Crain's Cleveland Business

VOL. 38, NO. 3

JANUARY 16 - 22, 2017

Source Lunch

Energized Case researchers are part of group working on future of grid. Page 3

CLEVELAND BUSINESS

Len Pagon, chairman of KINETiQ, on his chance to “reinvent his life.” Page 43 FINANCE

Fedeli has new CEO, but same bold goals

AKRON

Demand outpacing space

The List Largest architectural firms in region Page 42 SHIPPING

Port has down ’16, mirroring industry

By JEREMY NOBILE

By JAY MILLER

jnobile@crain.com @JeremyNobile

jmiller@crain.com @millerjh

After more than 35 years in the insurance brokerage and consulting business, The Fedeli Group has a new face behind its daily operations in a president charged with the goal of doubling the business in the near future.

CEO Umberto Fedeli isn’t going anywhere, though. He’s simWick ply letting another captain steer his ship.

Newly named president Scott Wick will focus on growing the Independence-based firm through the acquisition of specialized talent, sales leadership and development of specialized services and industry niches.

Doing that will free up Fedeli, he said, to spend even more time with clients and working on other strategies and investments.

Wick, 39, comes with an impressive background. Among various jobs, one thing that stands out on Wick’s résumé is his time at Chicago-based insurance brokerage HUB International, one of the largest privately held insurance firms in the world, with about 6,000 employees.

At Fedeli Group, Wick will oversee a business with about 110 employees.

At HUB, Wick went on to oversee a region of business composed of 800 people in nine offices. He's credited with increasing revenue in his operations by more than 500% through organic growth and at least eight acquisitions.

Ever the connected businessmen, Wick and Fedeli were introduced not through a headhunter, but through SEE FEDELI, PAGE 7

Although 2016 was not a banner year for shipping through the docks along Lake Erie and the Cuyahoga River, it wasn’t awful, either. The local results mirrored the results for the Great Inside: Victory Lakes-St. Lawrence Cruise Lines is Seaway inland wa- coming to the Great Lakes. terway system.

In particular, the Page 6 Cleveland-Europe Express, the only regularly scheduled cargo and container service between the Great Lakes and Europe, suffered from low-rate competition. “(The year) was not as strong as we’d hoped,” said Will Friedman, president and CEO of the Cleveland-Cuyahoga County Port Authority, in an interview. “It was one of the worst years for ocean transport.

Shippers were offering crazy-low rates from East Coast ports.”

The Journal of Commerce, a shipping industry watcher, reported earlier this month that world container ship capacity has grown at 8% a year since 2008, while shipping volume has grown by only 3% a year, Idle ships led to lower rates, which, Friedman said, negated the cost advantage of moving goods between Cleveland and Europe, India or beyond. It was cheaper to shuttle cargo or containers on rail cars or in trucks between Cleveland and ports in New York, Philadelphia and Norfolk, Va., for ocean crossing.

According to The St. Lawrence Seaway Management Corp., total cargo shipments on the system was 30.3 million metric tons for the period from March 21 to Nov. 30, 2016, the latest figures available. That’s 5.9% below 2015’s 32.2 metric tons.

SEE PORT, PAGE 6

Alexandre Marr and Dominic Iudiciani, both 24, live in Cascade Lofts in downtown Akron. “It’s just super affordable to live here,” Iudiciani said. (Dan Shingler)

Akron has become a sought-out place to live, but it needs more residential development downtown

By DAN SHINGLER dshingler@crain.com @DanShingler

Downtown Akron has an apartment and condo problem.

There aren’t enough of them.

And while it is indeed a challenge the city will need to address if it’s to be successful with its economic development plans, the mere fact that a shortage exists says a lot about how far Akron’s core has come as a desirable place to live.

“We need 3,000 to 5,000 more units, maybe more,” says developer Tony Troppe.

Troppe should know. He’s not only developing apartments in and around

“We need 3,000 to 5,000 more units, maybe more.”

— Akron developer Tony Troppe

downtown Akron, but he’s responsible for a good chunk of the current demand in the eyes of many observers.

In the past few years, Troppe has redeveloped much of the city’s historic

arts district near the Akron Art Museum, turning spaces that have been vacant for decades into modern mixeduse developments that include office space, restaurant space, the Musica bar and concert venue, and BLU Jazz Akron nightclub. He’s planning a boutique hotel for later this year.

Troppe also opened the 24-unit Cascade Lofts, a modern apartment building that is a converted 100-yearold tire factory. It sits along the Towpath Trail at North and Howard streets on the edge of downtown.

That building’s units rented out quickly, for $1.10 a square foot and up, with no marketing or advertising.

The building is fully occupied, Troppe reports.

SEE AKRON, PAGE 39

FIND MORE AKRON COVERAGE BEGINNING ON PAGE 39

Entire contents © 2017 by Crain Communications Inc.

Wellness Warriors <<T3 Performance kicks training up a notch Page 35 Namaste: Cleveland Yoga puts city at ease Page 36 Q&A; Adviser Page 37

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CRAINâ&#x20AC;&#x2122;S CLEVELAND BUSINESS

Investors buy office complex for $50 million

By STAN BULLARD sbullard@crain.com @CrainRltywriter

Stamford, Conn.-based private equity fund Five Mile Capital Partners placed a big bet early on the Rockside Road office market, and it just reaped a big part of its reward.

Through FMC Investment Opportunities Cleveland Office Portfolio SPE llc, Five Mile on Jan. 6 sold the Park Center Plaza trio of buildings in Independence for $49.95 million.

Five Mile retained two other buildings from the five-building portfolio it bought three years ago from Duke Realty Corp. for $62.4 million, according to Cuyahoga County records.

Broker Joseph Greenberg of Pepper Pike-based Lee & Associates, who serves as managing partner of new owner Park Center Plaza LP, said the investor group he leads â&#x20AC;&#x153;plans to hold the properties for a very long time.â&#x20AC;?

Greenberg did not identify his partners in the purchase, but insiders said it includes several local investors.

The Park Center Plaza office complex in Independence was sold for $49.95 million. (Stan Bullard)

â&#x20AC;&#x153;Weâ&#x20AC;&#x2122;re very excited to have bought these buildings,â&#x20AC;? Greenberg said of the buildings at 6050-6150 Oak Tree Blvd., which date from the mid-to-late 1990s.

Thereâ&#x20AC;&#x2122;s likely little to do, however, other than manage and continue to lease the remaining pockets of empty office space in the buildings. The prior owner substantially updated the buildings and boosted tenancy of the buildings, which have a total of about

422,000 square feet of multitenant office space.

Jeff Patterson, CEO of Five Mileowned Riverview Partners of Chicago, said Five Mile sold the buildings because it had successfully implemented plans to complete delayed maintenance and improve their occupancy. He declined to comment on specific gains on Park Center.

David Browning, managing director

of CBRE Group Inc.â&#x20AC;&#x2122;s Cleveland office, said Five Mile believed in the basic strength of the Rockside Road office market, which was not easy to do before leasing activity picked up in 2015. â&#x20AC;&#x153;Itâ&#x20AC;&#x2122;s a significantly leased asset now. We got it up to a nice rent,â&#x20AC;?

Browning said of CBREâ&#x20AC;&#x2122;s efforts managing and leasing the buildings for Five Mile. However, he said his brokerage was not involved in the recent sale of the complex.

The Five Mile investor group booked about a 14% gain on a square footage basis on flipping the property, selling Park Center Plaza for $118.37 a square foot while it had paid $104 a square foot for the five-building portfolio. However, that is a rough measure because it marks a larger portfolio to a smaller one.

Local land records do not assign sale prices to individual buildings.

Since Five Mile bought Park Center Plaza â&#x20AC;&#x201D; so named because the lookalike semicircular-shaped buildings surround a pocket park â&#x20AC;&#x201D; the complexâ&#x20AC;&#x2122;s occupancy increased to 93% from 83% in 2014 with leasing

efforts as the owner made substantial investments in the properties.

Vacancy on the office-rich Rockside Road area in Independence and Seven Hills fell to 8% as of the end of 2016 from twice that in 2014, according to the CoStar online realty data service.

Brian Hurtuk, managing director and principal of the Cleveland office of Colliers International, considers the Park Center buildings some of the best located and appointed properties in the southern suburbs. â&#x20AC;&#x153;Iâ&#x20AC;&#x2122;ve put tenants into the buildings who have expanded there because they did not want to leave,â&#x20AC;? Hurtuk said.

Five Mileâ&#x20AC;&#x2122;s affiliate continues to own the Corporate Place I and II office buildings at 6450 and 6480 Rockside Woods Blvd. South. Those buildings are slightly older and have slightly more vacancy than the Park Center buildings.

Patterson said Five Mile recently refinanced the Corporate Place buildings and has â&#x20AC;&#x153;some more leasing to doâ&#x20AC;? with them. He declined to say if or when Five Mile would offer those buildings for sale.

ABB Inc. plans to move to 16-acre Highland Hills site

By STAN BULLARD sbullard@crain.com @CrainRltywriter

After years of on-again, off-again searching, Zurich-based ABB Inc. is moving closer to moving its instrumentation and analytics unit to Highland Hills from its legacy 50-year-old home in Wickliffe.

Preliminary plans for a sprawling, single-floor building with 145,000 square feet of office and research space were approved unanimously on Jan. 4 by Highland Hills Planning Commission.

However, Weston, the Warrensville Heights-based real estate developer and owner, and Arco Design/Building Inc., an Atlanta-based national contractor, need to return with more detailed plans to start building later this year, according to Larry Finch, Highland Hillsâ&#x20AC;&#x2122; community development director.

ABB and its vendors intend for the company to be in the new structure by year-end, he added.

ABBâ&#x20AC;&#x2122;s process control unit, originally Cleveland-founded Bailey Controls Co., plans to occupy a 16-acre site on the southeast corner of Har-

vard and Green roads in the Chagrin Highlands corporate center developed by Jacobs Real Estate Services and Scott Technologies Inc. Finch said the site would be purchased from the Chagrin Highlands joint venture of Jacobs and Scott.

However, Cuyahoga County land records showed no land sale by last Friday, Jan. 13.

Melissa London Zingle, a New Yorkbased spokeswoman for ABB, wrote in an email on Thursday, Jan. 12, that she had no additional information on ABBâ&#x20AC;&#x2122;s location, though she may be able to provide some in a week.

Previously, Zingle and others said ABB had searched several times in the past for a new home for its Cleveland operations without committing to a move.

Committing to a new site in Northeast Ohio would reduce risk the group might be relocated to Cary, N.C., the headquarters of Swissowned ABB in the United States. ABB moved its U.S. operations to Cary six years ago from Norwalk, Conn.

About 600 workers would be moved to the new building when it is completed.

The proposed ABB building is much

smaller than the 500,000-square-foot complex ABB currently occupies at 29801 Euclid Ave. When the former Bailey Controls moved its meter and related mechanical controls unit to the site from Cleveland in 1955, the Wickliffe property also was used for manufacturing. Over the years, the group became a process control maker and servicer for industrial, health care and other concerns around the globe.

Highland Hills Village Council last October approved an income tax incentive and 12-year abatement of half of the property taxes on the proposed building.

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PA G E 3

Researchers plotting out future of grid

By RACHEL ABBEY McCAFFERTY rmccafferty@crain.com @ramccafferty

Alexis Abramson, director of the Great Lakes Energy Institute at Case Western Reserve University, thinks it’s likely the energy grid of the future will look drastically different from today’s system, upgrading the aging traditional grid and incorporating more renewable energy sources.

It’s unclear how all those parts could best work together, but a cohort of Ohio institutions, including Case, aims to find out as part of a new project.

The Northern Ohio Building-toGrid Integration Demonstration is designed to test those new energy scenarios in real-world settings at Case and the University of Toledo, and through simulated tests at NASA Glenn Research Center. The project is funded by the Department of Energy and administered by the Pacific Northwest National Laboratory, a Department of Energy research lab. It has industry buy-in, too. A post on Case’s The Daily website lists the corporate partners as FirstEnergy Corp., Eaton Corp., Siemens Corp. and Johnson Controls International Plc. The project focuses on expanding the laboratory’s research on “transactive control,” the practice of constantly managing energy and building connections to the grid. Together, federal funding and industry investment add up to more than $1 million, according to The Daily post.

Abramson, who is one of the faculty members leading the project, wouldn’t get more specific on that point. The funding started on Nov. 1, 2016, and will last for 15 months, Abramson said, but she could see it growing as questions about the grid of the future evolve.

For example, instead of just relying on centralized power, a future grid may incorporate solar panels and wind energy, but those sources of energy are only available sometimes.

But the grid still needs to be reliable, secure and cost-effective. That kind of complexity “changes the game,” said Abramson, who also is the university’s Milton and Tamar Maltz professor in mechanical and aerospace engineering.

The so-called living laboratories — because these buildings will still be in use — in the Northern Ohio Buildingto-Grid Integration Demonstration will test out different energy-related scenarios in a variety of types of buildings.

Case will upgrade and monitor two of its older buildings, Olin and White, as part of the project, which will help researchers learn about what it will take to get those kinds of buildings on a more futuristic grid.

The school will monitor energy budgets for the buildings and work to maximize the use of renewable energy. The campus already has a wind turbine, and the university is looking into ways to get solar power to the buildings, Abramson said. And a building battery installation will take place in about the next six months, she said.

“Ultimately, the lessons learned from this pilot will be used to expand the capabilities and applicability of the controls and increase our knowledge of how this equipment interacts with the grid.”

— Todd Schneider, FirstEnergy spokesman

“Hopefully, in some ways, you won’t be able to tell they’re part of the project,” Abramson said.

On the other hand, the buildings at the University of Toledo already are equipped with the majority of the technology they will need. Toledo is using its Scott Park campus for the project, and the buildings have solar power from a large field, LEDs and motion sensors in the rooms, said director of energy management Michael Green. The only technology Toledo will need to add is a battery module to absorb power from its existing solar panels.

The university will use Department of Energy/Pacific Northwest National Laboratory software to track data like price points and stress levels

on the grid to automate the energy usage of the buildings. Green said the school also will gather feedback from the students and others on campus on factors like comfort under the automated conditions. Case also will use the software, which is open source, Abramson said.

NASA Glenn is in the process of finalizing its partnership agreement with Case for the project, said Robert Romero, NASA Glenn chief of innovation and integration in the Office of Technology Innovation and Incubation.

But once it does, the plan is for NASA Glenn’s Lewis Field to be the industrial site for the project, relying on simulations, instead of real-life situations like the universities. Robert Puzak, branch chief in the facilities division who is responsible for systems and operation, said the facility is “like a municipality.” There are no renewable energy sources at Lewis Field, but they can be simulated after models of the systems are created.

As part of the project, NASA will focus on grid stability, while the schools will be focused on demand management, Puzak said. This work of studying how to keep voltage regulated and stable is particularly important to utilities companies.

Akron-based FirstEnergy has been a partner of Case’s Great Lakes Energy Institute for years and has worked on a number of projects in the past, spokesman Todd Schneider said in an email. This project will help FirstEnergy see how new “smart”

control technology could affect the distribution grid, he said.

“With some customers using distributed generation — such as onsite wind turbines, solar panels or battery storage — these types of research projects take on added significance when it comes to analyzing energy savings, cost reductions and maintaining overall system reliability,” Schneider said. “Ultimately, the lessons learned from this pilot will be used to expand the capabilities and applicability of the controls and increase our knowledge of how this equipment interacts with the grid.”

But the industry partners include more than just utilities companies.

Johnson Controls, which technically is based in Ireland but has North American headquarters in Milwaukee, will provide lithium ion batteries for the sites. Case is staged first, followed by the University of Toledo, said John Schaaf, vice president and general manager of distributed energy storage for Johnson Controls.

NASA isn’t staged yet. One of the barriers to a more diverse energy grid is how to deal with the risk renewable energies carry, Schaaf said. But energy storage systems like batteries help address that risk.

Johnson Controls wanted to be involved in the project because it’s “core to our business,” Schaaf said.

The company is a major manufacturer of batteries and a supplier of building equipment, technology and supplies. Bringing the two parts together is a “natural extension,” he said.

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Cleveland Lofts LLC is upgrading a two-story building at 4211 Lorain Avenue. (Stan Bullard)

Knez purchase could signal more Ohio City development

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A suburban homebuilder buying the landmark Bodnar funeral home building in the Ohio City neighborhood of Cleveland signals another potential change for lower Lorain Avenue: new residential development.

Although Concord-based builder Bo Knez confirms his Triban Investment LLC owns the property, 3929 Lorain Avenue, he is not ready to discuss what he hopes to do with it.

Cuyahoga County land records show Triban on Jan. 6 paid $700,000 for the building. The structure sits on a sea of parking about a half-acre in size, which is huge in the context of an urban neighborhood.

However, his B.R. Knez Construction has been busy building single-family homes just south of Lorain.

Significantly, a few hundred feet north of Lorain, Knez through Howard Hanna is marketing Greenbriar, a city-approved 11-unit townhouse project with properties costing upwards of $300,000. Part of the site is at 4019 Bridge Avenue, and part of it is on the east side of Randall Road, which becomes West 41st Street south of Lorain.

So, it’s a safe bet Knez wants to construct for-sale housing there. Moreover, architect David Ellison, whose firm is based at 2002 W. 41st St. in a building that also borders Lorain, said Knez has shared some concepts for townhouse development on the site with retail space lining the site’s Lorain frontage.

He believes they’ve not been well-received by neighborhood residents.

Caution is warranted, as a Knez proposal for a six-townhouse development at 4195 Lorain Court, an alley south of the avenue, was tabled last July by Cleveland City Planning Commission after getting neighborhood pushback.

However, zoning is on Knez’s side: Bill Sanderson, vice president for development at Knez, said in an interview that the Bodnar site can accommodate townhouses, single-family

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homes or even apartments. The southern-most end is zoned single-family and could accommodate several houses independent from the rest of the site.

Platform Beer Co., 4125 Lorain Avenue, has something to lose with Bodnar’s potential redevelopment.

The parking lot at Bodnar, once the site of a Fisher’s supermarket, also serves the brewery’s patrons. It even has a banner on a fence saying so.

However, Justin Carson, president of Platform Beer Co., said the brewery can temporarily continue to use the funeral home’s parking when it’s available. Platform also has made arrangements to use another big parking lot on Bridge Avenue and Random.

“It’s a very walkable area,” Carson said. He wouldn’t discuss the Knez plans, but supports its redevelopment.

“Unfortunately, for 50 years, Lorain has not seen growth," he said.

“Now you’re seeing storefronts fill.

The only way we can continue to grow is to create more housing.”

Tom McNair, executive director of the Ohio City Inc. local development corporation, said his group will be able to work meaningfully with Knez now that his affiliate owns the property.

Moreover, lower Lorain Avenue is on the receiving end of other potential residential developments.

The Tinnerman Building, 2038 Fulton Road near Lorain, is undergoing a review for listing on the National Register for Historic Places, which could trigger apartment conversion of the 1890-vintage factory complex. Two other townhouse projects have been proposed on Lorain at West 38th and West 47th, although they have languished since the housing bust. Additional investments are going into existing commercial buildings with apartments above them. Those squat retail-residential buildings are a relic of the avenue’s development as a streetcar neighborhood in the late 19th and early 20th century.

For example, an affiliate of Cleveland Lofts LLC is amidst a massive upgrading of the two-story building at 4211 Lorain, which dates from 1900.

However, in this case, the street’s

startup restaurant and hair salon resurgence is pulling along the housing.

Doug Perkowski, manager of Cleveland Lofts, said he bought the building in 2015 because it would be possible to put a restaurant in, which would not have been the case just five years ago.

“The space would have sat empty,” said Perkowski, whose Cleveland Lofts owns about 250 suites in Tremont and Ohio City. A restaurateur he declined to identify has leased the first floor for a 100-seat eatery, which also triggered his efforts upstairs.

“We’re updating everything and rationalizing the layout of the apartments," Perkowski said. “We’re enlarging the bathrooms. They were so small you had your feet in the tub when you sat on the toilet.”

The building’s only parking is a one-car garage, so tenants will have to find parking nearby — a legacy of its trolley-era construction. The one-bedroom suites will rent for about $700 monthly, half the going rate in updated rentals in the area.

“These will be a little less expensive,” Perkowski said, and will hit a market for updated housing that’s underserved. “People who work in Ohio City (bars and restaurants) can’t quite afford all the apartments coming in.”

Perkowski, who redeveloped houses as rentals in Tremont and Ohio City and converted offices to apartments starting 20 years ago on West 25th, said he sees a larger trend shaping lower Lorain.

“On West 25th Street, parking is an issue. It’s so developed now. Platform opening up made it OK for that (Lorain) area to develop,” Perkowski said. “Five years ago, who would walk there?”

Volume 38, Number 3 Crain’s Cleveland Business (ISSN 0197-2375) is published weekly at 700 West St. Clair Ave., Suite 310, Cleveland, OH 441131230. Copyright © 2017 by Crain Communications Inc. Periodicals postage paid at Cleveland, Ohio, and at additional mailing offices. Price per copy: $2.00.

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Correction A story in the Jan. 9 issue on the plans for the Campus District misidentified Karen Perkowski’s husband. She is married to Dave Perkowski. The story also incorrectly identified the location of Cleveland's former garment district. It ran along Superior Avenue.

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A win for Cleveland: Cruise ship adds city to schedule It wonâ&#x20AC;&#x2122;t have a great impact on the activity at the Port of Cleveland, but for the first time in years, a major Great Lakes cruise ship operator, seeing Cleveland as â&#x20AC;&#x153;an up-and-comingâ&#x20AC;? city, has added it to its itinerary and will bring tourists to the port 16 times this summer.

Victory Cruise Linesâ&#x20AC;&#x2122; 200-passenger M/V Victory 1 will spend the summer shuttling tourists on 10-day cruises between Toronto and Chicago, with stops including Niagara Falls, the Georgian Bay and Mackinac Island.

Another cruise ship line, Blount Small Ship Adventures, has been bringing its smaller, 88-passenger

cruise ships to Cleveland since 2013.

Its 15-day cruises between Chicago and Warren, R.I., will stop in Cleveland six times this summer, said Lynde Vespoli, director of destination management for Discover My Cleveland, a firm that provides tour guide services. The Blount ships tie up alongside the Nautica Queen on the Cuyahoga River, rather than at the Port of Cleveland.

Bruce Nierenberg, Victory Cruise Linesâ&#x20AC;&#x2122; president and CEO, said his firm took over the ship and its Great Lakes cruises before the 2016 season from another operator that didnâ&#x20AC;&#x2122;t have Cleveland on its itinerary. He wondered why.

Before this year, the ship would leave Toronto and head straight for Detroit. â&#x20AC;&#x153;I asked our people, â&#x20AC;&#x2DC;Why donâ&#x20AC;&#x2122;t we stop there?â&#x20AC;&#x2122; â&#x20AC;? Nierenberg said. â&#x20AC;&#x153;Cleveland is an up-and-coming city, theyâ&#x20AC;&#x2122;ve got the Rock and Roll Hall of Fame. Our guests are 65-plus, and itâ&#x20AC;&#x2122;s the music they grew up on. And there are a lot of other things to do in Cleveland, so I thought it would be a really good stop.â&#x20AC;?

Great Lakes touring isnâ&#x20AC;&#x2122;t cheap.

The cost of the 10-day excursion runs from $6,498 to $9,487 per person, although that includes meals, including unlimited alcohol service, and tours at each stop. â&#x20AC;&#x201D; Jay Miller

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Gregory West

NathanOsborne@HannaCRE.com

GregoryWest@HannaCRE.com

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Victory Cruise Linesâ&#x20AC;&#x2122; M/V Victory 1 will be stopping in Cleveland beginning this summer. (Contributed photo)

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PORT CONTINUED FROM PAGE 1 On the Cleveland docks, cargo tonnage was down from 536,000 metric tons of cargo to 530,500 tons, down 1%. The down year also broke a string of six years of international cargo growth.

