capital

Steven Peterson: 414.225.0228 www.brassringcapital.com

FCF Partners

43% Insurance Company 40% Fund of Funds 10% High Net Worth Individual 5% Foundation 2% Corporation

2

$45,000,000

$15-30 million

Yes $125MM Total Capital

Paul J. Raab: 414.807.4178 www.fcffunds.com

29% Insurance Company 29% Banks 27% Foundation 2% Corporation

10

Undisclosed

$8-20 million

Yes $60MM Total Capital

John Reinke: 414.291.8908 www.generationgrowth.com

100% Family Office

5

$20,000,000+

5

$35,000,000

$10-30 million

Yes $80+MM Total Capital

Undisclosed

$20-200 million

N/A

Vince Shiely: 414.291.9000 www.lubar.com

$0-20 million

N/A

Christopher Notle: 414.200.0229 www.marcusinvestments.com

Generation Growth Capital

Jacsten Holdings, LLC

70% High Net Worth Individual Lakeview Equity Partners, LLC 20% Insurance Company 10% Banks Lubar & Co.

100% Family Office

9

Marcus Investments

100% Family Office

4

Mason Wells

Undisclosed

Undisclosed

$6-10 million

14

$565,000,000

$50-250 million

Undisclosed

< $10 million

N/A

Jake Hansen: 414.278.5990 J.P. Zvesper: 414.278.5993 Stephen Hansen: 414.278.0625 www.jacsten.com www.lakeviewequity.com

Yes $175MM Fund I (1998) $300MM Fund II (2005) $525MM Fund III (2010) $1,000MM Total Capital

Gregoy J. Myers: 414.727.6404 www.masonwells.com

No

Richard R. Ruffo: 414.282.8492 www.procapgroup.com

Progress Capital Group

70% High Net Worth Individual 30% Family Office

0

PS Capital Partners, LLC

100% High Net Worth Individual

8

$44,200,000

$5-30 million

No

Paul Stewart/Paul Sweeney: 414.831.1801 pscapitalpartners.com

RSA Capital

95% High Net Worth Individual 5% Other

1

< $1,000,000

$5-20 million

No

www.rsacap.com

Sparta Capital Partners

100% High Net Worth Individual

2

Undisclosed

$10-40 million

No

Richard Armbrust: 262.389.8423 www.sparta-llc.com

The Mendota Group

75% Private Investment Fund 25% High Net Worth Individual

5

$20,000,000

$5-10 million

No

Curtis Burgess: 608.287.0649 www.themendotagroup.com

Wing Capital Group

50% High Net Worth Individual 50% Family Office

4

Undisclosed

$10-100 million

No

Jeff Beischel: 262.375.6401 www.wingcapitalgroup.com

*Note: This listing may not be all inclusive

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15

CORE ADVISOR GROUP KEY FOR FUTURE PLANNING Advisors are often asked by business owners when they should start preparing for a future event. The answer is now! Whether company leadership is contemplating an acquisition, a full or partial sale of their business, or a major expansion requiring BILL PENKWITZ debt or equity, proper planPartner, ning and having access to an Promontory Point experienced team of profesCapital sional advisors ensures the successful achievement of the desired objectives. The preparation that starts today will take on many forms but the payoff is generally realized almost immediately.

Shorter-term benefits include a stronger organization with a solid strategic plan, experienced leadership, more diverse customer base, and access to timely and accurate data. Longer-term payoff will be realized in better economics for the owner. One of the most important first steps for the business owner is to assemble a team of key advisors who can help them understand their alternatives.

The most successful transactions utilize a team approach of accountants, law firms with robust business and estate planning groups, and bankers. Further input may be sought from other advisors including wealth managers, insurance advisors, appraisers, and a variety of funding sources. There are generally many parts of a transaction that need attention at any one time and a well-managed process can alleviate many of the stress points during a typically emotional period. A successful transaction takes a great deal of coordination between the company, the funding source and/or acquirer, and the advisors.

