Crain's Cleveland Business

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S-2 JANUARY 28 - FEBRUARY 3, 2013

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LETTER FROM THE PRESIDENT

ACG: What’s in a name? land include investment bankers, corporate M&A officers, private ften I am asked, “What equity, “C” level corporate offidoes Association for cers, senior asset based/corporate Corporate Growth lenders, junior/mezzanine lenders, actually mean?” Whose transaction attorneys, tax/assurgrowth? Is it the companies, the ance accounting professionals and corporate officers or the other service providers. financial professionals Earlier this year ACG who support businesses?

Cleveland was recognized The short answer is yes, as 2012 ACG Large Chapyes and yes. ter of Year. We are proud To be successful you to be honored ahead of must always be looking to chapters in New York, develop new relationships.

Chicago, Los Angeles, A strategy to consistently Boston and Dallas. This connect with deal makers SEAN MCCAULEY achievement would not ACG president and shapers will always have been possible withresult in new business opout the significant efforts portunities. The mission of ACG is of our current and past volunteer to provide this critical networkboard members, our chapter ing platform among participants members, and the thousands of in mergers and acquisitions and professionals who support our corporate finance. ACG Cleveevents each year. land’s primary networking efforts On Jan. 31, ACG Cleveland are the 25 to 30 diverse and awardwill host its 17th Annual Deal winning events hosted each year.

Maker Awards. This signature Social media is important, but event to recognize significant building long-term relationships merger and acquisition accomis done by getting out, rolling up plishments attracts more than your sleeves and talking to people 800 financial professionals from face to face. No matter how big Northeast Ohio and around the or small the company, business country. M&A financial profesgets done between individuals sionals know that Cleveland is and not solely through a web page a deal-making town and an or phone call. important destination for netACG Cleveland has a 30-year working. The event is a unique tradition of connection and experience complete with nonengagement in Northeast Ohio. stop introductions and reconnecOur Cleveland chapter is one of tions, past and future deal discus58 around the world, including sions, and market observations Asia, South America and Europe, and frustrations. and part of a 14,500-member Our monthly breakfast meetACG global organization. ings showcase Northeast Ohio’s The 500 members of ACG Clevemost senior corporate and com-

By SEAN MCCAULEY

O

munity leaders. Twice a year, ACG Cleveland hosts workshop events that bring together a panel of industry experts to explore a specific business trend, issue, industry or community project.

The Great Lakes ACG Capital Connection is a two-day event for capital providers and deal makers that attracts more than 700 M&A professionals. ACG Cleveland hosted the event in its first two years and we supported successful events in Indianapolis and Detroit in 2011 and 2012.

Over the years ACG Cleveland has evolved its programming and expanded its mission to address the needs of future leaders, connect with Ohio’s graduate business schools and engage in the economic vibrancy of our region.

Our ACG Cup brings together MBA student teams from the top graduate business schools in Northeast Ohio for a deal-specific case study competition. Over the last few years ACG Cleveland has developed programming specific to Women in Transactions (WIT) and a Young ACG (YACG) initiative to develop the next generation of deal makers.

If you are serious about building or growing your own business network, I encourage you to learn more about our organization. Attend an event, talk to a chapter member, visit www.acgcleveland.org or contact me at 216-222-2847.

■

Sean McCauley is president of ACG Cleveland and a vice president with PNC Business Credit.

table of

contents

FILE PHOTO

S4 Sky’s the limit Cleveland’s diverse business base and wealth of service firms enhance private equity position.

S3 Buyer due diligence S6 Purchase agreements S7 80/20 rule S7 Primary care revolution S8 Earn-out contingent consideration S8 Acquisition advice S9 Timing deals S10 Tax considerations for carve-out statements S10 Corporate divestitures S11 Managing M&A fees

“I work with Benesch because of their ability to get to the core of an issue and then develop the strategies to resolve it, whether an everyday matter or something out of the ordinary.”

DAVID I. MANSBERY President, Duck Creek Energy, Inc.

David considers himself a “serial entrepreneur” and has relied on Benesch for a multitude of business needs. From handling real estate, leasing, litigation and general business matters for Duck Creek Energy to navigating the successful sale of a prior business and its intellectual property to incorporating a new venture, Benesch has the breadth and depth to help David go wherever his ideas take him.