Friedman said demand was strong for some bulk cargoes, including stone and coal, although the Lake Carriers Association, which represents Great Lakes ship owners, reported that iron ore shipments to Cleveland docks was down 15.6%, from 3.2 million tons to 2.7 million tons.

The port received 400,000 tons of imported steel, which Friedman said was â&#x20AC;&#x153;pretty typical.â&#x20AC;?

The decline of the European service, though, no longer affects the Port Authority financially.

The Cleveland-Europe Express was introduced in 2014, with the Port Authority subsidizing one vessel sailing a month back and forth between Cleveland and Antwerp, Belgium. For the first year, the Port Authority pledged $800,000 a month, which could be offset by cargo revenue. The subsidy the first year was $3.7 million.

In 2015, the capacity doubled to two sailings per month, and as of spring 2016, Spliethoff Transport BV, the Port Authorityâ&#x20AC;&#x2122;s partner on the service, added more sailings.

But the Port Authorityâ&#x20AC;&#x2122;s financial commitment has declined. The Port Authorityâ&#x20AC;&#x2122;s 2017 budget projects a subsidy of $1 million, down from $1.8 million in 2016.

The Port Authority sees the service as a long-term investment to stimulate cargo traffic through the port. In May, Lubrizol Corp. of Wickliffe committed to regular shipments of specialty chemicals produced at its Avon Lake plant from the Cleveland docks, the serviceâ&#x20AC;&#x2122;s first major commitment from an exporter.

The Port Authority is looking forward to startup of work building the Lake Erie wind farm. Lake Erie Energy Development Co. (LEEDCo) plans to ship the pieces and parts of the six wind turbines to the local docks for assembly before they are towed out to the construction site on barges.

Friedman said the Port of Cleveland could become an assembly site for other lake or inland wind farms.

Much of the bulk shipments into the private docks along the Cuyahoga River are commodities â&#x20AC;&#x201D; iron ore, grain, limestone, cement and coal â&#x20AC;&#x201D; that originate elsewhere in the Great Lakes.

That kind of shipping is the bread and butter of Middleburg Heightsbased Interlake Steamship Co. Its fleet of 10 ships, some 1,000 feet long, shuttle coal between the Iron Range of northern Minnesota to the steel towns further south in the Great Lakes. â&#x20AC;&#x153;Itâ&#x20AC;&#x2122;s been OK. Weâ&#x20AC;&#x2122;ve seen a steady year,â&#x20AC;? said company president Mark Barker of his company's 2016 operations. â&#x20AC;&#x153;Steelmaking has been running about 70% utilization. Thatâ&#x20AC;&#x2122;s not a fantastic number, but itâ&#x20AC;&#x2122;s not a horrible number.â&#x20AC;?

That soft production at the steel mills resulted in the temporarily idling of several of Interlake customersâ&#x20AC;&#x2122; mines, he said.

One factor affecting both the local port authority and the ship operators is insufficient dredging of shipping lanes. â&#x20AC;&#x153;The Great Lakes have quite a substantial backlog in dredging,â&#x20AC;? Barker said. â&#x20AC;&#x153;Our channels are functional, but they are not maintained to the full design. In some cases, that restricts us.â&#x20AC;?

That means that ships, to keep from scraping bottom in parts of the shipping lanes, must lighten their loads, raising operating costs.

In Cleveland, the U.S. Army Corps of Engineers stopped dredging the Cuyahoga River as it, the Port Authority and the Ohio Environmental Protection Agency sparred for more than two years over where to put the sediment that builds up on the river bottom.

As on the lakes, shallower shipping lanes lighten the loads of ships that drop off stone, iron ore and other cargo at docks along the river.

The Army Corps says the material is no longer toxic and is now safe to deposit in Lake Erie. The Port Authority and the Ohio Environmental Protection Agency disagree and want the sediment placed along the waterfront.

The Army Corps finally agreed to dredge last October, after more than a year without dredging.

Friedman said heâ&#x20AC;&#x2122;s optimistic the federal Water Infrastructure Improvements for the Nation Act, passed in December, will solve the dispute, which has been mired in federal court for several years. The act requires the Army Corps to accept the water quality standards set by state EPAs.

CRAIN’S CLEVELAND BUSINESS

FEDELI CONTINUED FROM PAGE 1 mutual contacts last fall as Wick was doing some consulting work after leaving HUB in February 2016.

“I wasn’t sure if the insurance brokerage community was what I wanted to get back into,” Wick said. “But then I met Umberto, and that was kind of it for me. His candor, his warmth and appreciation for employees — it was humbling. And I realized this was something I wanted to pursue further.”

Wick said he’s emboldened by the opportunity to get back into this field at a company like Fedeli Group.

“I think as this industry sees continued consolidation, people get further and further away from the customer,” Wick said. “The customer

really does come first here. And that was something I was really drawn to.”

Executives at the privately held firm declined to disclose revenue figures, but Fedeli said the business has been growing consistently through the years.

Wick’s job will be to accelerate that growth pace with the ultimate goal of doubling the business in five years. If the company can log 15% growth annually, “then we’ll have succeeded,” Wick said.

The dominant strategy in achieving that is “no secret,” he said.

“When you look at the regional insurance brokerage industry, to grow in scale is to focus around specialization," Wick said.

That’s mainly because the business is so competitive.

“We’ll specialize in horizontals as well, like product offerings,” he said.

Construction will remain a “hot-

“We don’t want to be part of a big national firm. We picked Wick because we wanted someone to embrace our culture and take it to the next level.”

— Umberto Fedeli

bed,” he said, along with financial services, which are areas on which Wick seems bullish.

Acquisitions are on the table — and they’re certainly something Wick is familiar with — but there aren’t firms immediately on their radar screens. In terms of geographies, Wick said one area he wants to “explore” for growing the business is Pittsburgh.

Onboarding new talent will come

as the business grows.

“We want to be an employer of choice,” Wick said, “and that will hopefully give us opportunities to get in front of some really good talent.”

In terms of challenges to their growth goals, Wick said that beyond competition, “a headwind will always be getting around that commoditization of the insurance brokerage community as a whole.”

“And just how brokers are viewed

Akron among cities with highest percentage of failed home sales BLOOMBERG

Spending months to find the perfect home in your price range, only to have your mortgage application rejected, or a home inspection turn up expensive repairs, is a nightmare — one that is coming true with increasing frequency, according to a new report from real estate listings website Trulia.

A Trulia analysis of U.S. listings shows that 3.9% of homes that moved from for sale to pending moved back to for sale again, nearly double the rate in 2015.

Such “failed sales” increased in 96 of the 100 biggest U.S. metros, with big swings in areas large and small, rich and poor. That includes Los Angeles and Charleston, S.C., as well as San Jose and Akron.

In Ventura County, Calif., where the median home value is $548,000, 11.6% of prospective sales failed to close in 2016. That’s the highest in the United States, up from 3.1% in 2015.

Tucson, Ariz., where the median home price is $176,000, had the second-highest rate of failed sales, at 10.8%, up from 3.5% the year before.

Akron’s rate of failed sales was about 9.3% in 2016, up from less than 2% in 2015, the Trulia data show.

The problem of failed sales has been most acute for cheaper homes and older ones: Some 6.3% of sales of starter homes fell through last year, according to Trulia’s analysis, compared with 3.6% of so-called premium home sales.

Homes built in the 1960s had the highest fail rates, while sales of newer and older houses were more likely to go through.

Trulia’s data don’t explain why listings reverted from pending to forsale, but broadly speaking, a few factors can reliably torpedo a deal: J The buyer’s mortgage doesn’t come through.

This can happen even for buyers who have been prequalified, especially when a buyer has to stretch to outbid rival house hunters.

It’s worth noting that borrowers are having an easier time getting mortgages: 77% of purchase mortgages made it to closing in October, according to mortgage software company Ellie Mae, the highest percentage since 2012.

J A home appraiser values the home below the sales price.

Low appraisals are more common in hot markets, where buyers bid up

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can be a headwind,” he added. “We need to get in front of these people and be a thought leader in the space.

So I think that’s something we have to work on.”

Regardless of all that growth, don’t expect Fedeli Group to relinquish its independent structure anytime soon.

“We don’t want to be part of a big national firm,” Fedeli said, commenting on his turning down interested potential acquirers of his company in the past. “We picked Wick because we wanted someone to embrace our culture and take it to the next level.”

“Our goal is to be world-class,” he added. “In order to do that, we need the right people in the right place, and we need to engage our clients and associates. If you take care of clients, associates and your strategic partners, things will take care of themselves.”

CLEVELAND BUSINESS 700 W. St. Clair Ave., Suite 310, Cleveland, OH 44113-1230 Phone: (216) 522-1383 www.crainscleveland.com @CrainsCleveland

Falling through Percentage of listings that moved from for sale to pending, then back to for sale, by type of home.

10% Starter

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Publisher/editor Elizabeth McIntyre Managing editor Scott Suttell

Trade-up

Sections editor Tim Magaw

Premium

Creative director David Kordalski Web editor Damon Sims Associate editor/Akron Sue Walton Assistant editor Kevin Kleps Senior reporter Stan Bullard Real estate/ construction Reporters Jay Miller, Government

5%

Dan Shingler Energy/steel/auto Rachel McCafferty Manufacturing/ energy

Q4 2014

Unhappy returns

Lydia Coutré, Health care Data editor Chuck Soder

The U.S. metros with the highest percentage of failed sales in 2016.

2016

Jeremy Nobile, Finance

Q4 2016

Cartoonist Rich Williams *** Events manager Ashley Martin

2015

Events coordinator Megan Lemke

Ventura County, CA

Integrated marketing manager Michelle Sustar

Tucson, AZ

Managing editor custom/special projects Amy Ann Stoessel

Atlanta, GA

Advertising director Nicole Mastrangelo Senior account exec. Dawn Donegan

Fort Worth, TX

Account executives Lindsie Bowman John Banks

Los Angeles, CA

Laura Kulber Mintz Office coordinator Denise Donaldson

Charleston, SC

*** Digital strategy/ audience development director Nancy Hanus

San Jose, CA Orange County, CA

Production director Craig L. Mackey Billing Peter Iseppi

Portland, OR

Credit Rod Warmsby

Akron, OH Kansas City, MO 0

2%

4%

6%

10%

12% Bloomberg

Source: Trulia

prices beyond what appraisers think homes are worth.

But there were plenty of hot markets in 2015, when the fail rate was lower, so it's not obvious why low appraisals are responsible for increased failed sales. Navigating the appraisal process has been an issue for buyers since reforms passed in the aftermath of the foreclosure crisis, said Robert Gleason, chief executive officer of the Greater Forth Worth Realtors Association.

“Any area you have a hot market is going to be a concern,” he said. “Prices have gone up quite a bit, and it can take a while for appraisals to catch up.”

8%

J Defects discovered in home inspections give a buyer reason to walk away.

A house that needs expensive repairs to fix a cracked foundation, say, or a faulty roof, may stop looking like a good value. That helps explain why sales of older homes are more likely to fall through.

As to why these things might be throwing a wrench into more sales than before, Felipe Chacón, a data analyst at Trulia, said an increase in first-time homebuyers could offer a plausible explanation.

Inventory shortages in many U.S. markets have been most acute for the

entry-level homes first-time buyers usually seek. Those buyers can face greater scrutiny from mortgage lenders, Chacón said.

Trulia’s data only go back two years, so they don’t indicate what rate is historically normal.

Lyle Elliott, branch manager for Berkshire Hathaway HomeServices office in Ventura, Calif., didn’t think his metropolitan area’s fail rate of 11.6% was particularly surprising.

“We’ve had a robust year,” he said.

“When you have more sales, you also have more sales that don’t complete.”

CRAIN COMMUNICATIONS INC. Chairman President Treasurer CIO CFO Group publisher Senior Executive VP Exec. VP/director of strategic operations Exec. VP/director of corporate operations VP of production and manufacturing

Keith E. Crain Rance Crain Mary Kay Crain Anthony DiPonio Bob Recchia Mary Kramer William A. Morrow Chris Crain KC Crain Dave Kamis

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CRAIN’S CLEVELAND BUSINESS

Opinion From the Sections Editor

Tell the whole story about Cleveland 2.0

Editorial

Two thumbs down Cuyahoga County is the envy of other arts communities across the country.

The Cleveland metropolitan area is regularly lauded for the amount of public money used to support the arts — something made possible when voters first passed a small tax on cigarettes to support arts and cultural efforts a little more than a decade ago.

However, a leadership and communication crisis unfolding with Cuyahoga Arts and Culture (CAC), the county agency that allocates cigarette tax revenue to the arts, is threatening that reputation.

The turmoil surrounds the future of the Creative Workforce Fellowship — which has been administered by the Community Partnership for Arts and Culture (CPAC), a Cleveland nonprofit that was instrumental in the creation of CAC — that supported the work of 161 artists since 2009. It ended Dec. 31.

CAC had planned to replace the existing program with something called the Creative Community Fellowship and move administration of the program to National Arts Strategies (NAS), a Washington, D.C.-based nonprofit. The news seemingly blinded CPAC leader Tom Schorgl and other arts activists in the community, who quickly rallied support for the existing program. Ultimately, NAS withdrew as a partner, citing the ongoing squabble.

CAC’s decision to nix the former program, according to the agency’s leaders, was because of its desire to increase the number of fellowships that go to minority artists, with an added emphasis on artists who can demonstrate a community benefit.

Those are, of course, admirable goals, and CAC’s Karen GahlMills insisted that working with CPAC to accomplish such goals over the last few years has been difficult.

Now, individuals artists are left wondering whether this critical financial support — something that many artists in the community have credited with launching their careers — will continue in any form.

Northeast Ohio is home to a bevy of remarkable cultural institutions, and CAC has been vital to their livelihood and continued to growth. But the success of the region’s individual artists is just as important, which is why it’s critical this issue be ironed out in short order.

And while we aren’t arguing the fellowship program was without fault, a radical redesign that overly defines what is and isn’t art would be dangerous.

Art can be many things, and therein is its beauty.

Summa stresses

Another leadership crisis is unfolding in Akron, and it actually doesn’t involve the university bearing the city’s name. This time, Summa Health is taking punches for swiftly replacing Summa Emergency Associates (SEA), an independent medical group, with a group called US Acute Care Solutions to run its emergency rooms.

The move was the result of talks having broken down between Summa’s administration and SEA. Since then, Summa has been characterized as greedy, uncooperative and plotting from the start to oust the group. But as the Akron Beacon Journal reported, SEA’s contractual requests were nothing short of absurd.

According to the Beacon, Summa initially offered a threeyear contract with a two-year extension, while SEA countered — despite the unpredictability in today’s health care environment — with a 15-year agreement with no opportunity for a cancellation. That’s ridiculous.

Still, SEA leadership was right to question Summa’s decision to go with US Acute Care given that its CEO, Dr. Dominic Bagnoli, is married to Dr. Vivian von Gruenigen, Summa’s chief medical officer. Summa insists the relationship had no role in its decision.

However, SEA should be clear about its relationship with Western Reserve Hospital and whether its docs are investors in the physician-owned hospital that’s been in an ongoing legal battle with Summa. So, was SEA’s ridiculous ask another attempt to add more friction between the health system and Akron’s independent docs?

Whatever happened, the focus should be on the patients.

They don’t care about how a contract is structured but whether they’re receiving top-notch care.

Publisher and Editor: Elizabeth McIntyre (emcintyre@crain.com)

CLEVELAND BUSINESS

CLEVELAND BUSINESS

Managing Editor:

Scott Suttell (ssuttell@crain.com)

Sections Editor:

Timothy Magaw (tmagaw@crain.com)

Contact Crain’s:

216-522-1383

Sometimes the current Cleveland narrative is exhausting.

Sure, the city’s so-called renaissance has made my professional — and personal — life much more enriching. The Republican National Convention? Glad it happened, and Cleveland is better off for it. The end to the 52-year championship drought? Hell, I had my picture taken next to the Larry O’Brien Trophy and proudly displayed it on my Facebook page like thousands of other Northeast Ohioans. I — an Akronite, and an Archbishop Hoban grad — couldn’t have been more proud of the St. Vincent-St. Mary grad who delivered on a promise.

But let’s face it. We have a long way to go.

Despite all the development, sports glory or write-ups in the national press, there are a few statistics we’ve yet to shake off: Timothy Today, in Cleveland, 53.2% of children live Magaw in poverty, according to recent estimates from the U.S. Census Bureau. Moreover, 36.2% of the overall Cleveland population does.

This month, my son Finn will turn 1. We live in a comfortable, middle-class East Side suburb. I, a journalist, and my wife Erin, a preschool teacher, manage to cover child care, health expenses, monthly student loans payments, a mortgage and other obligations with only a sliver left over to funnel into savings. Tough?

Sure, but we live in luxury compared to many in Northeast Ohio.

Still, the current Cleveland narrative isn’t an assault on my way of life.

It’s an assault on every child in Northeast Ohio who goes to sleep hungry. It’s an assault on those who depend on public transit but are degraded in the comments section on Cleveland.com or on social media for not owning a car or being able to rely on Uber.

It’s an assault on those whose voices are drowned out every time a wealthy developer pledges with much fanfare to pump millions of dollars into a piece of real estate downtown while some of the city’s other neighborhoods struggle to attract any outside dollars.

I, admittedly, in my role as a journalist haven’t always offered this idealistic platform to those whom needed a voice. But given the incoming administration’s seeming disdain for those of moderate or little means, now is as critical time as ever to lift up those in our community needing it most.

Last week, we reported on Edwins, a nonprofit that operates a restaurant that helps formerly incarcerated people gain job skills, for shelling out $50,000 to acquire a one-time butcher shop building on Buckeye Road with hopes of turning it into another vessel to advance its mission of giving people a second chance.

So, $50,000? That’s typically not the size of a deal that would tickle our radar — the multimillion-dollar exchanges are what, after all, get our gears turning. Still, Edwins founder Brandon Chrostowski’s commitment to giving folks another shot at life is just one example of the type of ingenuity that should serve as the underpinnings of the modern Cleveland narrative. It’s also not just endeavors like Chrostowski’s entrepreneurial philanthropy that should be the building blocks of this narrative, but also — and perhaps more importantly — the folks like the Edwins clients striving to rise above their current circumstance.

Coming off such a monumental year, it would be easy to continue to push the Cleveland 2.0 narrative so easily spelled out on Destination Cleveland’s website. But as we barrel into 2017, let’s remember that Cleveland’s success depends on so much more than turning old industrial buildings into luxury dwellings, raising championship banners or hoping the national press pats us on the back.

Let’s just take care of our own.

Write us: Crain’s welcomes responses from readers. Letters should be as brief as possible and may be edited. Send letters to Crain’s Cleveland Business, 700 West St. Clair Ave., Suite 310, Cleveland, OH 44113, or by emailing letters@crain.com. Please include your complete name and city from which you are writing, and a telephone number for fact-checking purposes.

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Please include a telephone number for verification purposes.

CRAIN’S CLEVELAND BUSINESS

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Help us

Personal View

As GOP prepares to dismantle ACA, insurers are likely to bolt

By J.B. SILVERS

There’s a joke among insurers that there are two things that health insurance companies hate to do — take risks and pay claims. But, of course, these are the essence of their business.

Yet, if they do too much of either, they will go broke, and if they do too little, their customers will find a better policy. This balancing act isn’t too hard if they have a pool sufficient to average out the highs and lows. I speak with some experience as the former CEO of one of these firms.

Employee-sponsored insurance has fit this model fairly well, providing good stability and reasonable predictability. Unfortunately, the market for individuals has never worked well.

Generally, this model forces insurers to take fewer risks so that they can still make money. They do this by excluding pre-existing conditions and paying fewer claims. In such a market, fewer people are helped, and when they are able to get insurance, they pay a lot more for it than if they were part of an employee-sponsored plan.

The Affordable Care Act changed all of this. Companies were required to stop doing these bad things.

In exchange for taking on substantially more risk of less healthy patients, they were promised more business by getting access to more potential customers.

The federal government offers subsidies to help pay the premiums for consumers whose income falls below a certain level. The law also stipulates that all people must be covered, or they face a penalty. This so-called individual mandate also guaranteed business for the insurance companies, because it led healthy people into the risk pool.

To entice insurers into the market, the ACA also offered well-established methods to reduce risk. For example, it built in protections for insurers who enrolled especially sick people. It also provided backup payments for very high-cost cases and protected against big losses and limited big gains in the first three years.

These steps worked well in establishing a stable market for Medicare drug plans when this program started under President George W. Bush in 2006.

Competition there is vigorous, rates are lower than estimated and enrollees are satisfied. In other words, the market works well.

But when the time came to pay up for risk reduction in the Obamacare exchanges, Congress reneged and paid only 12% of what was owed to the insurers.

So, on top of the fact that the companies had to bear the risk of unknown costs and utilization in the startup years, which turned out to be higher than they expected, insurers had to absorb legislative uncertainty of whether the rules would be rewritten.

It is no wonder that this year they have dramatically increased premiums, averaging 20%, to compensate for the extra risk they didn’t factor into the original lower rates. In contrast, underlying health costs are rising at about 5%.

Repeal and replace?

And now comes the reality of the “repeal and replace” initiatives from the Republicans. If the uncertainty of this market was large before with the ACA, it is almost unknowable under whatever comes next. Thus the initial exit of some latecomers, including United Healthcare, and undercapitalized minor entrants, such as nonprofit co-ops, is almost certain to become a flood of firms leaving the exchanges. They have little choice since the risks are too large and the actuarially appropriate rates are still not obvious given the political turmoil and changing rules.

Some in Congress seem to think that passing the

“repeal” part immediately but delaying its implementation for two or three years will somehow leave everything as it is now. But this naïve notion misses the fact that the riskiness of the Obamacare individual insurance exchange markets will have been ramped up to such a level that continuing makes no sense.

Even if a company reaches break-even in the “delay” years, it will lose when the repeal is effective. If the premium subsidies now available to lower-income enrollees go away immediately and the mandate to sign up for an insurance plan disappears, then the number of people purchasing individual policies on the exchanges will drop like a rock. In fact, it is clear that even debating this scenario is likely to be self-fulfilling, since insurers must decide on their participation for 2018 by the late spring of 2017. Look for many to leave then.

When risks are too high, just exit It is easy to leave a market when things look bad.

The health plan I oversaw, although top-rated by JD Powers, was losing huge amounts when I took over.

Part of the turnaround we put into place was to withdraw from a number of counties where most of the losses were occurring. The same will be the case in the ACA exchanges.

It is easy to predict that this induced uncertainty from Congress will effectively kill the exchanges even if it delays the implementation of repeal. As a result, all of the individuals who have benefited from coverage and subsidies will lose out. They will either not be able to gain insurance because of a pre-existing condition, or they will not be able to afford the higher premiums.

When they leave the market, it is also easy to guess that the political and economic price will be substantial in terms of patient access, provider uncompensated care costs and employment in the health sector — a major job creator. It is hard to predict these costs, but they could be into the billions of dollars. And, the health of millions could be jeopardized.

Is there any way out of this dilemma for those who don’t like Obamacare? Clearly, the first principle, since all of the solutions suggested rely on private insurers, is to reduce the level of risk for them — the opposite of what we are doing now. Even House Speaker Paul Ryan’s proposals rely on private firms, which will be loath to trust the game they are asked to play because of the dramatic changes to the rules.

If we want them to continue to do the good things required by the ACA, we can’t make it so uncertain.

What this means is that the mechanisms designed to reduce risk and a stable set of operating arrangements must be reaffirmed as core principles of all reform and replace efforts. This shouldn’t be hard for market-oriented Republicans, if they can leave behind their political baggage. Blind talk of repeal with no clear way to build confidence among the private insurers, which will be needed in the replace phase, leads to market failure.