A well-rounded team of advisors helps the business owner balance their personal financial strategies with the financial options that are available based on their company’s financial performance. Proper planning allows an experienced team to manage a transaction process that is well-structured, properly documented, and completed in a manner that allows an owner to maximize the impact of whatever ultimate strategy is important to them.

When business leaders have the benefit of time in a transaction, they can evaluate all facets of their business to understand where improvements can be realized. When owner objectives are discussed years in advance, issues can be addressed such as customer concentrations, management, systems, legal and tax structure, and much more. Business owners typically already know about the deficiencies in their business.

Time permitting, the business can address the challenges and show a track record of improvement. The net result will generally be a more lucrative economic event for the business owner.

Bridgewood Advisors Doug Marconnet stated, “Three years out, the business owner has time to upgrade management, demonstrate a growth track record, and improve customer diversification. With only one or two years notice, some of these things can be accomplished, but to a lesser extent. ” And advisors have an opportunity to better understand and manage the risks involved in the transaction that could lead to a failed deal.

The key benefit to the business owner of a strong strategic plan and advanced planning is improved economics. A stronger business will yield a greater audience and generally show better financial performance versus their peer group. Both of these scenarios fuel a more competitive environment where buyers may move to above-market multiples and funding sources may stretch with their availability, structure, covenants, or rate. The winner again is the business owner.

In addition to operational improvements, engaging with a strong advisory team allows time for the company to make more substantial changes including legal or tax structure. Vicki Fox of Eisen Fox recalled a scenario where “following advice from their tax attorney and accountants, our client elected to convert from C to S Corporation status and is likely to pay proportionately less in taxes.”

The financial impact of any given strategy entails careful analysis of a company’s financial situation and a business owner’s individual financial position. Feedback from the legal team, wealth managers, and accounting team should be balanced with transaction feedback from the investment banking group. Continuous and consistent communication amongst team members is critical and the transaction team must be allowed time to collect, absorb, and evaluate information to make recommendations that make sense. This is not a linear process among advi-

sor groups, it is one that takes time.

Professional coordination is needed while the company continues to perform as projected to ensure there are no “hiccups” while a transaction is being completed.

Ryan Chimenti of Clearly Gull noted, “One of the biggest deal killers after a letter of intent is signed is missing monthly forecasts during the buyer’s due diligence.” A well-rounded team of advisors that understand your business challenges and planning process will help you navigate this scenario with financial modeling that is believable and achievable. Further financial targets, such as net working capital, are challenging to properly set and model unless you and your advisor group understand the nuances of your monthly business swings.

The cost of engaging expertise is well-returned in the economics you receive from proper planning. Emory & Co.’s John Emory Jr. noted that “the earlier sellers get their attorneys and investment bankers involved, the better price and terms they tend to receive.”

Understanding where you want to go is helpful when you need to sprint down the path to get there. Having the wealth of knowledge available to you from an advisor group will help you run a business that has you pointed in the right strategic direction with strong awareness of the current challenges and a plan of attack to correct.

ACG AWARDS

16

MERGERS & ACQUISITIONS

STILL NIMBLE, ENTREPRENEURIAL AFTER ALL THESE YEARS

F

or a 140-year-old manufacturer, A.O. Smith Corporation does not act its age. The Milwaukee-based firm made a major strategic transition in 2011, becoming a focused global water technology company. Today, A.O. Smith is North America’s leading manufacturer of residential and commercial water heaters and boilers, the market share leader in the Chinese residential water heater market, and a growing presence in other emerging global markets.

The concentration on water technology has helped accelerate A.O. Smith’s growth as evidenced by its recent financial performance. Over the five-year period 2009-2013, earnings grew at a compound annual rate of more than 25 percent. During the same period, sales increased from $1.38 billion in 2009 to $2.15 billion last year. The company achieved record sales and adjusted net earnings in 2013, and total returns of A.O. Smith common stock exceeded 70 percent.