To learn more about our relationship with Duck Creek Energy, visit beneschlaw.com/myteam

FEATURED ATTORNEYS (left-right): ROBERT A. ZIMMERMAN, LORI H. WELKER, DAVID MANSBERY, JR., DAVID R. MAYO AND JOSEPH G. TEGREENE

MY BENESCH MY TEAM

S12 Valuations S13 Purchase accounting rules S13 Sell-side due diligence S14 What is your corporate M.P.G.?

COVER PHOTO: The Veterans Memorial Bridge with 200 Public Square, Terminal Tower and Carl B. Stokes U.S. Courthouse in the background. Photo by Eureka Lott

DISCLAIMER The articles in this section were prepared by the respective contributors for general information purposes only and are not intended as legal, tax, accounting or financial advice. Under no circumstances should any information contained in any of these articles be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon any such information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed in the article are those of the respective contributor and are subject to change without notice due to market conditions and other factors.

YOUR MARKETS MAY BE GLOBAL BUT YOUR LEGAL ISSUES ARE LOCAL

Cleveland • Columbus • Indianapolis • Philadelphia • Shanghai • White Plains • Wilmington • www.beneschlaw.com © 2012 Benesch Friedlander Coplan & Aronoff LLP

S14 Prepare for selling family held business S15 Tale of M&A markets S16 Combining ABL with syndicated term loans and high-yield bonds S17 Noncorrelated investments S18 Lending alternatives S19 Leverage buyout trends S20 Global M&A S20 Conflict minerals rule S20 Private equity survey S21 Judging a private equity firm S22 Transactional insurance S23 Asset-based lending S23 Deal Maker awards

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Crain’s Cleveland Business Custom Publishing

With expertise encompassing business law, regulatory matters and advocacy, Squire Sanders lawyers have the skills and in-depth industry knowledge to provide the full range of legal counsel needed to implement your strategy in Cleveland, across the country and around the world.

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JANUARY 28 - FEBRUARY 3, 2013

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Best practices in financial due diligence Target firm’s earnings quality key to crafting solid transaction

By MARK BOBER

T

horough due diligence is an important component of a transaction that, if done properly, provides a prospective buyer with an in-depth understanding of the quality of earnings of the target company. Knowing a target’s quality of earnings can further assist a buyer in establishing pricing, deal structure and postacquisition planning. Generally, it would not be disclosed in their audited financial statements or a confidential information memorandum, which is a description of the business and its financial performance.

While every situation is different, following are typical focal points of a quality of earnings investigation:

ment of revenues and margins by customer, product line and channel to assess the quality of such revenue and the sustainability of the revenue stream.

should be closely assessed to determine the appropriateness of such valuation given its direct impact on reported earnings.

■ Accounting adjustments impacting earnings: The nature of activity within reserves and accruals, such as allowance for doubtful accounts, inventory reserves, warranty reserves, accrued liabilities, etc., should be analyzed to determine potential inflation of reported earnings.

■ Pro forma cost adjustments: Pro forma costs might include restructuring or financing costs. These need to be carefully analyzed in order to determine the appropriateness of such adjustments. This will require assessment of both the qualitative and quantitative aspects of these adjustments.

■ Inventory valuation: Capitalization of costs into inventory

Other due diligence areas to consider include the following:

■ Scalability of the business, depth of the management team, adequacy of information systems and related items ■ Debt and debt-like liabilities.

Items are often not recorded on the balance sheet ■ Working capital requirements and thresholds established in the purchase agreement or letter of intent ■ Capital expenditures, both past and future Acquisitions provide tremendous opportunities, but without adequate due

■ Revenue recognition: Revenues should be recogMARK BOBER nized in the Bober Markey proper period Federovich as well as costs related to generating such revenues. Generally accepted accounting principles (GAAP) applied on a consistent basis would be the standard that would govern such treatment.

■ Normalization adjustments: This would include validation of seller discretionary items including compensation in excess of fair market value, perks, etc. It would also include the appropriateness of other non-recurring income and expenses that would not be anticipated to impact future earnings.

■ Quality of revenues: This entails a comprehensive assess-

Crain’s Cleveland Business Custom Publishing

diligence, it’s buyer beware.

Mark Bober is a partner with Bober Markey Federovich. Contact him at 330-255-2425 or email mbober@ bobermarkey.com.