Like the dog that finally caught the car it had been chasing and doesn’t know what to do, what comes next for the administration and Congress is not clear.

But we shouldn’t fool ourselves to think it will be easy or painless. Otherwise, it may be that the great experiment trying to establish a viable market for individual insurance — ironically long a conservative objective — will end in the chaos of what came before.

J.B. Silvers is the John R. Mannix/Medical Mutual of Ohio professor of health care management at the Weatherhead School of Management and professor of epidemiology and biostatistics at the School of Medicine, both at Case Western Reserve University.

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Western Reserve Partners ĐŽŶƟŶƵĞƐ ƚŽ ƉƌŽǀŝĚĞ ĞdžĐĞƉƟŽŶĂů ĐƵƐƚŽŵŝnjĞĚ ŝŶǀĞƐƚŵĞŶƚ ďĂŶŬŝŶŐ ƐĞƌǀŝĐĞƐ ƚŽ ŵŝĚĚůĞ ŵĂƌŬĞƚ ĐůŝĞŶƚƐ ĂĐƌŽƐƐ Ă ĨŽĐƵƐĞĚ ƐĞƚ ŽĨ ŝŶĚƵƐƚƌLJ ǀĞƌƟĐĂůƐ dŚĞ Įƌŵ Ɛ ƐƚƌŽŶŐ ĞdžĞĐƵƟŽŶ ĐĂƉĂďŝůŝƟĞƐ ĂŶĚ ĚĞƉƚŚ ŽĨ ĞdžƉĞƌŝĞŶĐĞ ĐŽŶƐŝƐƚĞŶƚůLJ LJŝĞůĚƐ ƌĞƐƵůƚƐ ƚŚĂƚ ĂƌĞ ƵŶƉĂƌĂůůĞůĞĚ ,ĂǀŝŶŐ ĐŽŵƉůĞƚĞĚ ŽǀĞƌ Ψϭ ďŝůůŝŽŶ ŝŶ ŵŝĚĚůĞ ŵĂƌŬĞƚ ŵĞƌŐĞƌƐ ĂŶĚ ĂĐƋƵŝƐŝƟŽŶƐ ŝŶ ϮϬϭϲ tĞƐƚĞƌŶ ZĞƐĞƌǀĞ WĂƌƚŶĞƌƐ ƌĞĐŽŐŶŝnjĞƐ ƚŚĞ ƉŽƐŝƟǀĞ ŽƵƚĐŽŵĞƐ ƚŚĂƚ ŽƵƌ ĐůŝĞŶƚƐ ƌĞĐĞŝǀĞĚ ƚŚŝƐ ƉĂƐƚ LJĞĂƌ ŽŶ ďŽƚŚ Ă ŶĂƟŽŶĂů ĂŶĚ ŐůŽďĂů ƐĐĂůĞ dŚĞƐĞ ƚƌĂŶƐĂĐƟŽŶƐ ŝůůƵƐƚƌĂƚĞ ƚŚĞ ďƌĞĂĚƚŚ ŽĨ tĞƐƚĞƌŶ ZĞƐĞƌǀĞ Ɛ ƐĞƌǀŝĐĞ ŽīĞƌŝŶŐƐ ŝŶƚĞƌŶĂƟŽŶĂů ĐĂƉĂďŝůŝƟĞƐ ĂŶĚ ĐŽŶƟŶƵĞĚ ĞdžƉĞƌƟƐĞ ŝŶ ďŽƚŚ ƉƌŝǀĂƚĞ ĂŶĚ ƉƵďůŝĐ ĐŽŵƉĂŶLJ ŵĞƌŐĞƌƐ ĂŶĚ ĂĐƋƵŝƐŝƟŽŶƐ &Žƌ ŵŽƌĞ ŝŶĨŽƌŵĂƟŽŶ ĂďŽƵƚ tĞƐƚĞƌŶ ZĞƐĞƌǀĞ ƉůĞĂƐĞ ǀŝƐŝƚ ŽƵƌ ǁĞďƐŝƚĞ Ăƚ ǁĞƐƌĞƐƉĂƌƚŶĞƌƐ ĐŽŵ Žƌ ĐŽŶƚĂĐƚ ZĂůƉŚ D ĞůůĂ ZĂƩĂ DĂŶĂŐŝŶŐ WĂƌƚŶĞƌ ĂŶĚ K (216) 589-9557 ƌĚĞůůĂƌĂƩĂΛǁĞƐƌĞƐƉĂƌƚŶĞƌƐ ĐŽŵ

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CONTENTS President’s Letter

3

PE Fund Priorities

4

Pre-acquisition Success

5

Seven Deadly Sins of a Unicorn

6

M&A and IPO Trends

7

Bank Acquisitions Transaction Professional Fees

8 8

Seeking Certainty

9

Cybersecurity Threats

10

Sealing the Deal M&A Growth Plan

11 11

‘Materiality Scrape’

12

Acquisition Land Mines Middle Market Business Management

14 14

Succession Planning

15

Data Breaches

16

Asset-Based Lending Cross-Border Transaction Advisers

17 17

Financial Due Diligence

18

Managing Seller Risk

19

Tax Insurance

20

Valuations Traditional Sale Variations

21 21

Organic Growth Small World Brings Growth

22 22

Raising Early Stage Capital

23

‘Copyleft’ Software The Deal Maker Awards ACG Cleveland 2016-17 Officers & Board of Directors ACG Events Calendar

24 24 24 24

January 16, 2017 S3

PRESIDENT’S LETTER

ACG celebrates 35 years of Accelerating Cleveland’s Growth

By JOHN M. SAADA JR.

W

hat a year to call Cleveland our home. The Republican National Convention, a redeveloped Public Square, a UFC heavyweight champion, the Calder Cup, an NBA championship and World Series baseball. At ACG Cleveland, we are proud of our city and our role in Accelerating Cleveland’s Growth.

ACG Cleveland is among the largest and most respected ACG chapters in the country. Our 500-plus members are exposed to a diverse membership group and exceptional professional development and networking opportunities.

Many of our members also actively participate on chapter committees or the board. I am honored to currently represent ACG Cleveland as its president, and look forward to another fantastic year for ACG Cleveland and Northeast Ohio.

In 2016, ACG Cleveland hosted many unique and diverse events, including the Great Lakes Capital Connection, a two-day networking, deal sourcing and educational event sponsored by the seven ACG chapters from the Great Lakes region.

Held at the new downtown Hilton, the event attracted more than 1,000 attendees from 29 states, the U.K. and Canada. We also hosted a panel discussion featuring the president, vice president and counsel to the RNC host committee. As a “members-only” event, we engaged in an energetic “off-the-record” discussion regarding Cleveland’s role in attracting, preparing for and hosting this historic event.

ACG Cleveland also hosted more casual, intimate events, including our annual golf outing at Firestone Country Club; downtown, East Side and West Side happy hours at several new local

About ACG ACG is a global organization focused on driving middle-market growth. Its 14,500 members include professionals from private equity firms, corporations and lenders that invest in middle-market companies, as well as from law, accounting, investment banking and other firms that provide advisory services. Founded in 1954, ACG is a global organization with 57 chapters.

Learn more at www.acg.org. ACG Cleveland serves professionals in Northeast Ohio and has more than 500 members. For more information, visit www.ACGcleveland.org

restaurants, theaters and breweries; clay shooting; and a family friendly event on the Polar Express. We take pride in offering something for everyone, and this year was no exception.

We also take pride in our commitment to leading Northeast Ohio into the future.

Over the past few years, ACG Cleveland Saada Jr. has been the first chapter to create nationally recognized, robust groups focused on attracting, retaining and providing professional development opportunities to the next generation of corporate leaders and professional women in Cleveland.

They are being served by our Young ACG and Women in Transactions special interest groups. I would encourage Cleveland’s young professionals and women in business to look at ACG Cleveland. We have developed unique opportunities for members of these two groups through networking, educational and entertainment events that meet their specific interests. As a result of the resounding success of these two programs, those involved in Young ACG and Women in Transactions now represent nearly a third of our membership.

Finally, one of our premier events, the annual Deal Maker Awards, will be held on Jan. 19 at the Cleveland Convention Center. This is an event not to be missed by anyone in Northeast

Ohio’s corporate community. We will honor Northeast Ohio’s top corporate dealmakers for demonstrated success in using acquisitions, divestitures and financing to fuel growth.

This year’s honorees include Capital Works, Huntington Bancshares, Diebold-Nixdorf and Trademark Global. We will welcome nearly 1,000 people from Northeast Ohio and around the country to congratulate the winners and enjoy a night of networking.

If you are considering membership, I encourage you to attend an event and see the benefits of membership first hand.

Personally, I’ve met many wonderful people and have developed some longstanding and meaningful business relationships through my involvement with ACG. It’s truly an exceptional network of energetic, interesting and diverse corporate professionals at all levels in their careers.

In closing, I would like to thank all of our current members for their continued support, and I would like to especially thank my fellow board members and those members who are active on an ACG committee.

Your dedication and commitment is inspiring and makes ACG Cleveland such a great organization.

John M. Saada Jr. is president of ACG Cleveland and a partner in the Private Equity Practice at Jones Day. For more information about ACG Cleveland, visit www.ACGcleveland.org.

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This is deeply embedded into our culture of worldclass service, and makes for raving fans” Joseph V. Pease, Jr., CPA Chairman jpease@peasecpa.com

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S4 January 16, 2017

CORPORATE GROWTH AND M&A

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Deal sourcing, deploying capital among PE fund priorities in 2017 A

s we approach the end of 2016, private equity continues to be a significant dri er in middle mar et A. hile a number of factors will continue to impose increased operating costs and more competition for deal ow the industr has largel had a great deal of success in fundraising. Accordingl deal sourcing and deplo ing capital will be imperati e tas s for private equity funds in . he enactment of the odd ran all treet eform and onsumer rotection Shelton Act in was a game changer for the industr . t re uired pri ate e uit fund ad isers with million or more of assets under management to register with the Securities and change ommission. he has made it clear that it will continue to push for increased transparenc from pri ate e uit

funds with respect to fees, costs and fund allocation. otabl Andrew owden director of the s ffice of ompliance nfractions and aminations was highl critical of pri ate e uit practices in a speech titled preading unshine in ri ate uit . he breadth and depth of SEC inspections will continue to e pand with emphasis on allocating e penses among funds charging portfolio companies for operating partners to a oid pa ment as a management compan fee and portfolio compan monitoring fees. oreo er pri ate e uit fund investors such as pension funds are pushing for transparenc as well. egulator compliance often in the form of a chief compliance officer will continue to be a must ha e for both registered and un registered funds. he balance of power between pri ate e uit fund general partners and their investors changed significantl in fa or of pri ate e uit fund in estors also nown as

‘‘

While the independent sponsor model has its own inherent challenges (such as convincing a seller that the sponsor will be able to secure adequate capital to timely complete the transaction), most independents view their ability to avoid traditional fundraising as an important advantage of their business model.

limited partners after the global economic downturn. owe er there are some signs of the balance shifting bac towards historic norms. onetheless institutional in estors who continue to allocate greater portions of their holdings to pri ate e uit and rein est returned capital bac into pri ate e uit are t picall demanding more concessions from the funds in which the in est.

As well as demanding greater transparenc limited partners are

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demanding greater concessions on management fees. he traditional management fee structure is no longer a gi en. n man instances limited partners are reser ing capital for co in estment opportunities rather than committing their dollars and pa ing the associated management fee.

As a result fund managers now are li el to ha e much more comple fund structures with multiple entities and varying fee structures for their funds limited partners. his comple it coupled with reporting and disclosure re uirements can and t picall does significantl increase the amount of infrastructure re uired to operate a fund. n addition to the greater amount of comple it in ol ed in operating a pri ate e uit fund since the enactment of odd ran traditional pri ate e uit funds now find themsel es competing for deal ow not onl with strategic buyers (that have a presumpti e ad antage in their abilit to pa more for a target compan but also a ariet of alternati e financial in estors. or e ample so called independent sponsors also commonl referred to as fund less sponsors are acti el competing with traditional pri ate e uit funds for deal ow without the need to e pend time and effort on time consuming fundraising acti ities. hile the independent sponsor model has its own inherent challenges such as con incing a seller that the sponsor will be able to secure ade uate capital to timel complete the transaction most independents iew their abilit to a oid traditional fundraising as an important ad antage of their business model. ndeed most independent sponsors ha e warm relationships with multiple in estors that can pro ide necessar capital thus mitigating an percei ed ris as to certaint of closing.

Another source of competition for deal ow is famil offices. raditionall famil offices were fund in estors and not direct deal

‘‘

By PETER K. SHELTON

in estors. owe er in the past se eral ears there has been a significant industr shift as famil offices ha e been less inclined to pa the ongoing management fees re uired b limited partners. hese da s famil offices are er li el to deplo their capital on a deal b deal basis with independent sponsors or often the will ma e a direct in estment without a sponsor. ertainl not all famil offices are equipped to source, execute on, and then operate their own deals. owe er more and more famil offices are adding the internal resources needed to compete directl with traditional pri ate e uit funds. n addition to independent sponsors and famil offices pri ate e uit funds of all si es are seeing greater downstream competition from funds that were traditionall in esting in larger transactions. espite the more comple regulator en ironment and despite increased comple it in general partner limited partner d namics and fee structures, private equity funds of all si es and t pes ha e largel been successful in their recent fundraising efforts. ndeed the e pected broad sha eout of the pri ate e uit following the global downturn did not materiali e for the most part. According to a ain o. report pri ate e uit funds managed . trillion in un in ested dr powder in .

Accordingl deal sourcing to deplo capital on terms that ield relati el attracti e returns will continue to be of paramount importance to pri ate e uit funds and their in estors.

Peter K. Shelton is a partner in the Corporate and Securities Group at Benesch LLP, and a member of the firm’s Private Equity Practice Group. He also serves on the Board of ACG Cleveland.

Contact him at 216-363-4169 or pshelton@beneschlaw.com.

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CORPORATE GROWTH AND M&A

January 16, 2017 S5

Transparency can pad a business’ price tag

Assess quality of earnings during pre-acquisition

By MARK B. BOBER

M

ost studies suggest that 70% to 90% of acquisitions fail to generate the investment returns targeted by the acquirer. M&A has always been tricky business, but what can executives do to increase their odds of success?

The success rate is highly dependent upon a number of key components, including thorough up-front due diligence, the quality of the man- Bober agement team, culture assessment, indepth understanding of the industry, and a comprehensive post-acquisition execution plan to generate whatever target returns are needed to pay for the acquisition.

That’s a lot of ground to cover, so let’s focus just on understanding the quality of earnings. During the

pre-acquisition period, here are areas to assess: n Commercial due diligence, including

analysis of historical as well as projected revenue and margins by customer, channel and originator; n Anal sis of fi ed cost structure ersus variable cost structure of business; n Net working capital requirements, historically as well as forecasted; n ro forma financial pro ections and a reasonable assessment of the underlying assumptions behind such projections; n The appropriateness of revenue recognition and expense cut-off to assess its impact on income as reported; n Adequacy of reserves for items such as doubtful accounts receivable, excess/obsolete inventory, warranty obligations, litigation exposures, etc.; n The quality and adequacy of property, plant and equipment to

assess the extent to which equipment requires replacement, deferred maintenance or incremental capital expenditures to support growth; n The quality and adequacy of the accounting and finance s stems as well as the financial management team; and n Tax compliance and exposures.

Of course, workforce culture issues, legal and tax structure of the transaction, and other acquisition nuances are critical to understand before the deal is completed. Looking at any deal objectively, with these facts in hand, will go a long way to boost the odds that any deal is a win-win for both parties.

Mark B. Bober is practice leader in Transaction Services at Bober Markey Fedorovich.

Contact him at 330-255-2425 or mbober@bmfcpa.com.

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S6 January 16, 2017

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The seven deadly sins of a unicorn

By JAYNE E. JUVAN and ASHLEY E. GAULT

A

kin to a white, wild and legendary beast with a mythical horn, a unicorn in the business world is a private company valued at $1 billion or more that lacks a lengthy track record. Modern examples include

Uber, an app-based transportation company; Theranos, a health care blood testing company; and Airbnb, an online marketplace for lodging. All Juvan of these companies quickly rose to prominence and have

received considerable media attention.

While a unicorn is supposed to be a symbol of purity and grace, in the corporate arena, some comGault panies once deemed unicorns have lost their way. Too of-

ten, lawsuits and enforcement actions follow media hype praising a rapidly rising company.

If you’re a founder chasing the brass ring or an investor targeting a company with unicorn potential, make sure to avoid each of the following seven deadly sins so that you’re positioned for long-term success.

1.

SIN: PRIDE

SOLUTION: Vet for character.

Unicorns receiving a lot of attention are at risk of engaging in negligent, reckless or illegal conduct to sustain results.

Don’t overlook vetting executives for character. A company governed by leaders with a strong moral and ethical compass is more likely to stay grounded and take compliance with laws seriously.

2.

SIN: GLUTTONY

SOLUTION: Develop a reasonable growth strategy. Instead of trying to build an empire to satisfy an extreme desire for more, develop a moderately ambitious strategy that is legal and ethical.

3.

SIN: ENVY

SOLUTION: Don’t let competitors drive your every move. Companies that constantly covet what their competitors have run the risk of being unable to differentiate themselves in the marketplace.

4.

SIN: SLOTH

SOLUTION: Implement a compliance program. Rapidly rising unicorns may neglect adopting a corporate compliance program, but this is a critical undertaking so that compliance with applicable laws becomes part of the fabric of the company’s culture.

CONNECT with

5.

500 local and 14,000 global

SIN: WRATH

SOLUTION: Value employees.

An effective corporate compliance program encourages reporting misconduct alues emplo ees who file reports and fairly investigates alleged wrongdoing without retaliation.

DEAL MAKERS

6.

SIN: LUST

SOLUTION: Focus on long-term results. Jettison the desire for immediate gratification and put in the hard work of designing a quality product or service.

7.

SIN: GREED

SOLUTION: Prove and sustain your valuation. Don’t chase a bloated aluation that is difficult to ustif and driven by a longing for immediate wealth, power and status.

Jayne E. Juvan is a corporate and securities partner at Roetzel & Andress LPA. She can be reached at 216-615-4837 or jjuvan@ralaw.com. Ashley E. Gault is a corporate and securities associate at Roetzel & Andress LPA. She can be reached at 216-615-4823 or agault@ralaw.com.

Association for Corporate Growth Driving Middle-Market Growth

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January 16, 2017 S7

Dealmakers should prepare for M&A and IPO trends

By BOB SAADA

2

016 will go down as one for the record books. The markets were able to shake off several major geopolitical events this year.

From the Brexit vote to the lead up to the election of President-elect Trump, over the past year, businesses have been focused on adjusting their strategies to prepare for longterm outcomes. What resulted has been a sustained, robust Matteson level of deal activity following two years of record-breaking momentum.

In the last 12 months, there have been 11,795 announced deals worth $1.75 billion. The resiliency and strength of the U.S. economy continues to make our country among the most attractive for deal making. With increasing appetite from companies to find a enues to grow quickly through inorganic means, dealmakers are preparing for several potential wildcards in 2017 and beyond, including:

Regulatory headwinds Itâ&#x20AC;&#x2122;s still too early to tell how the regulatory landscape may shift or ease under President-elect Trumpâ&#x20AC;&#x2122;s administration; however, companies are exploring various scenarios so that their long-term dealmaking strategy stays on the straight and narrow. Industries most likely to be impacted include: health care, pharma, technology, industrials, power/energy, ban ing and financial ser ices.

2016 was the year for the most blocked megadeals in history. As such, dealmakers across sever-

al different industries are monitoring for developments surrounding the spate of recently announced megadeals, including AT&TTime Warner, Qualcomm-NXP, CenturyLink-Level 3 and GE-Baker Hughes.

Everyone will be watching to see how closely these deals get scrutinized under the new administration and whether they actually make it to the finish line. istorical trends suggest we can expect to see a number Kelly of assets to come to market as a result of regulatory concerns or duplicity surrounding some of these mega transactions.

Cross-border opportunities Overall, cross-border activity in 2016 was slower than 2015, with deal value declining by 5% and volumes declining by 4%. While outbound deal volume decreased by 15%, inbound volume increased by 8% in 2016.

Despite the decline in overall crossborder activity, the continued inbound interest signals that the U.S. is still an attractive place for investors.

Foreign investors, particularly those in China, are gearing up to navigate more challenges for cross-border deals than previously anticipated.

In some cases, the U.S. is the only place foreign buyers plan to invest. They view the U.S. market as a safer bet with the strength of the U.S. dollar and overall continued resiliency and economic stability when compared with Europe and other areas of the globe. Expect the recent wave of Chinese interest to continue despite recent reports about the Chinese governmentâ&#x20AC;&#x2122;s concerns

o er capital ight. hinese bu ers are motivated by the desire to own and operate businesses in the U.S., particularly in health care, tech, media, telecom, hospitality, retail and consumer industries.

market debuts, prompting others to follow suit. The key for new issuers will be their ability to be prepared with their regulatory and marketing story early on to take advantage of the market when the window opens.

New year, new IPO market

Private equity gets creative

Early 2016 was one of the slowest periods for new public issuance acti it since the financial crisis. he upside for nicorns are finding it increasingl difficult to hold off on going public. Faced with mounting pressure from investors and employees to cash in, in addition to a decline in pace of private fundraising, investors will once again turn to the IPO market as a way to achieve returns.

Expect a robust pipeline with several big names waiting to make their public

Increased competition from corporate sources has led the private equity industry to look for alternative ways to deploy capital. Private equity dealmakers are moving from large standalone deals toward bolt-on acquisitions within the existing portfolio companies. They are also looking at market-driven opportunities, including acquiring carve-out businesses from corporate sellers partially driven by the rise of shareholder activism. Private equity

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buyers are placing bets in disruptive but volatile sectors such as energy and health care.

Despite many unknowns ahead, dealmakers will continue to aggressively pursue strategic plays that will allow them to in uence and put pressure on the competition in their respective industries. Technologydriven disruption will remain a key driving force behind deal activity.

In Cleveland, contact local Deals partners Brian Kelly at 216-8753121 or brian.kelly@pwc.com or Thorne Matteson at 216-875- 3441 or thorne.matteson@pwc.com.

Cleveland M&A tax partner Bradley C. Thompson may be reached at 216-875- 3062 or bradley.c.thompson@pwc.com.