The foundation of A.O. Smith’s growth rests on its legacy North American residential and commercial water heater business, which represents roughly half of total revenue. The company offers the most comprehensive line of water heaters on the market, with a particular emphasis on energy-efficient products and renewable technologies, such as heat pump water heaters and solar units. The importance of high-efficiency products continues to grow as more residential and commercial customers seek ways to reduce energy consumption and save money. The North American market is largely a stable, replacement-driven market, evenly split between the traditional wholesale distribution channel and the retail channel. A.O. Smith is well positioned in both segments, with long-term relationships with a number of the major national wholesale distributors, such as Ferguson and Winnelson, and a major presence in the retail segment through such well-known names as Lowe’s, Sears, Ace Hardware, True Value, and Do-It-Best.

Another major contributor to the company’s success in the water heater market is its long-standing emphasis on research, engineering, and new product

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development. A.O. Smith patented the glass-lined water heater nearly 80 years ago, and glass lining remains the industry standard to this day. It was the first company to offer a high-efficiency residential product (back in 1976). With nearly 500 engineers working in engineering centers in the U.S., Canada, China and India, the company has the capabilities to continue developing innovative approaches to heating water with features that customers value.

places a high degree of emphasis on product engineering, focusing on efficiency, combustion technology, and electronic controls technology. The market for high-efficiency boilers has been growing more than 10 percent annually, as customers realize significant cost savings and paybacks in as little as three years from these products. Lochinvar is the leader in this segment of the market with an extensive line of condensing boilers that deliver up to 98 percent thermal efficiency.

SUCCESSFUL ENTRY INTO CHINA

COMPANY ENTERS WATER PURIFICATION MARKET

Global growth has been central to the company’s recent success. In 1995, A.O. Smith entered China, becoming one of the first U. S. water heater companies to serve this rapidly growing market. With an emerging middle class seeking greater comfort and convenience—including the convenience of hot water—China represented a logical extension of A.O. Smith’s water heating business. In the five-year period 2009-2013, compound annual sales growth in China exceeded 25 percent. A.O. Smith is now the leading water heating brand in the Chinese market, as measured by market share in dollars; and total sales of A.O. Smith branded products last year exceeded $575 million.

The approach the company took in China was to play to its strengths in product engineering, particularly its reputation for high-quality glass lined products, and establishing an extensive distribution network in the major urban areas of the country. Early on, A. O. Smith recognized the importance of designing products specifically for the needs of the Chinese market. It conducted extensive market research, including consumer interviews, and introduced products that fit the Chinese customer’s lifestyle. Building upon this foundation, the company’s engineers have introduced new products on a regular basis including heat pump, solar, and high-efficiency gas tankless water heaters.

Another important element of A. O. Smith’s success was its partnerships with the leading retailers in the Chinese market, most notably Suning and Gome. At the end of 2013, the number of outlets in China exceeded 5,900, which included more than 1,200 exclusive A.O. Smith branded stores. In October 2013, the company opened a second, 575,000-square-foot manufacturing plant in Nanjing to meet the growing water heater demand throughout China. When fully utilized, this facility will expand A.O. Smith’s capacity in China by 50 percent.

ACQUISITION ADDS TO WATER HEATING CAPABILITIES In 2011, the company supplemented its presence in water heating with the acquisition of Lochinvar LLC. Lochinvar manufactures an extensive line of high-efficiency condensing boilers for residential and commercial applications, as well as residential and commercial water heaters. Much like its parent company, Lochinvar

A.O. Smith also identified the growing importance of fresh water, particularly in Third World countries, and in 2009, entered the water treatment industry by acquiring a small operation in China. The company invested in new manufacturing operations, opening a new plant in Nanjing, and expanded its water treatment engineering capabilities. The following year, it introduced a line of A.O. Smith branded water purification products aimed at the Chinese consumer market. The company was able to take advantage of its brand recognition and distribution network in China to gain share in the water purification market and, by the end of last year, had more than 2,900 outlets. New products also contributed to its success, most notably a patented water purifier capable of producing double the amount of pure water as conventional units. Earlier this year, A.O. Smith became the No. 2 brand in the Chinese water purifier market.