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Dealmakers elevate position of private equity industry Professional service firms augment burgeoning sector

By CHERYL HIGLEY

B

uilt on the shoulders of visionaries such as Kirtland Capital’s Jack Turben, Linsalata Capital Partners’ Frank Linsalata, Morgenthaler’s David Morgenthaler and Primus Capital’s Loyal Wilson, Cleveland has quietly and steadily cemented itself as a private equity powerhouse over the past 30 years.

There are no signs of wear on the industry, as both established and up-and-coming firms continue to evolve to meet the changing needs of their investors and portfolio companies with the same “roll up your sleeves and get to work” mentality for which Northeast Ohio is famous.

“Private equity in Cleveland is growing up. Firms are learning

from each other and from the markets we’re in, and our investors are refining how they do business,” says Jim Marra, director of business development for Blue Point Capital Partners.

Despite the long legacy of private equity in Cleveland, performance is still key — and it is those companies that embrace their history and work to build a different future that continue to thrive.

Tim Healy, senior vice president of Linsalata Capital Partners, says: “It’s a different world than it was in 1984. To survive in any industry, you have to be open to change — or you will have a limited life span. We are lucky to have some really good, smart, hard-working individuals who have been successful and have been able to evolve and adapt in

their thinking to continue to perform well.”

AN EVOLUTION The evolution of private equity in Cleveland includes focused yet flexible approach to getting deals done: More firms are taking a more targeted approach to deals, focusing on specific types of deals, industries or ownership styles — all important criteria to consider given the competitive market.

“With so many private equity firms bidding for good businesses, this has become a much more efficient market today. As a seller, it’s great — however, if you’re buying, it is much more challenging,” Marra says.

Primus Capital Director Scott

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Seelbach says while many firms get away with it. But as company began (and some remain) as genvaluations have gotten more eralists, a trend toward building robust, if you don’t understand expertise in certain sectors is the competitive landscape facing taking hold. the target company, you can “We find that make serious focusing on mistakes. Getting “By bringing financial and specific industry deeply familiar intellectual capital to the sectors where we the industable and looking at different with have had past tries in which ways to help companies success and can companies comcontinue to grow, it opens a broad slate pete helps mitileverage a gate our risk of opportunities.” segment specific and adds more – Stewart Kohl, The Riverside Co. knowledge base value to the is imperative deal.” to generate favorable returns.

Stewart Kohl, co-CEO of The Within health care specifically, a Riverside Co., says multi-sector constantly evolving regulatory specialists can thrive — with and reimbursement landscape good due diligence: “We like the requires a significant amount of generalist approach; it’s in our focus to properly assess investDNA. But we succeed because ment risks.” we’re big on comparison shopMarra agrees: “When compaping and choosing only those nies were relatively cheap, you companies that offer the best could invest in companies you risk-reward opportunities for our didn’t know much about and investors.”

Why Cleveland?

What is it about Cleveland that makes it a prime hub for private equity deals? Cleveland private equity insiders attribute it to three keys: ■ Diverse industries/ Fortune 500 history. While a smaller number remain, a number of Fortune 500-size corporations were founded and headquartered in the region in the last century — giving root to smaller support businesses. “Both the large and small businesses have developed a lot of management talent

Scott Gilbertson Principal, Origination sgilbertson@riversidecompany.com

that helped develop the private equity community. There are resources that were invested here decades ago that continue to benefit the community today,” says Tim Healy, senior vice president of Linsalata Capital Partners.

Clusters of economic development and manufacturing specialties in a variety of company sizes (rubber, health care, manufacturing, etc.) give Cleveland a competitive advantage, he says.

■ Midwest moxie. “Cleveland and the Midwest in general are

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COMPLEMENTARY PLAYERS

FOTOLIA

DIFFERENT DEALS Another key factor in the evolution of private equity in Northeast Ohio is that firms are taking more interest in the operations of the companies they are buying.

“Twenty years ago, we were talking about how much to borrow from the bank to get a deal done. Today, there is relatively little talk on the financing side.

You have to do it well, obviously, but now the question is ‘How are we going to help the companies we’ve invested in become more profitable?’” Kohl says.

Tied to the operational focus is that more owners are looking for private equity partners not because they want to sell and exit the business but because they want to grow.

“Recapitalization transactions wouldn’t have been considered 10 to 15 years ago, but they can be very profitable for both parties,”

hotbeds of lower middle market, founder- and family-owned businesses,” says Karen Tuleta, partner with Morgenthaler Private Equity. “There are a lot of high-value manufacturing companies in Northeast Ohio, which helps fuel the private equity deal flow.