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CORPORATE GROWTH AND M&A

S8 January 16, 2017

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Successful bank acquisitions start with customers, employees and communities

By JAMES R. RESKE

P

a ing the highest price isn t the e to successful ban ac uisitions. he ban ing landscape is littered with ban s that o erpaid for ac uisitions and subse uentl found themsel es on the bloc . he confused being a successful bidder with being a successful ac uirer. he e to long term success in A is understanding the true

underl ing concerns of potential sellers and meeting those concerns better than the seller themsel es would. ommunit ban ers ha e t picall spent their careers meeting the financial needs of their neighbors and their businesses. he seller wants to now that Reske their new partner will complete the mission the e started. ellers are lo -

al to their customers and want to now that their customers will ha e impro ed products and ser ices et still deli ered with a communit ban st le and touch. he are de oted to their emplo ees and want to now that their emplo ees will ha e more opportunities with the ac uiring institution. he lo e their communities and want to now that their communities will be in e en better hands with the new partner. es these communit ban sellers understand their obligation to

Consider value, service when evaluating professional fees in a transaction

By ROSS VOZAR

W

hen completing a transaction hiring e perienced adisers is critical. owe er ualified ad isers come at a price and professional fees can become a significant component of transaction costs.

enerall in estment ban ing legal and accounting ser ices come with the steepest price tag. hopping for ad isers b price isn t recommended rather alue for mone is e . As a best practice ou should find the right ad isers to fit our transactional needs first and then negotiate fees.

n estment ban ing fees are t picall success based and are calculated as a percentage of the sale price. aw firms historicall charge on an hourl basis but recentl some ha e e perimented with fi ed fees. onsulting firms performing accounting functions can price contingentl . Accounting

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SEE CHALLENGES BEFORE THEYâ&#x20AC;&#x2122;RE CHALLENGING. To make confident decisions about the future, middle market leaders need a different kind of advisor. One who starts by understanding where you want to go and then brings the ideas and insights of an experienced global team to helpget you there.

ma imi e shareholder alue. owe er concerns o er customers emplo ees and communities will naturall weigh hea il on the decision of whether to sell and to whom. ould be ac uirers must not ust persuade a seller that the can deli er on these promises simpl so that the can win the deal. ather trul successful ac uirers will ha e wo en the concerns of the customer emplo ee and communit so deepl into the fabric of their own A

that when the do win a deal the customers emplo ees and communit respond to the ac uiring ban in such a wa that the all wor together to ma e it a success. he result will be a win win for the shareholders of both the ac uirer and the seller.

firms howe er bill on an hourl basis as independence is fundamental to the industr and contingent fees are not permitted. ees for all of these ser ice pro iders ar significantl based on e perience alue and a ailabilit . has long approached transaction ser ices through a e ible and indi iduali ed scope. Accounting diligence Vozar should not be treated as one si e fits all. ailoring ser ices and fees to meet each client s needs is the best wa to eep fees commensurate with transactional ris . A customi ed approach helps target diligence according to the primar dri ers of the alue and the goals of the client.

Another wa to reduce fee costs is to a oid duplicati e efforts where er possible. or e ample if a compan

alread has an internal team focused on sales and profitabilit b customer or product line these efforts could be eliminated from the scope of financial due diligence. imel communication also is an essential tool for managing transaction costs. ed ags should be uic l communicated to all ad isers and internal teams so priorities can be shifted if needed. therwise wasted time and higher fees result if e findings are not deli ered until after the report is generated. hile each transaction is uni ue abiding b these best practices eeps ou ahead of the game in managing professional fees.

James R. Reske, CFA, is executive vice president, chief financial officer and treasurer at First Commonwealth Bank. Contact him at jreske@fcbanking.com.

Ross Vozar is managing director of BDO Transaction Advisory Services. Contact him at 216-325-1716 or rvozar@bdo.com.

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CORPORATE GROWTH AND M&A

January 16, 2017 S9

Seeking certainty in uncertain times

Amass expertise early on

By JEFF SCHWAB

B

definition a trend is a general direction in which something is de eloping or changing. rior to the end of the pri ate e uit en ironment trended cautiousl optimistic. he seller s mar et dominated competition for deals and talent escalated and purchases for add on ersus platform companies continued.

At the same time Schwab man pri ate e uit firms closed funds at or abo e targets demonstrating that in estors continue to loo for multiples of return unmatched in traditional in estment ehicles. o earn these returns pri ate e uit is finding wa s to increase efficiencies and manage ris in the bu sell process and be ond. ne such tactic that has directionall de eloped is ha ing ris managers

in ol ed earlier in the bu sell process. ngaging an e pert ris manager as a member of a due diligence team helps a oid roadbloc s and can e pedite the close of a deal which benefits both the bu er and seller and ultimatel the in estors. n addition ha ing the right transactional co erage in place can protect from unforeseen circumstances while the deal is in process. nce a deal is closed smoothl na igating from the transaction phase to the growth phase re uires the e pertise of trusted ad isor partners who address unforeseen transactional ris s and needs and can seamlessl con ert co erage to longer term when the deal is complete. ore firms are adding to e isting platform companies to le erage s nergies and reduce initial costs. hese add ons complement the platforms and in man cases help the firms de elop niche erticals.

As the ear unfolds we e pect the un nowns of a new administration

to de elop into more isible actions. hile it is far too earl to predict the dependent trends each element will re uire nimble proacti it aligned with changing economics and an e er growing arsenal of legal mandates. he most successful pri ate e uit firms ha e alwa s been and must continue to be prepared for inherent ris s

de elop iable business transactions and grow companies to satisf in estors. imple steps can build certaint .

As one of a firm s trusted ad isers a good ris management and emplo ee benefits consultant can add alue well be ond the price of the due diligence fee. oo ing at the full spectrum of insurance ser ices can gain efficiencies

be ond a sale s close date. en in the most uncertain of times reducing ris and ma imi ing returns is all about ha ing the right team in our corner.

Jeff Schwab is senior vice president and private equity practice leader at Oswald Cos. Contact him at 216-658-5208.

TMA Ohio Chapter announces 2016 award winners!

We congratulate Joseph F. Hutchinson, Jr., Baker & Hostetler LLP, winner of the 2016 Lifetime Achievement Award pictured with Sally Barton, TMA Chapter President.

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

We congratulate the winners of the 2016 Turnaround of the Year Award (from left) Michael Kaczka, McDonald Hopkins, LLC; Christopher Peer and John Polinko, Wickens, Herzer, Paniza, Cook & Batista Co.; Scott Opincar, McDonald Hopkins LLC; John Lane, Inglewood Associates LLC; Mark Kozel, BDO USA, LLP; and Stewart Saddler, Inglewood Associates LLC.

We are proud of the achievements of these members and celebrate their specific accomplishments with this yearâ&#x20AC;&#x2122;s award. To the winners, thank you for your contributions to the Turnaround Management Association.

CORPORATE GROWTH AND M&A

S10 January 16, 2017

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r cybersecurity threats Internal policy reviews, training should be continual

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A successful transaction.

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The complexity of mergers and acquisitions transactions demands skilled and dedicated advisors who can identify risks and opportunities and add value throughout the lifecycle of a deal.

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

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

Risk. Reinsurance. Human Resources.

P

ri ate e uit firms are facing increased scrutin from in estors regulators and legislators around c bersecurit .

As pri ate e uit firms ma e in estments the are preparing for an e entual attac both during their due diligence and as part of their ongoing monitoring. ather than a historicall reacti e approach to securit man companies are forced to proacti el pro e the are secure. i e ears ago a compan would answer some basic uestions pertaining to securit . ost often Schulman no further uestions were as ed. ow ac uisition targets t picall as uestions related to a firm s infrastructure third part endors and whether the conduct regular penetration testing to proacti el pre ent attac s. e hear mostl about the ma or c berattac e ents but the small e ents can be the most significant. mail attac s recei ing re uests for wire transfers or lin s to malware start off small and often blossom into something bigger. o pre ent email attac s there are a few steps firms can ta e such as re iewing internal policies and controls including procedures related to wires and how the are processed. ash transfer re uests should be double chec ed and emplo ees should be trained on the proper proce dures and policies. he et iligence report

shows that of emplo ee incidents are accidental which means training and emplo ee controls are er important. hile it ma be frustrating to emplo ees to ha e to change their passwords e er da s or be denied access to social media sites most understand the alue of the securit when their emplo er e plains the ris s. f an incident does occur the first call should be to e ternal legal counsel. he will be able to determine whether there was data e filtration in a ransomware case which will later assist our insurance claim and whether the firm should pa the ransom.

Additionall if the ransom is attributed to funding terrorism the firm could be liable if it were to pa the ransom. he mounting cost of c berattac s has hea il impacted insurance companies which are now ta ing se eral measures to assure the manage claims and losses. t is er important to read the entire polic and understand our obligations what is co ered or what is e cluded.

At a time when pri ate e uit firms are alread being hit b increasing compliance re uirements and costs related to business continuit fees and e penses reporting and standardi ation c bersecurit has emerged as et another ma or burden for firms. ut it has also become indispensable as the threat to the industr grows.

Jay Schulman is principal of Security and Privacy at RSM. Contact him at jay.schulman@rsmus.com.

CORPORATE GROWTH AND M&A

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sse

By ALBERT D. MELCHIORRE

F

or most business owners, the sale of a business is a once-in-alifetime endeavor. Owners should evaluate a sale and how it aligns with their goals and objectives for themselves, their families, companies and legacies. The following advice can help facilitate a successful sale process.

To begin, be prepared if you want to maximize the value Melchiorre of the business and create a smoother sale. The areas of business to focus on include improving operational efficiencies remo ing obsolete items from our in entor compl ing with all en ironmental laws and regulations preparing accurate monthly and annual financials re iew or audit ensuring the right management personnel are in

e the right positions and identif ing a successor if you are retiring.

Before you begin the process, you will need to assemble a strong M&A deal team. This will include an experienced M&A attorney, accountant, investment banker and investment adviser. Based on the input of this team, it is important to determine if your valuation goals and objectives can be met given the current state of the M&A market.

Discuss your role post-closing.

Some questions to think through: Are you looking to retire immediately after closing? Do you have your successor in place? Would you like to rollover a portion of your proceeds to participate in the future growth of the business to get a second bite of the apple?

The M&A process will be a distraction to your business. The process can take between six to 12 months from the time your investment

High-growth firms should formulate an M&A plan

e

e

January 16, 2017 S11

se

e e that a buyer might identify in due diligence. Make sure the business is performing at a high level throughout the process.

Finally, try and keep an open mind when it comes to buyers. You need to balance keeping your eye focused on the end game of achieving your goals and objectives, and treating each interested buyer as if they are “the one.” Make sure you perform your own due diligence with each buyer, and understand their past performance and plan for the business after the transaction to ensure they are a good fit.

banker is hired until close. A solid deal team will help minimize disruption by managing the process. That being

said, it is important you manage your business in ordinary course throughout the process to avoid negative surprises

Al Melchiorre is president and founder of MelCap Partners LLC. Contact him at 330-239-1990 or al@melcap.co.

Calfee Congratulates CapitalWorks and Huntington as 2017 ACG Cleveland Deal Maker Award Recipients

Seasoned team can help propel growth

By MICHAEL SHAW

“W

e want to do some deals to supplement organic growth, but don’t know where to start.” This is a common refrain we hear from new clients and prospects.

An active, programmatic M&A campaign to supplement organic growth can be a powerful tool when e ecuted efficiently. Also, it is critical for high-growth companies to structure deals to allow for future investment. We typically recommend Shaw starting by identifying the M&A team and documenting a process that will be followed on a continuous basis.

Focus on team, process The team should consist of internal and external parties.

Internal parties are typically those responsible for target identification operational due diligence financing and implementation.

Your external team may consist of legal, accounting and buy-side advisers. The buy-side advisers will be able to help quarterback the process,

dri e deal ow structure the deal and keep the internal team focused on its core objectives.

The M&A team should then be tasked with documenting a systematic, disciplined approach to deal discovery and e ecution the pla boo . oo to your external advisers for input on the playbook, as they should each have a breadth of experience executing deals for clients.

The attorneys at Calfee are proud to represent companies that engage

Financing acquisitions

in middle-market mergers and acquisitions and corporate finance.

High-growth businesses need to invest cash into working capital or capital expenditures, which may not lea e significant cash resources for acquisitions. Acquirers can utilize non diluti e sources of financing li e seller financing or non ban debt. eller financing is a er attracti e option — this can come in the form of a seller note, earn-out or having the seller roll equity. Outside of seller financing non ban debt can be attracti e due to its e ible principal amortization structure, allowing an acquirer to preserve cash.

We congratulate our clients and all other award winners.

Michael Shaw is partner at Copper Run Capital LLC. Contact him at 614-888-1786 or mshaw@copperruncap.com.

Calfee. Clients First.

Cleveland | Columbus | Cincinnati calfee.com

CORPORATE GROWTH AND M&A

S12 January 16, 2017

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‘Materiality scrape’ can be more than a minor cut Provisions unexpectedly alter a transaction

By CHRISTAL L. CONTINI

A

ny business owner who has sold a business through a merger, stock sale or asset sale has gone through what I like to call the “death march,” wading through the various proposed representations and warranties. The owner has to recall and describe anything that would qualify as an exception to the long list of disclosures required by the buyer in the purchase agreement.

Inevitably, the sellside lawyer and business people heavily negotiate with the buyer team to increase the Contini number of representations and warranties that would be ualified b materiality” in order to limit the disclosures to areas of significance to the business.

However, after all of the compromises are made, one sentence — which is usually found at the end of the purchase agreement — can undo all of the protection that the seller thought he or she had negotiated by inserting qualifiers such as material or material adverse effect” into certain representations and warranties.

Deal term surveys have indicated an increase in the use of the legal provision called a “materiality scrape.”

The typical materiality scrape is a double materiality scrape. It eliminates or reads out an materialit ualifiers in a representation and warranty for purposes of determining whether or not a breach has occurred and the amount of indemnifiable losses as a result of the breach.

For example, in a purchase agreement that includes a materiality scrape, the typical representation and warranty “seller is in compliance, in all material respects, with all laws” would be read for indemnification purposes as seller is in compliance, in all respects, with all laws.”

The word “material” would be completely disregarded and the seller would be liable for any losses incurred by the buyer as a result of the seller’s failure to comply with all applicable laws.

Buyer’s reasons for including the materiality scrape include the following:

1

The purchase agreement usuall contains an indemnification threshold (a basket) that serves to protect the seller. This prohibits the buy-

er from recovering losses until the total losses for seller’s breaches of representations and warranties exceed a pre-agreed threshold amount. The materiality scrape protects the buyer from “double materiality” hurdles because the buyer will have to prove materiality and have losses that exceed the threshold amount.

2

When determining the amount of losses resulting from a breach, the purchase agreement should be clear that the resulting losses recoverable from the breach should not just be those above a material amount.

3

cluding materialit ualifiers can serve to eliminate or reduce post-closing disputes

over what constitutes “material.”

Seller’s reasons for excluding the materiality scrape include the following:

1

The materiality scrape could give the buyer an incentive to search for any claim, no matter how minor, to pursue the seller postclosing for immaterial breaches of representations and warranties.

2

The seller will have an increased burden to disclose every immaterial exception to a representation and warranty. This could create inefficiencies in finali ing the disclosure schedules and ultimately closing the transaction.

3

Often, the materiality scrape does not apply to determining whether closing conditions ha e been satisfied. n this instance the representations and warranties will be read for purposes of closing to include the materialit ualifiers.

Therefore, the same representation and warranty that was true at closing may not be true immediately after closing, and the seller could be held accountable for a breach immediately after the closing.

4

The use of materiality ualifiers in certain representations and warranties is central to the meaning of the clause, and removing “materiality” in some instances can cause unintended applications. For example, the financial statement representation is based on generally accepted accounting principles, which provide

that the financial statements fairl present in all material respects” the financial condition of seller.

While no one wants to terminate a transaction negotiation over one sentence in a purchase agreement, a materialit scrape has a significant impact on the overall risk allocation of the transaction between buyer and seller. Therefore, the following compromises are often used to bridge the gap in negotiation: n

Increase the amount of the indemnification bas et. n pecificall e clude certain repre sentations and warranties from the materiality scrape to avoid unintended applications. n Instead use a “single materiality scrape” — the materiality scrape only applies to the determination of losses, but not for purposes of determining whether a breach has occurred.

Like most negotiated points in a purchase agreement, the inclusion or exclusion of a provision will likely depend upon which party has the stronger negotiating position.

While it is not uncommon for both parties to feel like they have a few cuts and bruises at the end of a negotiation, sellers should understand the potential effect that the inclusion of one powerful provision can have on an overall transaction.

Christal Contini is a member in the Mergers and Acquisitions Practice Group at McDonald Hopkins LLC. Contact her at 216-430-2020 or ccontini@mcdonaldhopkins.com.

RALAW.COM ROETZEL & ANDRESS A LEGAL PROFESSIONAL ASSOCIATION

Our attorneys provide experienced counsel to boards on corporate growth strategy, governance, and compliance.

www.ralaw.com/corporate

B USI NESS C R ED I T

Because sometimes capital hides in plain sight.

Leveraging your collateral can be a powerful way to secure financing.

An asset-based loan can help you with acquisitions, unexpected growth, recapitalization, cyclical needs and more – all while managing risk. We’ve financed solutions for hundreds of companies in wholesale, distribution, manufacturing, retail and more. Here are just a few of them.

Biery Cheese Co. $ 37,600,000 Senior Secured Credit Facility Refinancing April 2016

Sellars Absorbent Materials, Inc. $ 45,300,000 Senior Secured Credit Facility Recapitalization April 2016

Orsini Pharmaceutical Services, Inc. $ 12,500,000 Senior Secured Credit Facility Refinancing May 2016

Specialty Foods Distribution, LLC $ 5,500,000 Senior Secured Credit Facility Refinancing May 2016

Sierra Lobo, Inc. $ 14,100,000 Senior Secured Credit Facility Growth Financing May 2016

Martex Fiber Southern Corp. $ 19,200,000 Senior Secured Credit Facility Refinancing June 2016

Formed Fiber Technologies, Inc. $ 61,000,000 Senior Secured Credit Facility Acquisition Financing November 2016

Beck Aluminum Corporation $ 45,000,000 Senior Secured Credit Facility Acquisition Financing November 2016

If you’d like to work with us too, we’re ready. Contact the Huntington Business Credit team:

Doug Winget

Executive Vice President 216-515-0789 doug.winget@huntington.com

Joe Kwasny

Senior Vice President 216-515-0754 joe.kwasny@huntington.com

Member FDIC. ® and Huntington® are federally registered service marks of Huntington Bancshares Incorporated. ©2016 Huntington Bancshares Incorporated.

CORPORATE GROWTH AND M&A

S14 January 16, 2017

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5 common acquisition land mines to avoid Sidestep recurring mistakes with these tips

By DAVID P. MARIANO

F

or an acquisition to be considered successful, one would assume the newly combined entity is better off than either of the parts were previously. Simply put, value is enhanced, not destroyed. No acquisition is perfect, but with failure rates often cited as 60%-80%, there is plenty of room for improvement. elow is a list of fi e common mistakes companies make when buying businesses as well as ways to avoid each.

1

NOT HAVING A PLAN. Not ha ing a plan for finding purchasing and integrating a business is like choosing a random city in the U.S. and then attempting to drive there without a map. You’ll waste a ton of time (if you make it there at all).

When you arrive, you might wonder wh ou went in the first place.

If you don’t know where to look for the right companies, you will waste time on the wrong ones. Even worse, you may actually close a deal that

doesn’t make sense.

How to avoid: Ask yourself, “What t pe of ac uisition would fulfill a relevant and current market need and benefit all m sta eholders Formulate a plan to guide you through the process, and solicit input early on from our sta eholders financing sources and advisers to avoid making moves you might regret.

OVERPAYING. This is the classic mistake. You get caught up in the emotions of a deal, possibly end up in a bidding war, and later realize the acquisition didn’t make financial sense. his isn t ust a roo ie mistake. Even the most seasoned businesspeople can fall in love with a deal.

As Shakespeare said, love is blind.

How to avoid: Know the market, retain experienced advisers, include your team in the decision and stay disciplined.

Stick with your original plan.

one can sneak up on you. You could consider it overpaying’s evil stepsister.

Often under the guise of discipline, not wanting to overpromise, or assuming one can convince the seller to be more reasonable far too many would-be buyers underbid and never reach the negotia- Mariano tion table. Be conscious that sellers are very aware of what their companies are worth these days. Don’t expect to see many bargains.

How to avoid: Again, know the market, retain experienced advisers, and don’t quit too early on those opportunities that are truly strategic. You can craft an offer letter that provides a fair and attractive value to the seller while still giving you, the buyer, an opportunity to make sure the seller’s claims and information check out.

3

4

2

UNDERBIDDING. Most buyers do anything they can to avoid paying too much, but this

INSUFFICIENT DILIGENCE. Much of this error is a result of simply not investing enough

time and resources to get the necessary work done. Executing a thorough diligence plan can be intense at times, but the outcome can be very rewarding when done well.

Just as important as doing enough diligence is spending time on the right things. If the acquisition opportunity is strategic and fits our criteria ou should know where to focus so you don’t waste valuable time on the wrong things.

How to avoid: Create a list of the top three to fi e items that will ma e or break the deal and focus on them.

Some items require checking the box, while others deserve more attention.

Don’t forget the areas that are easy to overlook during negotiations, such as culture, leadership and employee dynamics. These are often the areas that can burn you after closing. Use your time wisely and involve your internal and external teams early.

issues post-transaction including, wasted time and money, customer defection, employee attrition and a damaged reputation.

One common oversight is not involving the target in the integration plan and execution. You may be the new owner, but don’t take their experience and perspective for granted — it may contain valuable information required for a better outcome.

How to avoid: Formulate a plan as early as possible with your internal and external teams and let the plan evolve as things unfold. Have open and direct conversations with the target about life after the deal. Seek third party help if you need it.

There are certainly other ways to sabotage an acquisition, but if you fall into one of the fi e traps abo e your odds of a successful transaction are certainly diminished.

5

David P. Mariano leads the Acquisition Advisory Practice at Western Reserve Partners and hosts Fully Invested, a podcast for business owners.

Contact him at 216-574-2108 or dmariano@wesrespartners.com.

NOT EXECUTING AN INTEGRATION PLAN. Closing the transaction requires a lot of wor but that s ust the beginning.

Not having an integration plan is far too common and can lead to many

Solid PE ownership key to middle market business management

By DICK HOLLINGTON

T “I know exactly who you should call.”

People who know Private Equity, know BDO.

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

BDO Hanna Building, 1422 Euclid Avenue, Suite 1500, Cleveland, OH 44115, 216-325-1700 Accountants and Consultants © 2016 BDO USA, LLP. All rights reserved.

www.bdo.com/privateequity

here are four key elements to effectively manage middle market businesses: strategy, talent, alignment and governance.

Mastering these four elements will improve the likelihood that you will have a successful business and investment outcome.

Private equity owners must work with the management teams to develop clear threeto fi e ear strategies that articulate an aspiration for the business and provide a roadmap for how to get there.

Making choices and Hollington prioritizing among strategic options is critical to developing a sound plan. Just as important is focusing on execution; otherwise the best plans are never realized.

There is no question that having the right talent in key leadership positions is critical to the business success.

Today’s leaders need to be smart, committed and willing to engage their teams to pursue a compelling vision.

The alignment of the management team and ownership through compensation and equity incentive programs

drives the right behavior and encourages them to make decisions like owners.

To do this, management teams need to have competitive current compensation with annual bonus plans aligned to the critical strategic and financial goals for the ear. ong term equity incentives tied to the ultimate value creation for investors complement these benefits.

Finally, creating a high value governing board keeps the team on track. Finding successful industrial entrepreneurs and executives who can add deep strategic value to a middle market business is very important.

These individuals can bring market perspectives that lower middle market business may not always understand. The board members become an extension of the private equity owner, and can be critical when trying to recruit top management talent and add credibility to the strategic planning process. The cadence and discipline that the board process brings to a middle market business further facilitates a successful outcome.

Dick Hollington III is managing director and CEO of CapitalWorks.

Contact him at 216-781-3233 dhollington@capitalworks.net.

CORPORATE GROWTH AND M&A

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January 16, 2017 S15

Company Succession Planning 101 Address basic questions before selling closely held business

By JACOB DERENTHAL

C

losely held business owners know they someday need a succession plan, but most are focused on day-to-day operations and delay addressing the transition process.

Company and family dynamics are unique to each situation, so there is no onesi e fits all solution.

Often, the hardest Derenthal part is knowing where to start. The simplest way is to ask three critical, interrelated questions.

1

WHO IS INVOLVED? Identify all existing stakeholders.

Address which trusted stakeholders can continue operations. Those given management responsibility do not need to be the same people who take ownership.

Then identify (a) what additional

training is needed to allow designated successors to run the business; (b) how to compensate successors to keep them incentivized; (c) what is needed to keep management personnel from being removed if they donâ&#x20AC;&#x2122;t control equity; and (d) a backup plan should preferred management exit the business.

If no one from the next generation can successfully take over, owners must search for outside talent or begin strategic planning required to prepare for a company sale to an unrelated buyer.