SUCCESSFUL ENTRY INTO INDIA Building on its success in China, the company entered the Indian water heating market in 2008, the first U.S. water heater manufacturer to serve India. The company developed new water heater designs specifically for Indian consumers, expanded distribution throughout the country, and invested in building the A. O. Smith brand with Indian consumers. Two years later, it opened a new residential water heater plant in Bangalore, solidifying its position as a leading brand in this rapidly growing market. Today, A. O. Smith has distribution in all 23 of India’s largest cities as well as 61 of the second-tier cities, and 2013 sales reached $20 million.

Quality and engineering have been constants throughout A.O. Smith’s 140-year history. The other recurring theme is the company’s commitment to doing business with integrity, a characteristic handed down from the founding Smith family. The company’s Statement of Values reaffirms its belief in treating employees, customers and suppliers with respect and dignity and in giving back to the communities in which it does business. Employees all over the world have embraced the company’s values, helping enhance A.O. Smith’s reputation as a good partner with which to do business. The values are also the centerpiece of the company’s 140th anniversary celebration, which is taking place at A.O. Smith facilities around the world this year.

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BRENNAN DIFFERENTIATION

T

he Brennan Companies traces its roots to a farm in northeastern Iowa, where, in 1919, Jim and Gene Brennan left agricultural work to start a small construction and general contracting firm. The brothers grew the company, eventually becoming a well-known heavy civil construction firm, building many of the signature bridges throughout the region of northeastern Iowa, southwestern Wisconsin and southeastern Minnesota. In the late 1940s, Jim and Gene split their business, with Jim setting up his headquarters in LaCrosse, Wis., ultimately incorporating as J.F. Brennan Company Incorporated.

The second generation saw J.F. Brennan Company grow into a firm performing heavy civil contracting work throughout the upper Midwest and Great Lakes states.

During the 1960s, leadership made the decision to deliberately focus Brennan work and asset acquisition on water resource projects and equipment.

The third generation, led by current President Anthony Binsfeld, continued to adapt to meet market demands.

The geographic footprint in which work was conducted continued to expand; a new marine transportation business, Brennan Marine, was started; and the company continued to evolve its service capabilities by entering the environmental clean-up and hazardous waste disposal market.

In 2014, the fourth generation of family is now actively involved in all aspects of the business. The core tenets on which the organization was founded continue to drive Brennan operations. These tenets include a strong corporate culture that drives safety, quality, efficiency, innovation and reinvestment. The Brennan Companies is now a diversified set of business units under two corporate names, J.F. Brennan Company Incorporated and Brennan Marine Company Incorporated.

Both companies focus on transportation, marine and water resource based services, including inland barge transportation, port management, inland ship repair, heavy civil construction, environmental remediation, dredging, construction diving, water treatment, hydro-electric power construction, railroad services and dam building. Within the state of Wisconsin, some of Brennan’s best-known work includes the cleanup of the Fox River between Appleton and Green Bay and movement of cargo that comprises much of the building materials and agricultural output of western Wisconsin. Collectively, the Brennan organization employs nearly 400 individuals throughout the upper Midwest.

project owners is enhanced, thereby strengthening relationships for ongoing work.

Growth, by its nature, is dependent on anticipation of market opportunities and responding to those opportunities in a way that your competitors cannot. Several key FAMILY OWNERSHIP areas set Brennan apart from its competition: Brennan is in its fourth generation of family • CULTURE - People drive the success of the busi- ownership, with an intense focus on reinvestment ness. Finding, training and retaining the right people in the people and assets that drive the business. An is only a single component of building a sustainable ownership mentality must pervade throughout its growth model. A larger and more important aspect is the nearly 400 stakeholders in order for the business to be definition of corporate culture expectations that pervade successful. Significant profit sharing, an unlimited 25 nearly every facet of the operation. Safety, quality and percent 401(k) match for non-union personnel, and a efficiency are pre-planned and measured with historic defined benefit plan for union personnel are a basis parameters or publicly available competitive informa- from which an employee can create a long-standing tion. Ultimately, it is the right people, under a strong career at Brennan. The company currently has many culture, that has allowed Brennan to pursue new oppor- second- and third-generation employees. Stakeholdtunities and has set the expectation for innovative and ers, to the greatest extent possible, are involved in the high-quality work. strategic decision process, analyzing and recom• INNOVATION - Brennan holds several U.S. and mending new work opportunities or markets. Tools and Canadian patents on tools or processes that have equipment are assigned to an individual, as if that redefined several of the markets in which the individual owned the equipment him or herself. organization works. Brennan’s best-known patents Above all, upon introduction into the organization, include the “Vic Vac,” which is a tool designed and individuals are taught that they have been selected to constructed by in-house personnel to eliminate work at Brennan because of their skills; ultimately they contamination in a riverine environment. Its Broad- will stay at Brennan because of their ability to think and cast Capping System, “BCS,” was developed to place lead. impermeable sediment caps on soft submerged The organizational fundamentals that began with Jim river bed soil, and the company’s patented floating Brennan in 1919 will continue to guide Brennan’s future bulkhead system has made it possible to rehabilitate growth. many of the country’s water retention structures. Each of Brennan’s most successful innovations have come from the collaborative process between the company’s engineers and shop employees.