2

WHEN TO TRANSITION? Most family owned business owners ha e identified a date or age when they want to walk away from day-to-day operations. Ask if current owners desire to remain involved in critical decisions going forward or if they want to exit without looking back.

Tax and estate planning may be required to ensure ownership transfer is completed in the most efficient manner.

Consider if it is advantageous to transfer equity over time or implement a recapitalization to separate voting and economic interests.

Certain deferred compensation plans and insurance products are most useful when implemented in advance

of retirement. Your transition structure will drive these transfer dates.

3

HOW TO IMPLEMENT THE PLAN? Economics drives most succession plans. Do current owners plan to give

the company away, or do they desire a buyout? Do the proposed future owners agree to assume financial responsibility and ensure their elders get paid?

Knowing exactly who expects to be paid and in what amounts allows planning to maximize payout and minimize taxes. The succession proposal should be communicated to all parties before drafting documents. nce there is sufficient consensus from all participants, the formal succession plan should be created through corporate agreements and estate documentation. perienced financial accounting and legal counsel can provide options and identify areas of concern. A good succession plan will eliminate lingering uncertainties and ensure your companyâ&#x20AC;&#x2122;s long-term future.

Jacob Derenthal is a partner in the Corporate Transactions Group of Cleveland-based Walter | Haverfield LLP. Contact him at 216-928-2933 or jderenthal@walterhav.com.

CORPORATE GROWTH AND M&A

S16 January 16, 2017

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Don’t let a data breach derail the deal Cybersecurity assessments critical in M&A

By TOD A. NORTHMAN and THOMAS R. PEPPARD JR.

T

he global cost of cybersecurity breaches in the business world is forecasted to exceed $2 trillion by 2019. The average cost of each data breach is more than $4 million and growing annually, according to a 2016 IBM-sponsored study.

Of those businesses that participated in the study, 26% were likely to experience a cyberbreach in the next 24 months.

Earlier this fall, Northman Verizon signaled the need to reevaluate its $4.8 billion bid to buy Yahoo! upon discovering a previously undisclosed Yahoo! data breach. With all of those cringe-worthy statistics in mind, cybersecurity due diligence should no longer be an afterthought to most buyers and their legal counsel.

For many buyers, the focus on business diligence ends once they get their arms around the usual suspects such as financials process personnel customers and suppliers.

That is unfortunate, because the

li elihood and significance of losses from cybersecurity breaches can be readily mitigated by well-designed due diligence. In addition, potential targets can enhance the value of their businesses by adopting robust cyber risk-management programs.

Buyers tend to evaluate a target’s information technology system based on whether the technolog is sufficient to conduct business.

Those buyers also are most concerned about confirming that industr specific Peppard data securit certifications, such as payment card industry compliance, are in place. ertification is important but insufficient. arget ome epot and Yahoo! all were payment card industr certified when their credit card systems were breached.

Failure to rigorously explore a target’s cybersecurity plan is an expensive lost opportunity.

Valuable intelligence can be learned by modestly expanding the scope of review if knowledgeable advisers, both legal and technical,

guide the investigation.

The goal is to evaluate the sophistication of the target’s understanding of its data security risks, but the problem is that many don’t even know where to begin. While certainly not comprehensive, these are some suggested lines of inquiry for buyers to get the ball rolling: n

n

n

Review the target’s cybersecurity organizational structure. C-suite leadership should spearhead the effort. Stakeholders across the business functions (operations, treasury, legal, human resources, IT, risk management and audit) must participate. Alarm bells should go off if cybersecurity is the province of the IT department alone. Analyze the role of target’s counsel in evaluating and complying with the regulatory and enforcement environment.

Evaluate target’s cybersecurity budget and consider its annual growth. Review the target’s unaccomplished goals for cybersecurity.

Study target’s recovery plan, including the adequacy and reasonableness of its recovery points and time objectives. Consider when it was last reviewed and by whom.

n

Assess how target exploits and protects its IT assets. Target should prioritize defending against the greatest threats to target’s information, networks and systems.

n

Investigate prior cyberbreaches.

Consider what is known about the attackers, what information was taken and what use was made of it, and how long it took from the time of intrusion until detection.

n

Analyze cybersecurity training programs for personnel. Review how frequently audits are performed. uman error causes of c ber breaches in the U.S., behind malicious and criminal attacks (48%) and system glitches (27%).

n

etermine if third part business partners hold company-sensitive information or are given the ability to access the company’s systems.

Examine whether protections are in place to safeguard such information.

n

Assess the adequacy of breach notification s stems. he longer it takes to detect and address the breach, the greater the damage done.

n

Evaluate the process for protecting the business’ information from misappropriation by former employees.

Buyers should also consider

including express representations and warranties in the definiti e purchase agreement relating to privacy, data protection and security (including an securit breach notification requirements).

This ensures compliance with applicable law, industry standards and the target’s existing policies and procedures. a ing policies in place is the first battle, but compliance wins the war.

The need for express representations and warranties is two-fold: to ensure the necessary information sharing and to make certain that there is an appropriate level of risk allocation between the buyer and seller.

Without understanding the target’s data security policies, any prior or existing breaches, and how the target’s plans and procedures can be retained (or replaced) going forward, there is no way for buyers to perform an educated assessment of the potential risk in a proposed transaction.

Tod A. Northman is counsel at Tucker Ellis LLP. He can be reached at tod.northman@ tuckerellis.com. Thomas R. Peppard Jr. is counsel at Tucker Ellis LLP. He can be reached at thomas.peppard@tuckerellis.com.

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CORPORATE GROWTH AND M&A

January 16, 2017 S17

Making the move to asset-based lending

By DOUG WINGET

W

ith the continued economic reco er more businesses are seeking to expand and diversify. All the more, they’re making this happen by leveraging a major financing opportunit still at their disposal: the alue the ha e in their assets.

With that in mind, how do ou decide if an asset-based loan is Winget right for ou usinesses loo ing for greater a ailabilit from their wor ing capital can often be a good fit for an asset based loan. ompanies in wholesale distribution manufacturing retail and e en ser ice companies ma find an asset based loan a powerful wa to le er-

age their assets to secure financing for such things as ac uisitions une pected growth recapitali ation c clical needs and more all while managing ris . f asset intensi e businesses those with a lower ratio of earnings before interest, taxes, depreciation and amorti ation with higher wor ing capital needs generall are more li el to benefit from asset based lending structures. igher A margin companies with lower wor ing capital needs generall benefit more from a traditional cash ow multiple debt structure.

Attributes of an asset based loan credit structure usuall re uire fewer financial co enants but necessitate more collateral reporting based on the company’s accounts recei able in entor wor ing capital and related materials.

Another difference over conventional lending structures is the re uirement

‘‘

‘‘

Sometimes capital hides in plain sight

Of asset-intensive businesses, those with a lower ratio of earnings before interest, taxes, depreciation and amortization with higher working capital needs generally are more likely to benefit from asset-based lending structures.

of cash dominion for an asset-based loan. This typically involves establishing an efficient approach to optimi ing cash ow and reducing debt through a comprehensi e treasur management solution that includes a controlled disbursement account. he account channels the company’s receivables to a loc bo designated for pa ing down the revolving line of credit.

Additionall business owners RS-Crains-ACG-Ad-2016_v1.pdf t picall aren t re uired to pro ide a

personal guarantee in an asset based lending solution. Asset based lending finances companies with satisfactor asset a ailabilit and will also finance into a substantial turnaround situation if the compan has sufficient a ailabilit .

Asset-based lenders are able to pro ide more e ible loan structures that ma not re uire personal guarantees.

Additionally, asset-based lending generall re uires fewer financial 1 11/30/16 3:37 PM co enants for pri ate business owners.

here can be much to consider when e aluating a ailable financing options. he ne t time ou re in need of loan the alue ou ha e in our assets ma re eal a smart alternative to conventional commercial and industrial lending structures.

Doug Winget is president of Huntington Business Credit and executive vice president of Huntington Bank.

Contact him at 330-384-7448 or doug.winget@huntington.com.

Cross-border transaction advisers facilitate deals

By TOM KELSEY and JESSICA XIE

T

he U.S. M&A market has seen an in u of hinese bu ers in the last few ears. he resource rich hinese state owned enterprises led the wa e. owe er those companies A acti ities ha e slowed down in the past ear or two as a result of the hinese anti corruption mo ement. nstead non state owned companies mostl publicly traded companies and pri ate e uit funds ha e become the leading force in Chinese M&A investments in the U.S., focusing on real estate ad ance manufactur- Kelsey ing consumer products and health care.

The investments are driven by lack of room for growth in hina due to the economic slowdown along with an increase in advanced technology and market expertise to China. Needless to say, that investing in the U.S. has alwa s been a desirable globali ation or asset di ersification strateg to hinese businesses. en though hinese companies ha e strong interests in ac uiring . . entities their chances of winning deals are lower than other . . competitors. ost hinese bu ers ha e little cross border A e perience. he language barrier significant difference in culture and regulations and tough . . national securit scrutin ha e made hinese M&A investments in the U.S. even more challenging and risky.

A lot of U.S. sellers are hesitant to wor with hinese bu ers despite their

heftier price offerings. he e to success is to engage ad isers who ha e strong cross border transaction experience and expertise in finding the optimal target companies. apable ad isers perform high ualit due diligence and now how to manage and identif ris s. roficienc in both the hinese and nglish languages is also critical.

An adviser’s experience in risk management is another important consideration as . . insurance considerations are still new to man Chinese investors. nsurance due diligence and transactional insurance products such as Representations & Xie Warranty and Environmental iabilit will help facilitate deal success and reduce post ac uisition disputes. hese issues ma include patent infringement, material adverse change, tax considerations, contingent liabilit litigation disputes or indemnities related to past transactions. n order to optimi e opportunities with hinese in estors and obtain a comprehensive report on risk-related matters and opportunities for insurance ris capital use engagement with experienced cross-border advisers is recommended.

C

M

Y

CM

MY

This City Inspires Us

And that’s why we call Cleveland our home To learn more about Riverside’s strategies to grow

CY

CMY

K

Tom Kelsey is client executive at Hylant Cleveland. Contact him at 216-674-2511 or Tom. kelsey@hylant.com. Jessica Xie is vice president of Cross-Border Transactions at Hylant Toledo.

Contact her at 419-259-2729 or jessica.xie@hylant.com.

companies with up to $30 million in EBITDA, contact Cheryl Strom, Origination, at +1 216 535 2238 or cstrom@riversidecompany.com.

The Riverside Company | 50 Public Square, 29th floor Terminal Tower, Cleveland, OH 44113 www.riversidecompany.com

CORPORATE GROWTH AND M&A

S18 January 16, 2017

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Is conducting financial due diligence enough?

Private equity buyers should canvas commercial, supply chain process

By DARON GIFFORD

P

rivate equity buyers need to think twice before limiting their due diligence to financials.

Numbers can be checked and doublechecked, but they can be unreliable and misleading if they aren’t evaluated in the right market context.

Commercial due diligence, especially involving your target’s customer base and supply, is critical for obtaining an accurate view of operations and marketplace position.

Commercial due diligence An effective commercial due diligence process provides buyers insight into the future growth of their target acquisition. But achieving this clarity calls for a thorough review of financial forecasts, operational procedures and market strength.

Consider the following:

1

CUSTOMER COUNTS. A company’s future earnings are directly tied to its customer base.

Disproportionate revenues coming from a few select clients indicate the customer list may be less stable than if sales were spread

evenly over more clients. Durability of customer relationships is critical to meeting future expectations. It’s important to understand the level of intimacy with the top purchasers, as well as the employees responsible for maintaining touchpoints.

2

PRODUCT LINE STRENGTH. Without a quality product line, there’s a risk of compromising loyalties. Examine the seller’s portfolio carefully to gauge product stability.

Pay close attention to new offerings.

Weigh them against the seller’s skill set and alignment with future customer demands.

Verify whether the seller’s selfprofessed skills are capable of delivering the results they promise.

If not, decide if those skills are easily obtained elsewhere — and at what cost.

3

SALES PROJECTIONS. If sales are spiking, confirm if the increase is organic or attributable to risk-related events. If the latter, distinguish between fleeting and long-term risks that could disrupt sales trends down the road.

Assess whether forecast projections are logical in the context of your

target’s customer relationships. For instance, if sales with a tech startup are projected to triple, due diligence will flag the projection and perform a more realistic assessment.

Perform a comprehensive industry analysis to understand short- and long-term trends. Document any Gifford uncertainties. Some industries require closer scrutiny, including health care, energy, telecommunications and manufacturing.

4

SIZE UP THE COMPETITION. Assess the seller’s marketplace position and value propositions against those of its competitors. Look for factors that threaten long-term financial health while charting growth (or decline) of market share. Recent M&A activity among competitors can also impact future earnings.

5

SALES FORCE DYNAMICS. Explore the seller’s sales organization to understand how business is secured and retained. This can reveal hidden, though important, business relationships. For example,

“WE ARE CREATING THE MOST SIGNIFICANT LIQUIDITY EVENT IN THE HISTORY OF OUR CLIENTS’ LIVES… AND WE TAKE THAT RESPONSIBILITY VERY SERIOUSLY.”

ers, should an event compromise supplies from the primary source.

if the seller offers a customer ongoing price reductions, make sure this expectation has been accounted for in post-integration projections.

Supply chain due diligence Market fluctuations, volatile foreign exchange rates, political turmoil, labor unrest and natural disasters all present risks that can interrupt the supply chain, which may cause part shortages and production slowdowns (or even shutdowns). In some instances, they can impact cash flow and trigger financial instability.

A critical element of your commercial due diligence should include a thorough review of the acquisition’s supply chain. Evaluate these areas to mitigate risks:

1

CONSIDER SPEND CONCENTRATION. Examine the spend concentration among suppliers, particularly for highly strategic/critical commodities and categories. An imbalance of qualified suppliers could lead to supply chain disruptions.

Also note products procured from a single source. These arrangements may present profound risks, depending on the supplier’s stability, backup facilities options and sphere of operations.

2

DETERMINE THE SUPPLIER’S FOOTPRINT. Assess the footprint to understand any known or probable risks, such as those related to geopolitical, disaster, political, economic or environmental factors. If the target relies on a single supplier, be sure to understand the availability of other qualified suppli-

3

REVIEW CONTRACTS. If the company presents a very small percentage of the supplier’s business, delivery during a supply chain event may face a greater chance of disruption than if they represented a larger percent of the supplier’s business.

4

EXAMINE SUPPLIER PERFORMANCE. Review all supplier relationships, assessing their performance and strength. Performance should be tied to specific metrics — cost, quality and delivery — while strength addresses trust, collaboration and efficiency. Understand where there are opportunities for improvement.

5

ASSESS MANAGEMENT PROCESSES. While the target should maintain robust supply chain monitoring, does the supplier offer the same? Assess the supplier’s qualifications and supply chain management processes.

While financials tend to be the most thoroughly examined aspect of the due diligence process, commercial and supply chain considerations should be equally examined to gain a more reliable view of the prospect’s business. The end result? Added clarity for what the future holds for the buyer. This helps mitigate risk to the buyer, strike the appropriate transaction price, and potentially can lead to a higher return on the investment.

Daron Gifford is a partner and leads Plante Moran’s Commercial Due Diligence practice. Contact him at 877-622-2257, x33709 or daron.gifford@plantemoran.com.

WHERE WILL YOUR GROWTH COME FROM?

At MelCap Partners, our goal is to show you, our valued client, that you are not just a number to us. We strive to provide high quality and innovative investmentbanking services to middle market companies. We are here to help you reach your goals and objectives.

MelCap Partners, LLC Middle Market Investment Bankers

1684 Medina Road, Suite 102 Medina, OH 44256 Phone: (330) 239-1990 Fax: (330) 239-1991 www.melcap.com

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

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

Copper Run’s merger and acquisition advisory professionals provide senior level attention on every transaction. We help our clients transition ownership, grow through acquisitions, or secure financial partners for future growth.

SELL-SIDE ADVISORY | BUY-SIDE ADVISORY | VALUATIONS Copper Run Capital LLC | 614-888-1786 | Copperruncap.com

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CORPORATE GROWTH AND M&A

January 16, 2017 S19

Managing seller risk in M&A transactions

By MARIE C. KUBAN and DOUGLAS K. SESNOWITZ

Y

ou’ve decided to sell your company. You’ve found the right buyer, the parties are completing due diligence and are negotiating the purchase agreement. It might seem like the perfect time to focus on managing your post-closing risk. After all, that’s what you are paying legal counsel to do — draft an ironclad agreement that protects you. However, if you wait to manage your risk until the due diligence or purchase agreement phase, then it might already be too late.

Many provisions get negotiated at the purchase agreement phase to protect sellers. Such provisions include negotiating a working capital methodology schedule with appropriate principles and benchmarks to determine target working capital, inserting “knowledge” and “materiality” qualifiers in the representations and warranties to limit risk shifting, including a deductible to Kuban reduce liability for incidental losses, negotiating a damages cap so the entire purchase price isn’t in jeopardy, and limiting earnouts and seller notes so that more of the pur- Sesnowitz chase price is paid in cash at closing.

The preparation of thorough disclosure schedules to the purchase agreement is also an important protective measure for sellers to reduce the risk of post-closing indemnification claims.

A strong purchase agreement is certainly a key component to managing risk. However, to get a deal done, a seller may not be able to get all of the protections it wants into the purchase agreement. Mitigating risk in an M&A transaction should begin long before a purchase agreement is negotiated, or even before a buyer shows interest in the company.

Self-assessment is one of the most important steps a seller can take to mitigate its risk in an M&A transaction.

While a company should always be assessing its business activities, it is even more critical to identify actual or perceived issues with the business when a sale transaction is under consideration — or even just a possibility. For example, is the company collecting ta es and filing returns in e er urisdiction where filings are re uired Does it have adequate compliance policies in place Are there an minorit shareholder or key employee issues that need to be addressed Are there an material issues with customer or vendor contracts or other performance issues A seller that can identify potential issues and either remedy them, start the correction process, or have an explanation that limits the potential negative impact of such information

is better able to manage its own risk.

This ground work can put the seller in position to push back if the buyer tries to introduce its own “protective” measures in the purchase agreement, and may even forestall a buyer from introducing such measures.

Such buyer protective measures can include lowering the purchase price, re-

uiring a larger indemnification escrow that lasts for a longer period of time, introducing special escrows, having longer survival periods for representations and warranties or re uiring specific indemnities not subject to caps and deductibles.

There will always be business issues that will need to be addressed when negotiating an M&A transaction. But

if a seller does its own proactive “due diligence” and can take corrective measures and control the narrative before issues are discovered by the buyer, it will strengthen its negotiating position, protect transaction value and reduce its post-closing risk.

Marie C. Kuban, Esq., is vice chair

of the Business Law Group at Ulmer & Berne LLP. Contact her at 216-583-7434 or mkuban@ulmer.com.

Douglas K. Sesnowitz, Esq., is vice chair of the Business Law Group at Ulmer & Berne LLP. Contact him at 216-583-7144 or dsesnowitz@ulmer.com.

Your deal gets done here.

Coshocton County Memorial Hospital Association Acquisition of assets of LC Drug and Alcohol Testing Associates, Inc.

Sale to Prime Healthcare Foundation, Inc. in Chapter 11

Gulfstream Polo, LLC $30 million sale of polo club to Pulte Homes

Kirtland Capital Partners Sale of Precision Dialogue to RR Donnelley

Ohio Travel Bag Manufacturing Co.

Pocono Mountain Recovery Center Sale of stock to CRC Health, LLC (a public healthcare company)

Flint Group North America Corporation Acquisition of American Inks and Coatings

MCM Capital Partners Acquisition of Action Industries, Ltd., Torsion Source LLC, Torsion Plastics, LLC and Flex Brush LLC

PT Liquidation Corp.

f/k/a Premier Tool & Die Cast Corp.

Sale to MV Metal Products & Solutions, LLC

Sale to Zorro Capital, LLC

Quaker Steak & Lube Sale to TravelCenters of America pursuant to Bankruptcy Code § 363

Zacara Farm $27 million sale of equestrian polo facility

Purchase of assets of De Garmo Marketing

Patrick J. Berry

Co-Chair, Mergers and Acquisitions

$24 million recapitalization of multi-tenant industrial flex warehouse portfolio

Michael J. Meaney

Co-Chair, Mergers and Acquisitions

McDonald Hopkins LLC 600 Superior Avenue East, Suite 2100 | Cleveland, OH 44114 | 216.348.5400

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CORPORATE GROWTH AND M&A

S20 January 16, 2017

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Tax insurance bolsters deal security T

ax insurance is one of a suite of risk-transfer insurance products — along with Representations and Warranties insurance and others — that are aimed at addressing deal risks. Tax insurance offers protection to a taxpayer in the event that the IRS or a state, local or foreign taxing authority challenges its tax position.

In concept, it’s quite simple. The policy works to provide comfort through insurance similar to what would be achieved by receiving a Private Letter Ruling from the IRS. The insured taxpayer sets the limit of liability it buys, and policies typically run concurrent with the Blitz statute of limitations up to seven years.

Reasons vary why tax insurance is used, as do the type of product user. ri ate e uit firms often use the product to avoid a large unanticipated

Acquisition of Multiple Tim Hortons Stores in Dayton and Zanesville

‘‘

‘‘

By GARY BLITZ

Private equity firms often use the product to avoid a large unanticipated tax payment that could compromise the economic upside of a deal.

tax payment that could compromise the economic upside of a deal. A fast-growing part of the tax insurance market is use of the product with no transaction, simply to manage a large contingent exposure.

Institutional tax equity investors also use tax insurance to achieve comfort that an anticipated tax credit, say the Solar ITC, will be available as projected and not recaptured.

For example, in the M&A context, a buyer and a seller might disagree over the availability of a 338(h)(10) election to achieve a basis step-up because of issues surrounding the target’s status

as an S-corporation. The insurance addresses buyer’s concerns if the seller’s more positive view of its tax position does not pan out post-closing.

Similarly, a Fortune 500 corporation might seek comfort that the tax treatment of a reorganization or restructuring will be respected by the tax authorities. Tax-free spin-offs, redemptions ualification net operating loss carry forwards and transfer pricing also have been the subject of tax insurance.

With an experienced tax insurance broker and seasoned insurers, tax insurance can be an effective tax

risk management tool. For corporate taxpayers as well as parties to M&A transactions, it is a means to add certainty where the size or complexity of a tax issue might raise concerns.

We Close Deals.

Gary Blitz is senior managing director and co-practice leader of Aon Transaction Solutions. Contact him at 212-441-1106, 301-7044640 or gary.blitz@aon.com.

Joint Venture in China

Representative Transactions January 2016

Sale to Pierry, Inc.

Underwriters to Medical Transcription Billing Corp.

Acquisition of Ohio Legacy Corp.

November 2016

July 2016

September 2016

Sale to Middlefield Banc Corp.

Refinancing Sale/Leaseback

December 2016

January 2016

Acquisition of Chem Link, Inc.

For more information please contact: July 2016

Sale to ICON PLC

April 2016

September 2016

Sale of a Controlling Interest to Stone-Goff Partners II, LP

Brian M. O’Neill Business Department Chair brian.oneill@tuckerellis.com 216.696.5590 Christopher J. Hewitt Mergers & Acquisitions Group Chair christopher.hewitt@tuckerellis.com 216.696.2691 M. Patricia Oliver Financial Services Group Chair patricia.oliver@tuckerellis.com 216.696.4149

November 2016

Acquisition of Retail Division of Pexco LLC

November 2016

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Sale of Eureka® Brand Vacuum Cleaner Assets to Midea Group Co., Ltd.

December 2016

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CORPORATE GROWTH AND M&A

January 16, 2017 S21

Valuations: Is the tide still rising?

By ANDREW K. PETRYK

W

e have witnessed conditions of a seller’s market, certainly for high quality businesses, as the status uo for a sustained period. Combined corporate cash hordes and bulging private equity coffers have fed a persistent imbalance between capital and a ailable deal ow.

Aggressive capital providers have moved in lock step — extending full leverage — supported by the rise of alternative Petryk lenders and a recharged mezzanine market. Factoring in a higher degree of seller sophistication, you are left with a market fervor that has fueled bidding wars and a run-up in valuations, with purchase price multiples returning to levels observed during the previous 2007 peak. oda s multiple in ation of to 2x EBITDA (earnings before interest, taxes, depreciation and amortization) doesn’t discriminate by company size. The market premium widens

when there is strategic interest, with differentiated assets in growing sectors garnering multiples in the double-digits.

EBITDA multiples for the middle market — whose enterprise values are between $25 million and $500 million — have remained within a tight band.

They averaged 8x to 9x throughout according to tandard oors e eraged ommentar ata. n November, median EBITDA multiples for strategic and financial bu ers were 7.4x and 9.5x, respectively, on transactions valued less than million and . and . on transactions valued between $250 million and $500 million.

Middle market leverage multiples reached an annual high in October, with total leverage expanding to 4.8x.

Are valuations at a peak? Timing is everything, which reminds us of the old adage, “all good things must come to an end particularl as we head into extra innings in the current business cycle. Uncertainty is the bane of the A mar et which will be digesting the ramifications of a changing political climate on the economy, interest rates

and the capital markets. All will have the effect to swa in estor confidence and in uence corporate ac uisition strategies.

What is certain: The rationale for acquisitions remains unchanged.

Limited organic growth opportunities are driving strategic acquisitions to meet shareholder expectations, with buyers looking to acquire technology, broaden product portfolios and diversify into growing markets.

Capital availability and deal scarcity should sustain purchase price multiples at current elevated levels, at least in the near term. ellers can be sure there is no better time to evaluate strategic options.

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

Experienced insights. Agenda-free advice.

Our private equity and M&A specialists are ready to help you evaluate complex risks and give you the advice we would want if we were you.

Hylant. Working hand in hand with clients since 1935 to position them for success.

hylant.com Risk Management | Employee Benefits | Property & Casualty | Personal 6000 Freedom Square Dr., Suite 400 | Independence, OH | 216-447-1050

ACQUISITIONS & DIVESTITURES

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FINANCINGS

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GROWTH CAPITAL

Variations to traditional sale offer additional benefits

By MICHAEL D. MAKOFSKY and STEVEN P. LARSON

W

hen owners contemplate a business sale, many envision selling their entire interest to a third party. This traditional type of sale, however, may not always be possible or in the owner’s best interest. The following are two types of transactions that may provide additional benefits to the owner and allow them to meet their goals.

Recapitalization In an equity recapitalization, a private equity investor buys out most, but not all, of the owner’s interest in the business. This allows Makofsky the owner to unlock some of the value tied up in the company and creates a liquidity event for what is often the largest portion of the owner’s net worth.

It also gives the owner the opportunity to remain involved in the operation and the decision-making process. Moreover, when the investor sells the business in the future, the owner may sell his or her remaining equity as well, thus gaining additional upside from a second liquidity event.

Management buy-out A management buy-out is a transaction where a company’s management team purchases the assets and oper-

ations of the business that they already manage. The existing managers acquiring the business have a better understanding of the company. There is little to no associated learning curve, as opposed to a new set of managers learning the business on the .

This transaction can be structured to occur all at once, with the owner leaving or staying as a consultant, or it can be structured over a period of years to allow control to gradually transition from the owner to the managers. This option especially makes sense when the owner is not quite ready to walk away entirely but wants to take on a reduced role in the business.

There is no “one size Larson fits all approach when owners are selling their business. These alternatives are among many variations that can pro ide e ibilit and better meet the needs of the owner.

Michael D. Makofsky is a principal in McCarthy Lebit’s Mergers & Acquisitions and Banking & Finance practice areas. Contact him at 216-696-1422 or mdm@ mccarthylebit.com. Steven P. Larson is an associate in McCarthy Lebit’s Business & Corporate, Mergers & Acquisitions and Real Estate & Construction practice areas. Contact him at at 216-6961422 or spl@mccarthylebit.com.

A Focus on Success Through Partnership Cascade Partners LLC is an investment banking firm serving entrepreneurs, businesses and investors active in the middle market.

We work with our client partners and provide:

Outsourced Corporate Development Services

Sell Side Advisory Services

Acquisition Advisory Support

Growth Financing

Recapitalizations

FOR ADDITIONAL INFORMATION CONTACT: Ken Marblestone 216.404.7221 kenm@cascade-partners.com Kevin Groff 216.404.7560 keving@cascade-partners.com

Securities offered by Cascade Partners BD, LLC – FINRA/SIPC Member

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Cascade Partners is a Midwest focused firm with offices in Cleveland, Detroit and Chicago

S22 January 16, 2017

CORPORATE GROWTH AND M&A

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Shrewd corporate planning aids in organic growth

By KEVIN GROFF

C

ontrary to perceptions created by the pace of M&A activity, not all business owners are clamoring for an exit. Across the landscape are high-functioning private companies planning for expansion. The persistent challenge, however, is that sustaining real growth in sales and earnings is difficult even for the most skilled managers.

Organic growth results from increasing Groff output, customers or new products.

These initiatives are all challenging, and have front-loaded expenses with long gestation periods.

Inorganic growth refers to enhancing performance by acquiring assets (such as product lines, customers, technologies and

companies) from others. In times of slow economic expansion and cheap capital firms wisel emplo their balance sheets to enhance profitabilit . nfortunatel a con u of forces is creating headwinds for companies lacking a committed corporate development function. ince the end of the reat ecession, capital availability has ballooned.

There are approximately 2,000 priate e uit firms now acti e in orth America. Coupled with historically high levels of cash on corporate balance sheets, the competition for “deal ow is as high as we e seen in ears.

The notion of effective ad hoc expansion strategies is dead, as competing players are highly organized.

In the absence of a proactive and consistent effort, the opportunities to drive growth will be unavailable or priced out of reach for producing

achievable returns.

Companies that succeed in acquisitions exhibit consistent traits that can be emulated. They create value by committing resources — internal or outsourced — to a proactive, disciplined and repeatable approach that ties to their strategic plans. They map and track competitive landscapes and build relationships outside of the enterprise.

A high-functioning corporate develdevel opment team should identify valued assets before they trade, and establish multiple pathways to engage (commer (commercial, joint venture or acquisition) and finance them before the come to mar market. Preparation is the key to success.

Kevin Groff is a director in the Cleveland office of Cascade Partners. Contact him at 216-404-7560 or keving@cascade-partners.com.

Small world means big potential for private equity r s

r

By STEWART KOHL

I

n its early years, private equity was largely practiced only in the United States. As globalization has increasingly affected all economies, pri ate e uit firms ha e become more adept at capturing the opportunities presented by a much more international marketplace. ew firms were doing deals in Europe when The Riverside Co. launched its European fund in the 1990s.

That changed rapidly as Kohl the Eurozone came into being and regulations changed to allow more private equity growth. Likewise, the Asia acific region had er little private equity presence until the last decade or so. We expect private equity to be practiced avidly in most parts of the world soon.

Beyond the regulatory changes, decline in trade barriers and investors’ appetite for international funds, we believe there’s a simple driver behind private equity’s global spread — good pri ate e uit stewardship benefits industries and economies everywhere it is practiced.

It helps companies thrive, creates jobs and helps build strong communities.

As the world gets smaller and pri ate e uit firms learn mar ets and industries even better, we expect more activity across the world, with options for those who prefer to invest

r

e

e

in developed economies, emerging economies and even distressed economies.

This interconnected world means more than finding the best companies in which to invest, wherever they reside. It also means harnessing those connections. Riverside and other companies benefit from globali ation not ust b finding a erman bi e parts retailer or an Australian orthopedic suppl compan . he benefit b applying talent and resources to connect markets, suppliers and potential across their portfolios.

This effort is perhaps most dramatically illustrated by crossborder add-on acquisitions. Some in estors finest platforms ha e been bolstered by an international add-on (or three). Even something that seems mundane can pro e ital. rowing sales internationally doesn’t sound exciting, but it can be a matter of success or failure if the company’s home economy is struggling.

Savvy private equity investors with local knowledge can get the job done, whether helping a U.S.-based company understand complex regulations and markets to reach customers overseas or assisting a Spanish company tap the U.S. market.

The shrinking world indeed is a growing world of opportunity.

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

CORPORATE GROWTH AND M&A

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January 16, 2017 S23

4 ways to prepare for raising early stage capital

By TERRY DOYLE

R

aising capital for an early stage company can be a daunting task. There is a lot of useful advice and “better” practices but unfortunatel no definiti e road map for success.

For most entrepreneurs, raising money will be a trying process that will re uire significant time and resources.

However, entrepreneurs who prepare for success can lead a more focused process and typically have better outcomes.

Below are four tips to prepare for fundraising that will allow you to hit the ground running when your business requires capital.

1

The first offer is not necessarily the best offer. At the outset, you should develop a detailed financial plan so that ou now how much capital your business requires.

This sounds intuitive, but many entrepreneurs raise too little or too much early stage capital because they have

not done the bottoms up financial planning to determine how much their business needs. nowing our financial needs will ensure you are talking to the right investors and can prevent unnecessary dilution. Raising too much money and failing to efficientl convert it to value, or acquiring too little money and having to Doyle raise mone again at a at or lower valuation, are both are less than ideal outcomes.

2

Pick the right investors. Just because an investor has the funds does not mean that individual is the best fit for our business. ic an in estor that understands your business and industry, is comfortable with your company’s stage of development and has a good reputation in the industry. Entrepreneurs should diligence how “hands on” an investor likes to be and should be on the same page regarding what the investor

will deem a successful return.

3

Prepare for due diligence.

Regardless of the size of the investment, most sophisticated investors will conduct some level of due diligence. Be prepared for these diligence probes by requiring employees to enter into invention assignment agreements, cleaning up your cap table and developing a repository for your material contracts.

Most entrepreneurs are surprised at how much work remains after the term sheet. roper documentation will greatly reduce the time it takes to secure your investment capital.

4

Determine the structure of your offering. reparation and knowing your structure options will allow you to jointly decide with your investor which structure is best for your company. Deal structure is always a negotiation. If one side is dictating all of the terms, chances are both sides will lose. Make sure you have discussed all of your options with your

accounting and legal advisers to ensure you are making the most informed decisions that give your business the best opportunity for success.

Raising capital for an emerging company can be an arduous process, but spending some time and money on the

front end to be better prepared can go a long way toward reaching your goals.

Terry Doyle is partner at Calfee, Halter & Griswold LLP. Contact him at 216-622-8499 or tdoyle@calfee.com.

Eliminate Surprises BMF Transaction Advisory Services provides thorough due diligence and quality of earnings assessments that help you better evaluate the value of a target company so there are no surprises down the road.

Mark B. Bober, CPA/ABV, CFF, CVA Partner and Practice Leader Transaction Advisory Services bmfcpa.com • 330.255.2425

Own success at every turn Navigating deals requires confident decisiveness to stay a step ahead of frequent shifts in complex government regulations and global market demands.

Our professionals can help you move ahead boldly with the right insights at the right time for the right deals. We bring extensive regional and sector experience as well as an understanding of your culture and situation, so we can assist on a variety of your deal needs including: domestic and cross-border acquisitions, divestitures and spin-offs, capital markets transactions like IPOs and debt offerings, and bankruptcies and other business reorganizations.

For more information on how we can help you, please contact Brian Kelly at (216) 875 3121 or Thorne Matteson at (216) 875 3441.

© 2016 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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CORPORATE GROWTH AND M&A

S24 January 16, 2017

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Buyers should be wary of ‘copyleft’ software Certain licenses impact target company’s valuation

By TERRENCE H. LINK and LINDSIE EVERETT

C

ompanies are increasingly using open source software in their businesses, and for some companies, this type of software is critical to their business models.

Buyers should be mindful of the unique challenges this software poses in M&A transactions, particularly in terms of a target company’s valuation. A buyer acquiring a technology company with valuable, revenue-driving proprietary software may spend millions only to

purchase software tainted by open source software, rendering it worthless.

Open source software is software with public source code developed through a collaborative process, which is licensed with different sets of requirements.

Software developers rely on open source software because it is easy to use, Link ields better ualit code and is cost efficient and rapid. Nevertheless, using open source software poses significant ris s depending on the licensing scheme.

Open source software generally falls under two groups of licenses.

Under a “permissive” license, companies with proprietary software incorporating open source software retain proprietary rights in the software by restricting access to the proprietary code.

Everett This preserves the software’s economic value.

Conversely, when companies develop proprietary software using open source software obtained under a strong “copy-

left” license, the open source software is deemed to have “tainted” the proprietary software. This requires disclosure of the software’s source code to the public.

Consequently, the ability of the company’s competitors, potential clients, and other third parties to have unlimited, free access to the proprietary software destroys the software’s economic value.

Buyers can avoid over-valuing a target company by conducting thorough due diligence of the target company’s software and use of open source software.

Periodically, an audit scan of the software source code may be appropriate. Buyers should also negotiate protective representations warranties and indemnification

Northeast Ohio’s leading deal makers to be honored ACG Cleveland, Northeast Ohio’s leading organization for merger and acquisition and corporate growth professionals, will recognize the winners of its 21st Annual Deal Maker Awards at 5:30 p.m. Thursday, Jan. 19, at the Huntington Convention Center of Cleveland.

The Deal Maker Awards are a tribute to Northeast Ohio’s preeminent corporate deal makers for their accomplishments in using acquisitions, divestitures, financings and other transactions to fuel sustainable growth. The 2017 winners are:

DIEBOLD-NIXDORF During the past year, Diebold divested a non-core business and made an acquisition that effectively doubled the size of the company. In February, it divested its electronic security business to Securitas AB for approximately $350 million. Then, in August, Diebold completed a $1.8 billion acquisition of Wincor-Nixdorf, a $2.5 billion, publicly traded German business, to create the world’s largest financial self-services and ATM company. This transaction transformed the company into a global entity heavily focused on services and software, with annual sales in excess of $5 billion. In addition, Diebold formed two joint ventures in China.

HUNTINGTON BANCSHARES In August, Huntington Bancshares merged with FirstMerit in a transaction valued at $3.4 billion. The merger established the largest bank in Ohio by deposit market share, with combined assets of nearly $100 billion. It was overwhelmingly approved by shareholders of each bank. FirstMerit shareholders received 1.72 shares of Huntington common stock, plus a fixed $5 per share for each share of FirstMerit stock outstanding. This represented a 32% premium over FirstMerit’s share price at the time of the announcement. The combined company will operate approximately 1,000 branches in eight Midwest states, including Ohio, Michigan, Pennsylvania, Indiana, West Virginia, Kentucky, Wisconsin and Illinois.

TRADEMARK GLOBAL LLC

provisions in the purchase agreement to address open source software ris s.

While using open source software is beneficial bu ers should identif ris s throughout the due diligence process and consider those ris s when negotiating purchase agreements. These steps help buyers appropriately value target companies software and minimi e ris s of “copyleft” surprises following the closing.

Terrence H. Link II is a partner at Roetzel & Andress. Contact him at 330-849-6755 or tink@ralaw.com.

Lindsie Everett is an associate at Roetzel & Andress. Contact her at 330-849-6611 or leverett@ralaw.com.

ACG Cleveland 2016-17 Officers/ Board of Directors OFFICERS President – John Saada Jr., Jones Day President Elect – Brian Kelly, PwC

Based in Lorain, Trademark Global is a multimillion-dollar e-commerce and drop-shipping business. Among its clients are household names such as Amazon, Walmart and Overstock. In order to accelerate growth, Trademark Global partnered with Blue Point Capital Partners in 2013.

It proceeded to establish a sourcing center in China that increased its speed to market and improved quality control. It also upgraded its IT platform and recreated its inventory management and product development processes, which provided Trademark with increased operational leverage. The company was sold to Bertram Capital in November. During its partnership with Blue Point, Trademark Global demonstrated exceptional top line and margin growth, and nearly doubled its EBITDA.

CAPITALWORKS LLC CapitalWorks is a Midwestern, family focused private equity firm that acquires lower middle-market companies and gives them the capital, support and freedom to grow. Over the past two years, the firm has been extremely active despite middle-market M&A being very competitive. Since December 2013, CapitalWorks has completed five platform acquisitions, four portfolio add-ons, three portfolio dividend recapitalizations and exited two portfolios.

Executive Vice President, Brand – Brad Kostka, Roop & Co. Strategic Integrated Communication Executive Vice President, Programming & Innovation – Dale Vernon, Bernstein Executive Vice President, Resources – Joseph C. Adams, Plante Moran Treasurer – Brian Leonard, Edgewater Capital Partners Secretary – M. Joan McCarthy, MJM Services Immediate Past President – David Dunstan, Western Reserve Partners

BOARD OF DIRECTORS Kevin Bader, MCM Capital Partners Rudolf Bentlage, Chase Mark Brandt, RSM US LLP Denise Carkhuff, Jones Day Jeffery Fickes, Vorys

Sponsors supporting the 2017 Deal Maker Awards include Benesch, Huntington, Grant Thornton, KeyBanc Capital Markets and Oswald Cos.

John Grabner, Hylant Group Beth Haas, Cyprium Partners

2017 ACG Events Calendar DATE Jan. 19 Jan. 26 Feb. 2 Feb. 9 Feb. 16 Feb. 21 Mar. 9 Mar. 23 Apr. 27 May 10 May 11 May 24 Jun. 13 Sept. TBD

Chris Hogan, KeyBanc Capital Markets

For more information and to register, visit www.ACGclevland.org

EVENT 21st Annual Deal Maker Awards Young ACG Lunch & Learn Regional Networking — East — Minority Business Owners Regional Networking — Central — Dale Wollschleger, ExactCare Regional Networking — West — Mike Ripich, AT&F George Veras, CFO, Football Hall of Fame (joint event with FEI) Anil Makhija, Board Member, National Center for the Middle Market Young ACG Networking and BVU Presentation Dick Pace, President, Cumberland Development, Waterfront Project Women in Transactions, Strategic Charisma, Part 1 David Given, Frank Linsalata, Stewart Kohl — Wizards & Legends of Private Equity Women in Transactions, Strategic Charisma, Part 2 Spring Social 13th Annual Golf Outing

TIME 5:30 p.m.

Noon 5:30 p.m.

5:30 p.m.

5:30 p.m.

5:30 p.m.

11:30 a.m.

4:00 p.m.

4:30 p.m.

7:30 a.m.

4:00 p.m.

7:30 a.m.

5:30 p.m.

TBD

LOCATION Cleveland Convention Center Vorys Shaker Country Club Lockkeepers Lakewood Country Club Union Club Union Club Tucker Ellis Nuevo Modern Mexican Jones Day Ritz-Carlton Plante Moran Shoreby Club Firestone Country Club

Jonathan Ives, SCG Partners Sean McCauley, Key Community Bank Jay Moroscak, AON Risk Services Kevin Murphy, Deloitte Matt Roberts, MelCap Partners Peter Shelton, Benesch Jeff Schwab, Oswald Cos. Bertrand Smyers, New Heights Research Cheryl Strom, The Riverside Co. Karen Tuleta, MPE Partners Theodore Wagner, Bober Markey Fedorovich William Watkins, Harris Williams & Co. Thomas Welsh, Calfee Halter & Griswold Rebecca White, Western Reserve Partners

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Focus

Coach Pete Koza works on drills with kids at T3 Performance in Avon. (Ken Blaze for Crain’s)

WELLNESS WARRIORS

O-H-I ... Oh, that was a workout

At T3 Performance, a former Buckeye linebacker is building better — and smarter — athletes

By KEVIN KLEPS

which stands for “test, teach, train” — also has an expanding camp and clinic business, manages six corporate wellness programs, and trains athletes of all ages.

“That’s always been the core of who we are — to make athletes better,” D’Andrea said.

kkleps@crain.com @KevinKleps

During a particularly busy Tuesday morning in late December, T3 Performance was hosting a youth baseball camp in one corner of its 18,000-square-foot space in Avon.

On the other side of the facility, which is adjacent to All Pro Freight Systems’ headquarters at 1200 Chester Industrial Parkway, a mix of youth, high school and college athletes were working out — some at their own pace, and plenty of others under the supervision of one of T3’s coaches.

Amid all of the activity, Mike D’Andrea — T3’s owner, and once the nation’s top-ranked linebacker as a member of Jim Tressel’s 2002 recruiting class at Ohio State — joked with a guest about the “awesome parking” T3’s limited space has for its growing number of visitors.

That should change this summer, when T3 will move a mile down the road, to a 56,000-square-foot facility it’s building on Recreation Lane in Avon.

The new headquarters, which is being constructed on the site of a since-scrapped plan for a Bo Jackson Elite Sports complex, will have more than 30,000 square feet of turf fields and 16,000 square feet of athlete and adult gyms, plus batting

A state of mind

T3 Performance owner Mike D’Andrea was once the nation’s top-ranked linebacker as a senior at Avon Lake High School.

cages, a yoga studio and outdoor sand pits.

Eight years after he started a performance training company by purchasing a 1,500-squarefoot gym in Westlake, the 32-year-old D’Andrea

YOGA - Page 36 | CYCLING - Page 37 | ADVISER - Page 37

is overseeing what he describes as a consistently growing business that has 10 full-time employees, 10 to 15 part-timers (depending on the season) and runs 15 travel baseball teams. T3 —

At 6-foot-3 and 240 pounds, D’Andrea — not future first-round draft picks and fellow Ohio State recruits A.J. Hawk and Bobby Carpenter — was the top-rated linebacker in the country as a senior at Avon Lake High School. But injuries derailed his OSU career, and a couple of years later led him on a path in which he aimed to help aspiring athletes train in a more effective, and smarter, manner.

“Training protocols and thoughts on training had changed so much from when I was in high school,” D’Andrea said. “It really is amazing. ... I was like, ‘Man, this would be awesome if I would have been doing this when I was their age.’ ” Now, almost a decade later, D’Andrea has transitioned from the trainer to the boss. He’s in charge of the business, and he lets what he calls his “awesome” group of coaches train athletes who start as young as 7. The new facility, which D’Andrea hopes will open in July, will allow T3 to do even more.

SEE T3, PAGE 38

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WELLNESS WARRIORS

Cleveland Yoga’s success isn’t a stretch The studio serves 350-plus clients at its locations on the city’s East Side

never expected to own a yoga studio, she said.

A former employee with IMG’s running and fitness division, Schneider started teaching individual yoga classes in 2001 at the Hamptons Apartments in Beachwood. She had previous experience coaching high-impact cardio and weight-training classes, but transitioned to yoga when her body started to break down from the constant running and jumping. Working with then business partner Sandy Gross, her yoga clientele ballooned to the point where she had to train new teachers to take on the overflow.

DOUGLAS J. GUTH clbfreelancer@crain.com

Tami Schneider has spent 15 years building a healthy Northeast Ohio through the empowering pathway of yoga.

As founder of Beachwood-based Cleveland Yoga, Schneider offers clientele the ancient discipline in its many forms. Veteran practitioners can try hot yoga, which delivers sweaty stretches in a room heated to 92 degrees Fahrenheit. First-timers, meanwhile, may prefer the therapeutic focus of Schneider’s slow-flow yoga classes. Regardless, the studio creator believes she has a class suited to every taste and skill level.

“Beginners can build their foundation, and if they want to try heated yoga, they can,” Schneider said.

“Over the course of practice, they’re going to better themselves.”

About 100 classes are available each week at Cleveland Yoga’s Beachwood and University Circle locations, serving over 350 clients looking to reduce stress, increase flexibility or simply develop a healthier lifestyle.

“We’ve had people coming off high blood pressure medications who try yoga as a way of getting better,” Schneider said. “They get a better understanding of themselves and what they’re capable of doing.”