• MARKET OPPORTUNITIES - Brennan has entirely focused its business ® model around markets or clients that require specialty services, typically involving water resourceor transportation-based opportunities. New pursuits largely have high When you trust the advice you’re getting, you know your next move capital barriers to entry is the right move. That’s what you can expect from McGladrey— and require a sophistia partner experienced in helping buyers optimize the strategic and financial aspects of their acquisitions. cated and highly trained That’s the power of being understood. workforce in order to complete work. By looking To learn more, contact Doug O’Connor at 414.298.2800 for market segments that or visit www.mcgladrey.com. fit the Brennan profile, competition is reduced and the opportunity to © 2014 McGladrey LLP. All Rights Reserved. work more closely with

Power comes from being understood.

ACG AWARDS

A CULTURE APART

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® The sixth annual ACG Cup graduate business school investment banking case competition concluded in February 2014 with the University of Wisconsin – Milwaukee winning its first title. Over the last three years in the ACG M&A sup- RYAN CHIMENTI plement, I have expressed Managing Director, my opinion that the ACG Cleary Gull Inc. Cup is: 1) an outstanding introduction to mergers & acquisitions; 2) the most efficient means for Wisconsin’s leading graduate students to network with Wisconsin’s top M&A professionals; and 3) an outstanding venue for employers to identify new talent to grow their organizations. In 2014, Cleary Gull put my thesis to work by using the ACG Cup to identify potential Associate and Analyst candidates. The majority of the candidates we interviewed this year were ACG Cup alumni and two of the three people we hired competed in the 2014 ACG Cup. As I look back at our hiring process, I am 100 percent certain that we would not have connected with these students had they not competed in the Cup. I am pleased to report that using the ACG Cup as a recruiting tool to attract and hire talented students is not limited to Cleary Gull. An increasing number of highly qualified students have leveraged their ACG Cup experience to grow their professional networks and evaluate and pursue a career or land a position in investment banking or private equity.

Each year the majority of the graduate students who participate in ACG Cup rate the competition as one of the best professional development experiences during graduate school. For a small minority, M&A becomes a passion and they commit a great deal of time and energy to landing a position in the M&A field. Here are four specific examples of past ACG Cup participants who refocused their career ambitions, were highly effective networkers, and landed the investment banking or private equity position they desired against long odds.

• STEVE LACZNIAK – Principal, Brass Ring Capital (ACG Cup 2009, 2011). Steve competed in the inaugural Wisconsin ACG Cup competition while working toward his MBA at Marquette. When Steve began to interview for internships and full-time positions during graduate school, he was able to use his ACG Cup pitchbook as a sample in his work product portfolio. When I asked Steve how the ACG Cup benefited his job search, he said, “The ACG Cup served as my initial, hands-on introduction to the M&A space. The ACG Cup was a