The studio’s 25 instructors teach new students simple yoga postures that weave in elements of breath and movement. Power yoga concentrates on challenging poses meant to build a framework for continued practice, while hot yoga devotees seek to sweat out toxins from their skin.

Welcoming all yogic passions has been Schneider’s mission since opening her 4,000 square-foot Beachwood location in 2004. Though the Pepper Pike resident began her career in the fitness industry, she

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“Starting a studio was scary, but our first class on a Saturday morning drew 65 people. I’d never seen anything like that before.”

— Tami Schneider, Cleveland Yoga founder

Tami Schneider earned the nickname ‘The Taminator’ for the way she pushes students. (Contributed photo)

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Revenue from the Hamptons was transferred to her space on Richmond Road, with Gross branching out to open her own studio. Fellow studio owners advised Schneider on industry best practices, which honed her entrepreneurial skills.

“We were bursting at the seams at the Hamptons,” said Schneider.

“Starting a studio was scary, but our first class on a Saturday morning drew 65 people. I’d never seen anything like that before. I put a lot of money into the build-out, and found my way without knowing what to expect.”

Success allowed Schneider to open a second location four years ago in University Circle’s Uptown District. Over the last decade, she’s also trained 350 Cleveland-area instructors as part of a program bringing yoga to disadvantaged populations. Schneider has traveled across the nation and beyond its borders to impart her craft, including journeys to Kenya and the United Kingdom.

Ann Zoller, a Cleveland Yoga client since 2004, said Schneider’s dedication to her work has benefited fitness-minded Clevelanders craving a break from routine.

“Tami got the nickname ‘The Taminator’ for the way she pushes her students,” Zoller said. “There’s a joy in the way she teaches that keeps people devoted to her work. Her passion is contagious.”

Hesitation is the biggest obstacle for potential clients, who worry their lack of flexibility or strength will transfer poorly to a yoga mat. To answer that concern, Schneider promotes a welcoming environment that has would-be yogis saying “Namaste” before a session concludes.

“You just have to come in and break through that barrier,” Schneider said. “We’ve built such a great community here and that’s something beginners want. To see them walk out of the studio feeling like they’ve done something great for themselves is the driving force for what I do.”

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WELLNESS WARRIORS

Q&A: Anne Hartnett

Adviser: Jim Pshock

Founder, Harness Cycle and GroundSwell Collective These days, Anne Hartnett might be Cleveland’s most talked about wellness warrior. She, of course, got a recent bump from LeBron James and Co. with an appearance on CNBC’s “Cleveland Hustles,” but her commitment to helping others with their fitness goals was well known before she NATHAN MIGAL, IMAGEN PHOTOGRAPHY appeared on the reality show. In 2013, to much success, she opened Harness Cycle in the Hingetown neighborhood on Cleveland’s near west side. In March, Harness will open its second cycling studio at the intersection of East 6th Street and Euclid Avenue in the Garfield building in downtown Cleveland. She also recently launched GroundSwell Collective — an events-driven business designed to build a community through movement. GroundSwell, for instance, in February is offering a weekend retreat in Mohican with yoga-inspired goal coaching, Crain’s recently chatted with Hartnett about her passion for fitness and why she’s made a career out of it. —Timothy Magaw Have you always been into fitness?

I was always into sports, and played Division 1 lacrosse all through college. After college, I was looking for that camaraderie being part of a team offered. It wasn’t until I was cross-training for a marathon that I found indoor cycling. I liked the atmosphere of self-challenge, but also the fact that you’re part of a group dynamic that connects through music. I liked the accountability of group classes. It was definitely to maintain a healthy lifestyle, but it also helped me become part of a community. When I would travel for work, I’d find that group fitness helped me connect with other people in a unique way.

You started Harness while working as Hyland Software’s wellness coordinator. How did you

end up in that role?

I had been in a technical role as a solutions engineer. I was working on a project in New York City just as boutique fitness studios were budding. That sparked my involvement, and I pitched the idea to HR just as corporate wellness was taking off and being tied to insurance, but also to the company culture. A lot of software companies are focused on biometric screenings and numbers, but Hyland wanted the wellness programs to be in line with their whole philosophy focused on community building.

What was it like leaving a company like Hyland to focus on your own business full-time?

It was a little scary, but we knew we were on to something because of the response we were getting.

Classes were selling out, and there was a strong interest. We focused our energy and really believed in it. In a lot of ways the environment I came from speaks volumes about Hyland.

They create an entrepreneurial spirit in every department. They helped set me up for success on my own.

How does Harness set it self apart from other cycling studios, and are there any misconceptions about cycling in general?

There are two camps of indoor cycling.

There’s the more traditional, very aerobics-focused camp where you follow the instructor the whole time.

We spun off into a new-age style that’s music driven and not metrics based.

You’re very much guided by your own physical connection. We think of it as active meditation. It’s a challenge and an incredible cardio and strength workout, but it’s incredibly self-driven.

Also, it’s changing, but traditionally, females would dominate the attendance in group fitness. Now we’re seeing about 10% of attendees are male, and that’s growing. We do a lot of strategic programs to get men to try it.

Why did you decide to branch out with GroundSwell?

The idea came out of Harness’ event programming. We wanted to do more events, like yoga, paddle boarding and running but it wasn’t fitting into the Harness brand. The idea is to bring Cleveland together through unique experiences that are mostly movement based. We have about 25 people signed up for a retreat down in Mohican with a yoga instructor focused on goal coaching. It’s an opportunity to unplug, move, recharge and step away from the daily grind.

Time for corporate wellness to focus on what matters

Wellness plans have become table stakes for companies who want to attract and retain employees and promote healthy choices. Within this movement, a deeper trend fully took root in 2016: “total well-being.”

Not only are companies realizing their people are their greatest asset, but an employee who is fully well (not just physically healthy) can yield massive returns on investment in productivity and in the impact on fellow team members. While rooted in traditional health care benefits, the focus goes beyond physical health to help employees become more resilient, define their life purpose and elevate their overall performance.

After eight years in corporate wellness, this shift is proof wellness is maturing as an industry. But in this process, it is essential that improved physical health remain a foundational measurement of success. A focus on total well-being does not shield us from demonstrating a measurable return on investment when it comes to employee health, especially when rising costs are still a major concern.

We don’t know a lot about what the future of health care looks like under the new presidential administration, but we expect Donald Trump to favor more of the performance metrics we’ve seen recently. Court rulings on wellness lawsuits, proposed legislation and updates to wellness regulations in 2016 all indicate that the bipartisan support for corporate wellness is likely to bring it to the forefront as a strategy for driving down health care costs.

This will bring corporate wellness on a collision course with the da-

Jim Pshock is the CEO and founder of Bravo Wellness in Cleveland.

ta-driven ratings in Medicare and Medicaid reimbursements and the dawn of outcomes-focused entities like accountable care organizations.

If providers and payers are being held accountable to focus on prevention, quality and controlling costs, it’s only a matter of time before individuals and the companies they work for are encouraged to do the same.

The challenge facing the wellness industry (and those companies invested in wellness) as we move forward is that we have a responsibility to demonstrate improved health. A shift to include more holistic elements such as financial wellness, sleep programs, stress management and career counseling is necessary to support individuals on their journey. However, health care costs are a serious risk for the economy and a focus on well-being cannot afford to separate its impact from measurable physical health improvement.

Companies need to take a critical look at their wellness initiatives and determine what they value most and whether they are seeing measurable progress. Results matter. And we should all ask ourselves, “If people aren’t getting healthier physically … can they really be well?” The future of wellness (and health care for that matter) may depend on how we answer.

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WELLNESS WARRIORS

Coach Pete Koza works on drills with kids at T3 Performance in Avon. (Ken Blaze for Crain’s)

T3

‘Brilliant model’

CONTINUED FROM PAGE 35 “It’s funny, we train them to get faster and stronger, but the No. 1 thing we always get back from parents and kids is, ‘My confidence is up,’ ” D’Andrea said. “So it’s almost more of a mental state as it is a physical state.

That will still be our core focus, but we’ll probably transition more into helping adults with their wellness as well. That’s something with our layout right now — we can’t offer a good solution or service to adults’ health and well-being, but we’ll have room for that in our new spot.”

T3 is still determining how it will arrange its programming for adults who want to work out at the new facility, but the company already has a dedicated group of local companies who use the current spot to promote corporate wellness.

Matt Hlavin, the president of Thogus Products Co. in Avon Lake, said he met D’Andrea when his then-8year-old son Jack started training at T3 six years ago. He says he remembers telling the former Buckeye that he needed “to build a corporate program,” which in turn would serve as a “feeder system,” as happy customers would then trust T3 to train their kids.

A couple years later, Hlavin helped D’Andrea launch T3’s corporate wellness program.

Thogus has a small gym at its headquarters on Pin Oak Parkway, but the company encourages its employees to work out at nearby T3. Thogus’ 2017 Wellbeing Program includes a $35 monthly credit that is given to employees who participate in a list of activities. Employees who are in the program year-round can earn $420 per year toward their health care benefits.

Hlavin tells the story of an operator who “was in the worst shape of his life” when he joined Thogus a few

Top: Coach James DiBiasio works with Helene Thomas; middle: Kate Kastelic practices her swing in the batting cages; bottom: Members of the Avon High School football team work out.

years ago. The company president said the worker lost about 80 pounds in his first year of the wellness program, and he has maintained his reduced weight since.

“It changed his life,” Hlavin said.

“Several others have seen that transformation. We’re all the same in that gym. There’s a sense of accountability to it.”

D’Andrea said T3’s other corporate clients have different ways of incen-

tivizing their wellness programs. But what T3 offers — from yoga, to strength training, and nutritional and motivational classes — is consistent.

“It’s great for company morale and production,” Hlavin said.

Baseball has “always been a staple” for T3, whose travel teams are given an offseason program to speed up their development. The company also has a softball program, and is “really looking to grow” its football training business, D’Andrea said.

T3 also has a partnership in which its trainers work with Cleveland United Soccer Club, which has boys and girls programs ranging from 9-and-under to 18-and-under.

Plus, a deal with University Hospitals means physical therapists are always on site to help rehab athletes who are coming back from injuries.

“It’s a brilliant model,” Hlavin said.

“You’re getting kids off their ass.

They’re not playing video games.

They’re working out.”

That’s the case for the 50 to 60 Avon High School students who work out at T3 twice a week, said Mike Elder, the school’s football coach.

The program — one-hour speed training sessions on Tuesdays and Saturdays — is open to all students.

“It’s very valuable to us,” Elder said. “I think it gives us a competitive advantage.”

More importantly, said the coach who guided Avon to a state runner-up finish in 2011, working out at T3 creates an “energy and enthusiasm” that makes the kids want to come back.

D’Andrea is banking on that.

His group estimates that the new facility will generate more than 300,000 total visits in the first year.

For the first time, T3 will be able to offer indoor leagues and competitions, in addition to its already-hectic schedule.

“It’s not going to change what we do. We’re just going to be able to add more services,” D’Andrea said.

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AKRON

AKRON CONTINUED FROM PAGE 1 Other apartments and lofts in the city’s center — and there aren’t that many yet — report similar strong response.

“We are usually at 100% occupancy. The building stays full and people are usually waiting to get in,” said Cassie LaRosa, residential agent for Cuyahoga Falls-based Testa Cos. LaRosa, who is engaged to Testa principal Joel Testa, was referring to Canal Square Apartments, located in the former YMCA building.

Testa is redeveloping the building into the 15-floor Canal Square Apartments, which lease from $850 a month for older units to $1,600 a month for larger, remodeled units.

Testa already has added 12 units to the building, bringing the total to 67, and it's working to build another 17 this year, LaRosa said.

Testa also develops lofts and condos downtown, including the Northside lofts, where Testa and LaRosa both live, at Furnace and North Howard streets.

There’s one condo available in that unit now, LaRosa said. But it’s not cheap. The asking price is $482,000, and it just came on the market this year, she said.

If that seems like a wildly unreasonable price for a condo in downtown Akron, consider that Northside already has sold one of its prime penthouse units for $1.2 million, according to LaRosa.

To many longtime Akronites — especially those old enough to remember the 1970s and ’80s, when the area of Howard Street now known for luxury lofts was best known for its population of prostitutes and drug dealers — that probably sounds surreal.

But ask some of the young people who make up the majority of the downtown area’s newcomers, and they will quickly tell you they want to live near downtown Akron because there are so many cool things to do.

Kaley Foster, a 29-year-old native of Portage Lakes, grew up in the epitome of a suburban environment. She works at her family’s company, Buckeye Reserve Title Co. in Munroe Falls, and often spends her spare time making beeswax candles for her own company, Urban Buzz. Like many newcomers, she wanted to live within walking and biking distance of amenities, and be part of a community of like-minded urban dwellers.

She got that when she moved into Troppe’s Cascade Lofts in April, she said. Concerts at Lock 4, LeBron James’ NBA championship celebration at Lock 3, Canal Park, the Akron Civic Theater and more — they’re all within a 10-minute walk of her building, Foster said. And her favorite amenity, the Towpath Trail, is within a stone’s throw of her back door.

“There’s so much to do. Some weekends, I have 10 events to choose from and I don’t know what to do,” Foster said.

Likewise for Alexandre Marr and Dominic Iudiciani, both 24 and from Poland, Ohio, south of Youngstown.

They also live in Cascade Lofts, in what even Foster admits is the building’s premier unit, complete with granite countertops, faux concrete floors and, in this case, a baby grand piano.

Marr and Iudiciani say they wanted an urban lifestyle and a luxury apartment, but didn’t want to pay what that would cost them in Cleveland or another large city. Their apartment is $1,700 a month in Akron.

“It’s just super affordable to live here,” Iudiciani said. “There’s nothing like this up there at this price.”

“And you have access to a major

Kaley Foster moved into Akron’s Cascade Lofts because, like many, she wanted to live close to downtown’s amenities. (Dan Shingler)

city within 30 minutes if you want to go to Cleveland,” said Marr, who commutes to Cleveland, where he works in product development for American Greetings.

Such new residents make up the “creative class” that Troppe and economic developers hope will move into the city and help to reinvigorate it. But they are not, and should not be, the only component of downtown Akron’s population, he says.

“It’s not just young people. It’s anyone who wants to simplify their lifestyle,” Troppe said.

That second component includes people like Yoly Miller, a freelance writer who lives in a rented house on Bluff Street, near the art museum. She wanted a walkable lifestyle and a cool place to live. “The house had just been completely refurbished," Miller said.

"Everything has been upcycled or re-

cycled and the place is just beautiful.

The counters in the kitchen are made from bowling alley floors."

She’s no empty nester, either. Miller is raising four children downtown, where she said they’ve all become “urban kids that love being able to walk to get ice cream."

Even schools weren’t an issue, said Miller, whose younger kids attend Akron Public Schools. (One is at the University of Akron.)

She said finding a place to live was not easy.

Others agree.

“We definitely need more (residential development),” said Jack Diamond, a partner at the Brennan, Manna & Diamond law firm on East Market Street.

“Cities don’t come back until people live downtown.”

He said some of his firm’s employees live downtown and others likely

want to.

Even the city of Akron agrees. It has made residential development a linchpin of its plans to revitalize downtown and other urban neighborhoods.

In November, the city unveiled its Downtown Vision and Redevelopment Plan, which relies heavily on downtown residential development, along with projects to make the area safer, more walkable and more attractive to both businesses and residents.

That’s a good idea, according to Troppe and other professionals.

“It’s a fantastic idea,” said Jerry Fiume, owner of Akron-based SVN | Summit Commercial Real Estate Group. “There’s way more demand than there is supply and they can’t build new units fast enough."

Troppe said he has other plans in the works and predicts other developers will follow suit. He also said Akron mayor Dan Horrigan is the right man in the right role at the right time, because he believes in working closely with developers to get more projects done downtown.

The city has had some recent success. At the end of November, it announced it has found new developers — North Canton-based DeHoff Development Co. and the Streetsboro-based Geis Cos. — to develop the long-vacant Landmark Building.

That plan calls for a $33 million facelift for the 70,000-square-foot building, which would result in a mixed-use development with 86 new apartment units.

That will help, say most observers, though it won’t be nearly enough to satisfy the demand.

In the meantime, residents like Foster said they’ll wait and remain engaged with the city.

“We don’t shun the city’s history.

We embrace it,” she said. “And we’re here to help rebuild Akron.”

The Dish: Jennifer Karpus-Romain

Wadsworth couple makes leap to professional brewing After many false starts during the second half of 2016, Ernie Joy and Ericha Fryfogle-Joy got their New Year’s wish: to open the doors of Wadsworth Brewing Co. After getting past permit and licensing delays, the couple officially debuted their new business Friday, Jan. 6. Because the company participated in recent local events, such as the Wadsworth Candlelight Walk, locals were keeping a close eye on the brewery’s opening “I hope people who have been following our journey recognize that the delay in opening is not what we want,” Fryfogle-Joy said.

Opening a brewery has been a long time coming for Joy and Fryfogle-Joy. “We’ve been home brewing for a little over a decade. And we like the trend of the small nano-craft breweries,” said Fryfogle-Joy. Brewing began as a hobby. Joy worked for a small sign company, and Fryfogle-Joy works as a sales manager in health care. But home brewing was fun, so they eventually started to seriously think about opening a brewery.

They began to research more about the science and chemistry behind the process.

“Certain chemicals can alter the pH of the beer,” said Joy, who is the company’s brewmaster.

Additionally, he said a communi-

ty’s water mineral makeup can dictate what style of beer best suits a brewery.

“It’s a huge leap from home brewing to this. We knew that it was going to take more research, knowledge and effort than just home brewing,” Fryfogle-Joy said. “After doing all the research, gathering the knowledge, we decided we really felt like this was something that we were capable of handling.”

The next step was to pick a location. They looked at other communities, but after living in Wadsworth for 17 years, they knew where they needed to go.

“For us, it just made the most sense to come to downtown Wadsworth,” Fryfogle-Joy said.

The Main Street location previously housed the Sub Station restaurant, which moved down the street. Joy and Fryfogle-Joy are currently renting the space, though Fryfogle-Joy said they’d like to eventually buy the building.

Wadsworth Brewing — which is a tap room only, not a restaurant — has six fermenters on site and opened with eight taps. It plans to move 10 taps. Fryfogle-Joy said the brewery has a 12-tap system, so it can test smaller batches as well.

One staple beer for Wadsworth Brewing Co. is a double IPA, which got its name when the couple learned about this region’s Bigfoot legend, the River Styx Monster.

Wadsworth Brewing: At a glance Where: 126 Main Street, Wadsworth When: 3-9 p.m., Wednesday and Thursday; noon to 11 p.m., Friday and Saturday; noon to 8 p.m., Sunday The vibe: A cozy, comfortable atmosphere with warm wood accents and refurbished decor Specialties: The River Styx Monster, a double IPA named after the region’s Bigfoot legend

Ernie Joy is the co-owner and brewmaster at Wadsworth Brewing Co. (Shane Wynn for Crain’s)

“The River Styx Monster is a hit with everybody, even people who say they don’t like IPAs,” said Fryfogle-Joy. As far as other regular brews, the owners said they need to see what becomes popular with patrons.

One currently featured brew is Papa Elf, a butter cookie porter.

“We joke that it’s Santa’s treat instead of milk,” she added.

While the couple thought about having a kitchen at the site, they decided to stick to their mission of beer.

Guests are free to bring in food from

Menu: Patrons can bring in food.

Beers currently on tap include: Under the Mistletoe, a milk stout with cocoa and mint additions; Papa Elf, a brown porter infused with whole bean Butter Cookie Coffee from Pearl Coffee Co. in Akron; Thelma Lou, a blonde ale; and Cran Apple Shandy, a hoppy beer with apple and cranberry flavors.

home or carryout from local restaurants. They can also take growlers of Wadsworth Brewing beer to go.

“We wanted to be able to offer good, local craft beer, brewed right here in Wadsworth”, Fryfogle-Joy said. “And we wanted to be able to offer some of the classic styles, yet offer fun and new twists on classics.”

Fryfogle-Joy declined to discuss financial investments, but she said she

and her husband hoped Wadsworth Brewing becomes a philanthropic business and does things like sponsoring local events and potentially a scholarship for the local schools.

Walking into Wadsworth Brewing, visitors will feel a comfortable vibe, with warm, brown tones. Much of the furniture is refurbished, with chairs from the Portage Path Community Mental Health Center. The bar top and facade is made from flooring from the former Isham Elementary School gymnasium. The space also utilizes pews from an old Mennonite church.

“We’ve always been people who like taking something old and giving it a new purpose or making sure it doesn’t end up in a landfill,” Fryfogle-Joy said.

When starting the business, it was important to them to carry over that ideology.

The brewery currently employs 10 to 12 part-time workers, including Joy, Fryfogle-Joy and their son. One of the couple’s long-term goals is to distribute their brews, but they are first focusing on the tap room.

While the couple knows any venture is a risk, this was one they knew they had to do together.

“We’d been talking about it so long, it was either do it or stop it,” Fryfogle-Joy said.

And after months of work, they can finally say they’ve done it.

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Parties in Summa dispute agree on little

By LYDIA COUTRÉ lcoutre@crain.com @LydiaCoutre

Leaders from Summa Health System and Summa Emergency Associates, the independent physician group that staffed the system’s emergency departments until this month, agree on this: Contract negotiations, which ultimately broke down days before the deadline, could have started sooner.

Both say they entered negotiations in early November fully expecting to have SEA clinicians staffing all five of Summa’s emergency departments in 2017 and years to come.

Beyond that, the two agree on little about how negotiations played out.

Upon reaching a stalemate in the last week of December, Summa solicited proposals from other companies that could, within days, have enough doctors available at midnight on New Year’s — an unnecessary move, said Dr. Jeff Wright, SEA president and ER physician. But Summa leaders say it was their only option.

Officials at US Acute Care Solutions (USACS) — which has been staffing the EDs since SEA’s contract expired Dec. 31 — thought Summa and the SEA group that has provided emergency services there for decades would reach an agreement.

Dr. Thomas Malone, Summa president and CEO, said it was a tough decision. Realizing they were at an impasse, he brought on USACS at the last minute to staff Summa’s Barberton, Akron, Wadsworth-Rittman, Green and Medina emergency departments.

“I don’t think they thought we could do it,” Malone said. “It was horribly disruptive to the organization, unbelievably disruptive to the ED staff, to the patients the first couple of days because they had longer waits.

But because of the hard work of the staff, mostly the nurses, the credentialing staff (and) IT, we were able to pull that off, and every day it’s been better.”

The wait times have returned to normal, and patient volumes have remained steady, said Valerie Gibson, chief operating officer of Summa and president of Summa Health System hospitals.

But that hasn’t appeased concerned practitioners and patients.

Summa leaders, its board and many of the system’s department chairs support the decision and stand on one side of what has become a very public and contentious debate. Facing them is a sea of unhappy community members, fed-up physicians — hundreds of whom have signed a no-confidence letter — and other groups weighing in.

Negotiations In late November, Summa sent SEA its initial proposed contract: a three-year deal without financial assistance, similar to what SEA had operated under before.

Wright returned it with additions two weeks later. He said he wanted a 15-year contract to help with recruitment and retention, as well as financial assistance to help SEA make up for financial losses sustained while staffing some less busy Summa emergency departments.

Although Wright said SEA had been talking to Summa for a year or two about the financial struggles in those EDs, no form of stipend was in the initial contract. His counteroffer was to not staff two of the financially underperforming departments.

Summa leaders realized the two were very far apart. A 15-year contract is outside the industry standard of three years, said Ben Sutton, Summa’s senior vice president for strategy and performance management.

And any stipends Summa includes in contracts are assessed by a third party for fair-market value, a process Sutton said SEA didn’t initially offer.