UWM TEAM CAPTURES FIRST TITLE challenging and positive experience, and it confirmed my notion that I wanted to shift into M&A.” • DANIEL VAN HOUSEN – Vice President, Eisen Fox & Company (ACG Cup 2010). Daniel competed in the 2010 ACG Cup while he was completing his MBA at UWM. Prior to making the transition into M&A, Daniel was working as a Project Manager (sales, quality, and product development) in a family manufacturing business. Daniel was one of the first ACG Cup alumni to really leverage the ACG network to learn more about M&A and make an informed decision before he left his position in the family business. When I asked Daniel about his networking experiences, he said, “I probably only met with 10-20 people because I received a pretty consistent message to get out there and get deal experience. Once I found an opportunity, I ran with it. I always wondered if the grass would be greener on the other side of the fence and, in this instance, it certainly has been.”

• TYLER CARLSON – M&A Analyst, Schenck SC (ACG Cup 2011 & 2012). Tyler’s team won the UWM competition in both 2011 and 2012. Prior to competing in the ACG Cup, Tyler was working as a Project Engineer at Brady Corporation with a goal of becoming an R&D Director after he completed his MBA. After competing in the ACG Cup, Tyler bought investment banking textbooks and broadened his network within the southeastern Wisconsin financial community. I know Schenck had a long list of very qualified candidates (many with industry experience) who applied for the position that Tyler obtained. From my perspective, Tyler’s enthusiasm and the long list of references he built through networking set him apart from other candidates. When I asked Tyler how he was able to break into M&A without any relevant experience, he said, “Without my dedicated approach to networking and my contacts’ willingness to open their own network to me, I don’t believe I would have been able to make the career switch because I had limited practical M&A experience in a highly desirable industry.”

• JAMES LAZAR – Associate, PS Capital Partners (ACG Cup 2013). James’ team won the UWM competition in 2013. Prior to joining PS Capital, James was a mechanical engineer for Felins Inc. After competing in the ACG Cup, James became an outstanding networker, meeting with more than 70 deal professionals (of which only one-third were ACG members). He also did a great job staying top-of-mind and following up with everyone he met with. I asked James how he was able to land a private equity position so quickly, and he said, “I felt that everyone I contacted in ACG was personally advocating for me.” When I asked James what influence his participation in ACG Cup had on his career transition, he

said, “The ACG Cup exposed me to real-world case work and a network of dedicated and helpful professionals that convinced me to pursue a career in private equity.”

These four students were successful in landing the M&A jobs they wanted because of their professionalism, commitment, networking persistence, and a little bit of luck. For organizations looking for talent in February 2015, I believe spending a Saturday morning watching the ACG Cup Finals is a good investment of your time.

The students competing in the ACG Cup fit a very similar profile and generally possess the following traits and characteristics: intelligence, team player, dedication, critical thinking, humility, poise, and a drive to succeed.

Now let’s get back to the highlights from the 2014 ACG Cup Finals.

2014 ACG CUP CASE COMPETITION In 2014, the ACG Cup was hosted by 27 ACG chapters throughout the U.S. with more than 1,500 students participating from more than 120 graduate business schools. The ACG Cup provides students from leading graduate business programs the unique opportunity to apply classroom studies to real-world experiences and gain invaluable insight into the everyday world of mergers and acquisitions, investment banking, financial advising, and private equity. Experienced merger and acquisition professionals judge the competition and engage business school teams in business analysis, valuation, and strategy. The intense competition provides participants with feedback from leading mergers and acquisition professionals and links the next generation of top-tier business-school talent with potential employers.

The UWM team proved that hard work and preparation can transform a presentation from good to great.

The team was very well-prepared and they were able to answer every challenging question from our distinguished panel of judges to defeat two very strong teams from the University of Wisconsin – Madison and Marquette University. The winning UWM team, taking home the $5,000 top prize and the prestigious ACG Cup traveling trophy, included Donnie Crego, Brian Dayton, and Drew Konop.

The judging panel for 2014 included Brian Durst, Managing Director, Blue Clay Capital; Karin Gale, Shareholder, Schenck SC; Debra Kessler, former CFO of Palermo Villa, Inc.; and Paul Stewart, Principal, PS Capital Partners. The judges were asked to rate each team on their quantitative and qualitative thoughts and their overall presentation skills. After the competition was completed, Paul Stewart said, “I have seen many investment banker and executive presentations that were not as good as the presentations we saw today.

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ACG WISCONSIN, AMONGST ACG’S BEST Over the past two years, I’ve had the pleasure of serving on the ACG Global Board of Directors. ACG Global is an international organization with nearly 15,000 members in 56 chapters around the world. Each year, ACG recognizes its highest performing GARY chapters in various size cat- LABRANCHE, egories with a Chapter of the CAE Year award. For the second President & CEO, time in the past five years, ACG Global ACG Wisconsin was selected as the winner in the mid-sized chapter category. This group is made up of 21 chapters ranging from cities like Charlotte, Pittsburgh, San Francisco and Toronto.

Chapter of the Year award winners are determined through a combination of factors including membership growth and retention, financial strength, best practices in chapter leadership and governance, and participation within the broader ACG organization. Notably, ACG Wisconsin has regularly ranked among the top one or two ACG chapters among all 56 in member retention (85% renew each year) and in the ratio of corporate membership to service professionals (60% corporate/40% service). This means that C-level professionals who join ACG Wisconsin tend to remain members for a long time.

It also means that corporate participants find membership of real value.

“The bottom line is that ACG Wisconsin has excelled at the things important to growth leaders in middle-market companies: facilitating face-to-face networking with high ranking peers, showcasing events of interest to like-minded professionals, and engaging members in ACG events,” commented Gary LaBranche, President & CEO of ACG Global. This is reflected in the strong participation at chapter events where participation regularly broke 100 attendees this past year.

2009 marked the first time ACG Wisconsin won Chapter of the Year. This award had come on the heels of key initiatives such as establishing a sponsorship program to fund high caliber events and the launch of the ACG Cup, an investment banking case study competition among students at area universities. Today, there is a waiting list to become an ACG Wisconsin sponsor, and the ACG Cup achieved record participation levels with 74 students in the latest competition.

This year, our chapter won the award again, following the launch of two other highly successful initiatives. The first was the inaugural Growth, Leadership & Human Capital (GLHC) event last fall. This one-day conference brought together a diverse group of more than 300

growth professionals in a venue to network and hear presentations from recognized thought leaders on the all-important area of human capital development and retention in middle-market businesses.

On the heels of this success, the 2014 GLHC conference is STEVEN slated to be even bigger.

PETERSON The second key initiative Managing Director, this past year was the launch Brass Ring Capital, Inc. of Young ACG. As a result of the demand among younger professionals in the area to participate in a similar organization, ACG Wisconsin launched a group for emerging professionals to network, learn, and share best practices. With more demand than membership slots available, Young ACG boasts 32 professionals that learn together through YACG University, a series of eight targeted learning sessions conducted by ACG Wisconsin member firms. Young ACG builds on the ACG Cup and provides younger professionals an opportunity to build their career at a stage of development before they qualify for regular ACG Wisconsin membership.

As a board member of ACG Global and big fan of the ACG organization, I participate in many ACG events across the country. Each has its own texture and areas of strength. This past spring, I and several other ACG Wisconsin members attended, along with nearly 2,000 other participants, the spectacular annual ACG Intergrowth conference in Las Vegas. As our chapter was receiving its award, we sat in conversation with leaders of other ACG chapters. Reflecting on our chapter’s strong member retention and high corporate participation, others marveled to hear us recount the numbers enjoyed

by ACG Wisconsin.

An article on the success of ACG Wisconsin would not be complete without acknowledging the tremendous support provided by ACG Global. As has been highlighted in the past few years’ Business Journal supplements, ACG has done much to advocate for middle-market businesses. Two years ago, ACG co-launched GrowthEconomy.org, a comprehensive database that allows visitors to analyze the performance of private capital backed companies relative to others on a state and local level. A quick review will demonstrate the general and resounding success of Wisconsin private capital based businesses in job and sales growth.