Summa offered an extension of the contract so they could get on the same page. Wright, thinking they’d certainly be able to work it out, de-

REAL ESTATE

clined the offer. He saw his requested changes as wording and legal issues that the attorneys could hammer out.

Summa leaders didn’t think it was that simple. Sutton said, they were asking for things “so far outside of the norm that there was no way that we could even contemplate doing some of the things that they asked.”

Summa offered four extensions, all of which SEA turned down, Gibson said. Wright doesn’t know an exact number, but acknowledges declining multiple extensions.

He said it didn’t seem like Summa officials were “putting the effort forward to get a contract finalized.”

Malone said he’s never been in an environment where people didn’t extend a contract, especially if they’d had it for as long as SEA did — about 40 years, according to Wright.

Although the short time frame worried Wright, he was more concerned that during any extensions, Summa would find another group to take over the contract. “It was a lack of trust,” Wright said.

Many have raised questions about the involvement of Dr. Vivian von Gruenigen, Summa’s chief medical officer, in the negotiations. Her husband is CEO of the group tapped to replace SEA. Summa officials say they ensured that anyone with conflicts of interests, including von Gruenigen, was excluded from the selection process for the new company.

In the crunch of the final week, SEA and Summa officials share different versions of the verbal and written offers from each. But ultimately, they could not bridge the gap, and USACS was put in place.

Fallout The fallout from doctors, community members and beyond was swift.

About 215 attending staff members signed a letter of no-confidence in Malone and another such letter with a couple hundred signatures came from medical residents, said Dr. Hitesh Makkar, vice president of

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celed the interviews, but said it would medical staff at Summa.

An anonymous survey circulating have “probably been someone in the has garnered 350 to 400 votes of residency office, which would have no-confidence, said Makkar, a part- been one of our physicians.”

Wright said SEA physicians had no ner and physician with Respiratory, Critical Care, Sleep Associates way of knowing whether medical stu(RCSA), whose contract with Summa dents traveling there would have anyone to meet with. also was not renewed.

This decision, though made last summer, is under public scrutiny fol- Future lowing the ED contract negotiation breakdown. Summa maintains that Summa’s board and department these were separate decisions. chairs have issued letters of support Summa moved to an exclusive for the administration’s decision. contract with its employed group but Summa and USACS say the EDs would include others who align with have been fully staffed since midthe system, Malone said. night on New Year’s and the wait Dr. Charles Fuenning, another times are back to normal, while partner with RCSA, said the move in- Wright says he’s heard otherwise dicates that Summa officials wish to from former colleagues.

Gibson emphasizes that the decimove to a wholly employed physician model and don’t appear to be sion was a contract dispute and had interested in collaborating with inde- nothing to do with quality of care. pendent physicians.

SEA physicians were high-level, Malone disputes this, saying they’ll board-certified doctors that Summa work with any independent group would love to have back — provided that wants to work with Summa and they come through USACS, which join its affordable care organization. has been reaching out to physicians.

Fuenning and Makkar are invesDr. David Scott, USACS chief adtors in Western Reserve Hospital, ministrative officer, said they’re in which is co-owned by Summa Health negotiations to hire some docs back. and Western Reserve Hospital PartSumma is working with physicians ners, who are in an ongoing legal bat- to make sure they understand the detle. cision and feel engaged in the sysMalone said the ED decision was tem’s vision, Sutton said. an unfortunate and separate situa“We made the right decision,” tion, but now independent docs who Malone said. “As I’ve gone through are shareholders at Western Reserve this again and again, no matter how “are trying to make it more disruptive much press we get on it, the board is than it needs to be.” confident in the new group and we’re Makkar and Fuenning both say not turning back.” they did not bring attention to their Dr. Eric Espinal, Summa’s chief of contract issue following the ED deci- cardiothoracic surgery, said that with sion and say the contract disputes are this much of an upset, it’s clear that separate from their involvement with communication should have been better. At the end of the day, the SumWestern Reserve.

Malone said the SEA residency ma administration and the physiprogram director canceled upcom- cians want the same thing, he said. ing interviews for medical students “We want a financially viable instiinterested in next year’s residency. tution, we want our nurses and the He said they “maliciously” attempted families who depend on all of these to impact the residency. “I’ve never employees to be happy and enjoy seen this kind of behavior from phy- coming to work, and we want our pasicians before,” Malone said. tients to be confident that they’re CRAIN'S CLEVELAND BUSINESS μ JANUARY 16, 2017 μ PAGE 41 Wright doesn’t know who can- well taken care of,” Espinal said.

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Victor March

Schneider Smeltz Spieth Bell LLP is pleased to announce Kyle B. Gee has become a Partner in the firm, effective January 1, 2017. Gee is licensed to practice law in Ohio, Pennsylvania, and New Jersey. A member of the firm’s Trusts and Estates practice group, he concentrates in the core areas of estate planning and wealth transfer, administration of estates and trusts, fiduciary representation and litigation, charitable planning, business succession, family foundations, and taxation.

Chris Karel is now Cinecraft’s Creative Director & Business Development Manager. Chris joined Cinecraft in 2012 as an eLearning instructional designer, video scriptwriter and producer/director. Neil McCormick, Cinecraft’s Chairman says, “In both video and eLearning, Chris has always shown a passion for this business of helping clients tell their stories.

This newly created role reflects the evolution of Cinecraft’s business model and Chris’ rapid professional development.”

FINANCIAL SERVICES

Kenny Luchesi practices in the area of intellectual property law, concentrating on patent litigation.

He has represented clients in patent cases in federal district courts nationwide and in inter partes review proceedings before the Patent Trial and Appeal Board. He also assists clients with intellectual property counseling, licensing, and patent prosecution. He holds a J.D. from the University of Texas at Austin and a B.S. from Texas A&M University.

LAW John C. Evans

Chris Cwiklinski

Partner, Intellectual Property

Senior Vice President, Director of Portfolio Management

Jones Day

F.N.B. Wealth Management Cwiklinski provides sophisticated investment solutions for individuals and institutions in northeast Ohio. He also leads a team of Portfolio Advisors who help clients reach their financial goals. Cwiklinski has more than 22 years of financial services experience, including the last 15 years as a regional manager with Huntington Bank’s wealth management division.

Ben Stulberg advises public and private clients on corporate and securities law matters, focusing on mergers and acquisitions. In the last five years, Ben has played leading roles on transactions valuing more than $70 billion. He has experience with deal-related disputes and advises clients on matters relating to corporate governance, takeover preparedness, and SEC compliance. He holds a J.D. and M.B.A. from Case Western Reserve University and a B.A. from The Johns Hopkins University.

John Evans is an intellectual property lawyer, with a primary focus on patent litigation. He represents clients in numerous patent disputes in courts across the United States, in the United States International Trade Commission, and in the United States Court of Appeals for the Federal Circuit. He holds a J.D. and Ph.D. in biophysics from the University of Michigan and a B.A. in physics and chemistry from Colby College.

For more information or questions regarding advertising in this section, please call Lynn Calcaterra at 216-771-5276 or email: lcalcaterra@crain.com

PA G E 4 2

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CRAIN’S CLEVELAND BUSINESS

The List NAME OF FIRM THIS ADDRESS YEAR PHONE/WEBSITE

LARGEST ARCHITECTURAL FIRMS Ranked by Local Registered Architects

(1)

LOCAL OFFICE REVENUE (MILLIONS)

LOCAL REGISTERED ARCHITECTS

(2)

TOTAL 01-1-2017 01-1-2016 STAFF

2016

2015

MAJOR CURRENT PROJECTS

TOP LOCAL EXECUTIVE TITLE

1

DLR Group|Westlake Reed Leskosky 1422 Euclid Ave., Suite 300, Cleveland 44115 (216) 522-1350/www.dlrgroup.com

61

60

180

$40.0

$40.0

CWRU/Cleveland Clinic Health Education Center, Point Park University Pittsburgh Playhouse, Denison University Performing Arts Center, 925 Euclid, 515 Euclid

Paul E. Westlake Global Culture + Performing Arts Leader, senior principal

2

GPD Group 520 S. Main St., Suite 2531, Akron 44311 (800) 955-4731/www.gpdgroup.com

46

43

563

$96.1

$90.1

PNC Banks, Signet Jewelers, Akron Court House, Lakewood schools, Strongsville schools, ODRC Population Management

Darrin Kotecki president

3

ThenDesign Architecture (TDA) 4135 Erie St., Willoughby 44094 (440) 269-2266/www.thendesign.com

27

25

52

NA

NA

The Bowery, Akron; Brecksville recreation center and aquatic facility; Willoughby-Eastlake City Schools; The Reserve assisted living facility, Northfield

Robert A. Fiala managing partner

4

Perspectus Architecture 13212 Shaker Square, Cleveland 44120 (216) 752-1800/www.perspectusarch.com

27

23

49

NA

NA

Health care, senior living, higher education, government, retail, sports and recreation, historical architecture

Lawrence Fischer William Ayars managing principals

5

Herschman Architects Inc. 25001 Emery Road, Suite 400, Cleveland 44128 (216) 223-3200/www.herschmanarchitects.com

26

27

81

$16.0

$14.0

Dick's Sporting Goods/Field & Stream; Fabletics; PetPeople; Golden Gate Plaza, Mayfield Heights; Tri-County Mall, Cincinnati; Maple Village, Ann Arbor, Mich.; Shops at Broken Arrow, Okla.

Mike Crislip, president, partner Carole Sanderson, CFO, partner

6

Hasenstab Architects Inc. 190 N. Union St., Suite 400, Akron 44304 (330) 434-4464/www.hasenstabinc.com

23

22

46

$12.5

$9.5

Chippewa High School; Summa Health bed tower; Cleveland Clinic Akron General emergency department; Akron ChildrenÕs Considine addition; Kent State Stark Fine Arts

Dennis Check president

7

Vocon 3142 Prospect Ave., Cleveland 44115 (216) 588-0800/www.vocon.com

21

22

98

$26.0

$25.0

Dealer Tire, Oatey, KeyBank, Cleveland Browns, Cleveland Clinic, West 25th Street and Detroit Avenue development, PwC

Deborah V. Donley principal

8

AECOM 1300 East 9th St., Suite 500, Cleveland 44114 (216) 622-2300/www.aecom.com

19

23

362

$225.0 (3)

$152.2 (3)

BMW, Toledo Area RTA, Cleveland Airport System, Lakeland Community College, Amtrak, Kent State University, Purdue University, U.S. Coast Guard, Lakewood City Schools

Dana S. Mitchell, vice president, Cleveland site manager; Michael J. Stepic, associate vice president, Akron site manager

9

Bialosky Cleveland 6555 Carnegie Ave., Cleveland 44103 (216) 752-8750/www.bialosky.com

18

17

54

NA

NA

Van Aken District; Montgomery Street, Hudson, N.Y.; Kent State Taylor Hall; Mandel Jewish Day School Phase II; USCB Hospitality Management Center

Jack Alan Bialosky Jr. senior and managing principal

10

KA Inc. 6000 Lombardo Center, Suite 500, Cleveland 44131 (216) 781-9144/www.kainc.com

18

19

36

NA

NA

Worthington Yards multi-family redevelopment, East End, JACK Thistledown Racino renovations, Avery Dennison expansion, Mellody Farm retail development, Brookfield Square expansion

John G. Burk president, chief operating officer

11

RDL Architects Inc. 16102 Chagrin Blvd., Suite 200, Shaker Heights 44120 (216) 752-4300/www.rdlarchitects.com

16

14

43

$7.0

$6.0

Vista Springs Parma, Gateway Senior, Hillcrest Senior, Hough Heritage, Gateway

Ron Lloyd president

12

Domokur Architects 4651 Medina Road, Akron 44321 (330) 666-7878/www.domokur.com

15

19

36

$6.6

$7.2

Camp Greenville, Westfield Bank, University of Illinois, J.M. Smucker Co., United Jewish Association, Kent State University, Ohio Department of Natural Resources, Huntington Bank

Michael Domokur owner

13

Bostwick Design Partnership 2729 Prospect Ave., Cleveland 44115 (216) 621-7900/www.bostwickdesign.com

15

17

30

NA

NA

Cleveland Clinic Florida, University of Pittsburgh, Penn State, University Hospitals, Allegheny Health Network, Mercyhurst University, LCCC, Cleveland Clinic, Cleveland State

Robert Lewis Bostwick president, director of design

14

Dorsky + Yue International 23240 Chagrin Blvd., Suite 325, Cleveland 44122 (216) 468-1850/www.dorskyyue.com

13

12

58

NA

NA

Liberty Center expansion, Cincinnati; Urban Edge, Bronx; Tanger Outlets; Lake Nona commercial/retail district, Fla.; Tomoka Town Center, Fla.; NRP Group

William Dorsky managing principal

15

C.C. Hodgson Architectural Group 23240 Chagrin Blvd., Suite 350, Cleveland 44122 (216) 593-0057/www.ccharch.com

13

15

48

NA

NA

Miami Lakes Senior Living, Fla.; Altenheim Senior Living facilities; Seasons at Alexandria campus, Ky.; Bethany Village II, Dayton; Miami Jewish Health

Cornelia C. Hodgson president

16

Stantec Architecture 3700 Park East Drive, Suite 200, Beachwood 44122 (216) 454-2150/www.stantec.com

12

12

22

$5.5

$5.1

Yale Science Building, Cleveland Clinic Cancer Institute, Chagrin Falls Intermediate School, Lake Forest College Science Center, Ohio State Marion Science and Engineering Building

Michael Reagan, vice president, science and technology; Michael R. Carter, managing principal

17

DS Architecture 136 N. Water St., Suite 208, Kent 44240 (330) 678-6144 /www.dsarchitecture.com

11

10

21

$2.6

$2.1

Kent Police Building, Kent State Lake & Olson Halls, Vermilion museum property, University Hospitals Portage Ð Pediatrics & Specialty Care, BMW Hall 50 CafŽ, Adamson Veterinary Clinic

Jeffrey G. Meyers partner

18

Richard L. Bowen + Associates Inc. 13000 Shaker Blvd., Cleveland 44120 (216) 491-9300/www.rlba.com

10

14

61

NA

NA

Cleveland City Kennel; The Shoppes at Parma; CMHA Carver Park RAD renovations; Wooster Safety Center; Walsh University Global Learning Center; Jonathan Rose Cos. housing program

Richard L. Bowen president

19

Braun & Steidl Architects Inc. 1041 W. Market St., Akron 44313 (330) 864-7755/www.bsa-net.com

10

10

24

$5.0

$5.0

University of Akron Law School, Woodridge Local Schools new elementary school and high school addition, Broadview Heights Recreation Center, hotels in Utica, N.Y., and Sarasota, Fla.

Charles Louis Schreckenberger president

20

HBM Architects LLC 1382 W. Ninth St., Suite 300, Cleveland 44113 (216) 421-1100/www.hbmarchitects.com

10

10

18

NA

NA

Public library projects in Ohio, Indiana, Kentucky, West Virginia, Tennessee, North Carolina, Alabama, Florida and Wisconsin; academic library projects in Pennsylvania, Texas, and Illinois

Peter Joseph Bolek, president, director of design; James Shook, Kevin Kennedy, principals

21

CBLH Design Inc. 7850 Freeway Circle, Cleveland 44130 (440) 243-2000/www.cblhdesign.com

10

10

17

NA

NA

MetroHealth; Cleveland State; Heights Libraries; Veterans Affairs medical facilities in Cleveland, Columbus, Dayton, Clarksburg, Pittsburgh and Ann Arbor; Rocky River Public Library

Marc B. Bittinger, Michael D. Liezert Jeffrey Valus principals

22

Van Auken Akins Architects LLC 1422 Euclid Ave., Suite 1010, Cleveland 44115 (216) 241-2220/www.vaakins.com

9

7

23

NA

NA

CMSD New Sunbeam School, Huntington Park Garage Rehabilitation, Cleveland Metroparks Zoo Primate, Cats & Aquatics Building, Tri-C Manufacturing Center of Excellence

Jill V. Akins principal

23

Sandvick Architects Inc. 1265 W. Sixth St., Cleveland 44113 (216) 621-8055/www.sandvickarchitects.com

8

8

27

$6.3

$4.0

Historic preservation, adaptive reuse and tax credit projects including: 925 Huntington Building, Cleveland Athletic Club, Garfield Building, Standard Building

Jonathan Sandvick president

24

The Austin Co. 6095 Parkland Blvd., Cleveland 44124 (440) 544-2600/www.theaustin.com

7

6

71

$6.2

$7.0

Bakery production plant, medical center emergency department, auto parts plant, poultry processing plant, aircraft production facilities

Michael G. Pierce president

25

HDS Architecture (4) 1939 W. 25th St., Suite 300, Cleveland 44113 (216) 696-3460/www.hds-architecture.com

7

6

16

$2.6

$2.2

Lutheran Home at Concord Reserve, Westlake; Stoney Point Apartments, Akron; Emerald Alliance X, Cleveland; Westerly Apartments, Lakewood; Jameson House, Oberlin

David P. DiFrancesco president

26

Makovich & Pusti Architects Inc. 111 Front St., Berea 44017 (440) 891-8910/www.mparc.com

7

6

13

NA

NA

Multiple behavioral health projects, South Pointe Hospital multifloor renovation, MetroHealth HealthSpan study, VA surgery addition, Tri-C swing space, Concord skilled nursing facility

Donald Rerko principal

27

HWH Architects Engineers Planners Inc. 1300 E. Ninth St., Suite 900, Cleveland 44114 (216) 875-4000/www.hwhaep.com

6

6

68

$12.0

$11.0

Industrial Projects, domestic and foreign

Peter P. Jancar chairman

28

Strollo Architects 201 W. Federal St., Youngstown 44503 (330) 743-1177/www.strolloarchitects.com

6

7

16

$1.9

$2.6

Central YMCA downtown Youngstown, Youngstown State University Melnick Hall and other projects, Howland Medical Center, Mercy Health projects

Gregg Strollo president, principal

RESEARCHED BY CHUCK SODER The online version of this lists includes 38 firms and identifies additional executives; it is available for purchase at CrainCleveland.com. Information is supplied by the companies. Crain's does not independently verify the information and there is no guarantee these listings are complete or accurate. We welcome all feedback and will include omitted information or clarifications in coming issues.

(1) To prevent ties, firms that employ the same number of architects are then ranked by total staff size. (2) Revenue figures in some cases include income from business lines other than architectural services. (3) An AECOM representative said these two revenue figures may have been calculated differently; the 2015 number was submitted by an employee who is no longer with the firm. (4) Formerly Herman Gibans Fodor

CRAIN’S CLEVELAND BUSINESS

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J A N U A RY 16 - 2 2 , 2 017

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PA G E 4 3

BUSINESS OF LIFE

Source Lunch When Len Pagon sold Brulant to Rosetta back in 2008, part of him was thinking about that last scene in “Cast Away,” when Tom Hanks delivers his final FedEx package and then stops at a dirt-road intersection, wondering where to go next.

Like Hanks’ character, Pagon realized that he could “go and reinvent his life.” Since leaving Rosetta in 2009, he has gotten in on some real estate deals. He’s invested in startup companies. And he’s spent a lot more time with his family, his friends, his bike, his golf clubs, his surf board and that place he bought in Cabo San Lucas.

Now he is getting back into the digital marketing world. Through his company, Next Sparc LLC, he bought a mobile gaming company, which eventually evolved into KINETiQ DIGITAL. The Beachwood company aims to help companies use data to reach customers as they move between the web, apps and different devices.

As chairman of KINETiQ, most of Pagon’s time is spent working on that company. But this time around, he’ll probably spend a little more time riding his bike and hanging out by the beach. — Chuck Soder

You went to Case Western for electrical engineering. Then you got into digital marketing. What drove you down that path?

In high school, I was good at math and calculus, and I went to an engineering school, but I was also one of the top fine art students and pretty creative as well. ... The roots (of Brulant) were in the engineering and the technology, but over the course of almost 20 years we were able to hire talented people and build out the creative and branding capabilities.

You started New Media, which became Brulant, in 1989, which was before the web was really a thing. What were you doing back then?

We were actually doing custom Macintosh development for Fortune 500 companies. If you remember the Mac was the first graphical user interface that started to make inroads (with businesses), especially into marketing departments. Apple at the time in the late ’80s actually had a corporate account sales force. ... From Day 1 our core competency was around user experience and the technology.

After the dot-com bust, Brulant nearly went bankrupt. What happened?

The dot-com bubble burst, and we were in a recession. ... I was calling up people I had relationships with and they were like, “Times are tough.

Love to have lunch with you, but we’re not doing anything. Call me in a year.” ... Before the dot-com bubble burst, we sold off our other offices,

we sold off our network services practice, we had an education business we just phased out. We really pruned the business back to this core internet, e-commerce agency. ... I think we went from 180 people to call it 65 people. Then the recession happened, and I think we had one round of layoffs, maybe two.

Then when we unwound (our merger with Acero) in late 2001, some more people left. ... It went from 180 or 200 down to 26 in Cleveland. We did a little over $4 million in revenue ...

The next year, in 2003, we had 80% growth. I think we did $8 million in revenue. One of the key things we did in 2002, we focused on industry verticals. Financial services was really doing well. Consumer spending was really doing well.

So it sounds like there’s a lesson or two in there for other business owners.

Understand your customers and segmentation. The vertical focus became a significant differentiation for us. A competitive advantage. We weren’t talking like another agency.

We were talking to financial services companies, “How are you going to get more loans? How are you going to get more deposits? How are you going to originate more home loans and car loans?”

Before Rosetta acquired Brulant, Brulant was actually looking for other companies to buy. How did you make that “sell-don’t sell” decision? Because it’s not like you were out looking for a buyer.

I told you about the restructuring. I went from thick dark hair to thinning

Len Pagon

DIGITAL MARKETING

gray hair as a result. It was difficult going through the recession and all the technology changes. .... So in the mid 2000s, as we were having a lot of growth, the demand for our kind of business and the multiples were significant. I was more mindful of the fact that it also wasn’t going to last forever. So I thought it was time to see what the value of the business would be and get some liquidity. The experience I had in the past was definitely a factor. I didn’t want to ride it all the way up and all the way down again. After 2002, I perpetually felt like I was one quarter away from having that stress again. I was paranoid about that for years. I really didn’t fully appreciate how well we were run and how great of a team we had and all the stuff we were doing right.

Five Things:

Has post-Brulant life been what you expected?

Yeah, I guess so. I’m actually healthier than I’ve ever been. After I sold the business in 2008, I lost 45 pounds. I bike and play tennis and do fun stuff. I think in most ways it’s probably surpassed my expectations. I didn’t really have expectations. I wanted to be healthy. I wanted to spend time with friends and family.

WHAT PEOPLE DON’T KNOW ABOUT ME

What’s the coolest thing you’ve done since the deal?

Earlier this year I went to New Zealand and did “heli-biking.” We actually got dropped from a helicopter on top of the Remarkables (mountains). It’s like a different planet up there. And we mountain biked all the way down the Remarkables.

FOODS HE LIKES Thai food. But if he had to pick one dish “it would be a really good bowl of sushi or some really good pasta.”

CURRENT OBSESSION Tennis. I didn’t play any tennis a year and a half ago. I’m between a 3.5 and a 4.0, which isn’t a bad tennis player.

I’m OK.”

FAVORITE TOM HANKS MOVIES He likes the ending of “Cast Away” but thinks “Saving Private Ryan” and “Forrest Gump” are better movies.

“I enjoy shopping and cooking.”

CHRISTMAS SHOPPING As of Dec. 21, he had not finished buying gifts. He was too busy helping KINETiQ work on a deal to buy a mobile marketing agency.

Lunch Spot Moxie 3355 Richmond Road Beachwood

The meal

Fish tacos and Diet Coke; Grouper special, small Caesar salad, water

The vibe

A dimly lit restaurant with an urban feel. And if you’re Len Pagon, lots of people will recognize you and say hi.

The bill

$41.04, plus tip