This past year, ACG launched one of its most important efforts to date: a middle-market caucus in Washington, D.C.After several years of exploratory efforts to understand and gain a voice in federal policy, ACG last

year registered as a lobbyist organization. One of the results of this effort is the Congressional Caucus for Middle Market Growth. The mission of the Caucus is to educate lawmakers on issues and concerns of the more than 200,000 U.S. middle-market businesses comprising 44 million employees. As the voice of the middle-market, ACG focuses on issues such as the deductibility of interest expense. Commented Gary LaBranche, “the understanding among lawmakers on issues impacting middle-market companies is, not surprisingly, quite diverse. ACG supported the creation of the Caucus to help provide this education and raise issues of importance to the job-making companies of this country.”

Rather than skipping this article, hopefully these tidbits provided perspective on why ACG Wisconsin won Chapter of the Year again and why it is considered by many to be the growth organization for high level professionals in southeastern Wisconsin.

CORPORATE MEMBER QUOTES “Through my years of involvement with ACG Wisconsin, it has become much more than just another professional organization. It is a network of friends that are dedicated to exploring and sharing key principals of growth leadership for the benefit of the organizations and communities which we are part of.”

- MICHAEL A. WIRTH

Director, Corporate Development

Rockwell Automation, Inc.

“ACG Wisconsin was an invaluable resource for me individually and our company when we re-entered the M&A game in 2010. The programming and networking opportunities provided the means for us to grow from a five-company, Wisconsin-based group to a 10-company entity with an international presence.”

- BART BLOHOWIAK

Mergers & Acquisitions

The Fisher Barton Group

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MERGERS & ACQUISITIONS

THRIVING COMPANIES ARE DIFFERENT In the 2014 McGladrey Manufacturing & Distribution Monitor survey, 36 percent of participating executives described their business as thriving, a modest rebound from 2013 when 31 percent said they were in that category. Companies are thriving in part due to investments, continuous improvement, and effective strategies including mergers and acquisitions.

DOUG O’CONNOR Partner, McGladrey

MERGERS AND ACQUISITIONS

With cash and credit more readily available, companies are looking with renewed interest at merger and acquisition (M&A) opportunities. Through Q1 2014, U.S. industrial and chemical M&A deal value was $28.6 billion, up from $14.8 billion in Q1 2013.

The U.S. technology sector also saw deal value rise— up to $38.1 billion from $27.1 billion a year ago. The deals will keep coming: 21 percent of U.S. executives plan to acquire a company in the same business, while 17 percent plan to acquire a company in a complementary business.

In fact, thriving companies are making these acquisitions primarily to expand product lines to reach new customers, create cost synergies, improve margins and improve their market position.

For example, Bimba Manufacturing Company, a leading provider of pneumatic, hydraulic and electric solutions based in Illinois, recently acquired Acro Associates, a California firm. Acro’s non-contact pinch valve product line provided Bimba with the ability to expand further into the medical industry, while also bringing new technologies to their existing industrial customers in food and beverage and other sectors.

Regardless of the reasons for buying or selling, the process may be new to some executives. Corporate governance and operational integration will be important areas of focus for companies growing through M&A. Creating a common culture within the newly combined entity will be critical for efficiency of integration and development of a consistent governance program. For example, one Philadelphia based distributor of glass bottles and related packaging grew by acquisition in order to bring the company expertise in specific domestic markets.

However, they tended to operate in regional silos and, as a result, were unable to leverage that expertise across the country. In an effort to work more “as one company,” the company began moving to a single information technology platform in order to share data and leverage the knowledge they acquired throughout the organization. M&A activity may be all the more difficult due to a significant gap between potential buyers (30 percent) and potential sellers (8 percent) identified in the Monitor survey. This gap will likely drive M&A deal prices higher, and will mean that buyers need to plan transactions carefully, from identification of compatible candidates through due diligence to final integration.

From a global perspective, U.S. businesses are more likely to be buyers than their global counterparts. Among non-U.S. companies, 17 percent plan to acquire a company in the same business and 18 percent in a complementary business. Twenty-six percent of non-U.S. participants will sell in some manner (to a strategic acquirer or private-equity firm), compared to just 8 percent of U.S. companies.