They are deeply rooted in product innovation and engineering talent.”

■ Organic growth. The diverse, middle market company base found in Cleveland keeps the deals churning. “If you look at Detroit and

Marra says. “We’re seeing a lot of older owners that are making a decent living, love their company but have their money wrapped up in one asset. Recapitalizing the business gives the founder deeper pockets to invest back into the company.”

Primus Capital’s Seelbach is also seeing more minority deals being consummated — taking complete control and changing management isn’t always the order of the day.

“Some firms only want a majority interest, but we’re seeing success with tailored investment structures where there is minority control and the private equity firm is adding more value at the Board of Directors level with growth strategies, leveraging contacts and evaluating acquisition opportunities.”

Kohl says Riverside is seeing more add-on acquisitions and expects that trend to continue.

Pittsburgh, for example, those cities are highly dependent on a narrow slice of a particular industry. As those companies became huge, they dwarfed the abilities of local service providers and went to New York City to get capital,” says Stewart Kohl, coCEO of The Riverside Company. “In Cleveland, the diverse middle market and smaller Fortune 500 companies are well-served by local providers. The whole private equity ecosystem has grown here and now people come to Cleveland to pursue private equity.”

While deal structures and targeted acquisitions continue to evolve, a critical component of private equity’s success in a given geographic market — the presence of complementary professional service companies — has also taken hold.

Attorneys, accountants, transactional advisory consultants, investment bankers and commercial banking specialists all play key roles in the deal-making process — and Cleveland is fortunate to have a robust cadre of such specialists.

“The third-party private equity resources within Northeast Ohio are amazing and have helped establish the region as a strong PE community,” says Karen Tuleta, partner with Morgenthaler Private Equity.

Kohl says the growth of those sectors has helped to keep Cleveland’s private equity hub thriving, providing an economic boost to the region.

“For a city our size, we are blessed to have a rich pool of human capital across all the service firms. The private equity network is a real economic engine … we have a lot of smart people making good investments and creating wealth for our city.”

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JANUARY 28 - FEBRUARY 3, 2013

S-5

Private equity synergy at work The synergistic relationships that exist in Cleveland’s private equity world help set it apart. Working together to get a deal done, and trends such as add-on transactions taking hold, makes PE hum: Western Reserve Partners introduces Morgenthaler Private Equity to Avtron, an Independence-based and family owned business in November 2007.

Avtron operated three business units, designing and manufacturing aerospace test equipment, power generation test equipment and high-end encoders and drive systems for industrial automation.

After 53 years, the company’s family owners were seeking liquidity and assistance in management succession.

Morgenthaler transitioned a family owned business to a PE-owned business, which provided Avtron’s management team with the framework to accelerate growth initiatives while reducing costs and improving operational efficiency. At the time of the recapitalization, creative transaction structuring facilitated the potential future divestiture of each business unit individually on a tax-efficient basis.

With Morgenthaler’s oversight, Avtron made two successful add-on acquisitions. Avtron Loadbank, the power generation test equipment business unit, was sold in March 2012 to Emerson Electric and Avtron Industrial Automation, the encoders and drive systems business unit, was sold to Nidec in September 2012. Both companies plan to grow their respective Avtron businesses in Independence.

Jones Day’s Cleveland office represented Morgenthaler on the initial acquisition and both sale processes.

KeyBanc and JP Morgan ChaseCleveland provided financing to Avtron during the course of ownership.

Reason says: M&A is the right growth strategy.

Instinct says: buying smart is the right path to growth.

At Grant Thornton we specialize in helping dynamic organizations execute transactions successfully. We bring a real, competitive advantage of a broad perspective, senior staff attention and short decision-making chains that our clients truly value. To help unlock your potential, visit GrantThornton.com/Deals.

Grant Thornton refers to Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd.

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GETS THE DEAL DONE.

Will your purchase agreement stop you from recovering losses?

EBITDA had been overstated by $1 million. ou have just purYou think you must chased XYZ Comhave a good claim pany for a puragainst the seller to rechase price equal cover your losses, since to five times EBITDA the purchase agreement (Earnings Before Interest, contains representations Taxes, Depreciation and that: MICHAEL J. Amortization). You ■ XYZ is in compliMEANEY discover that XYZ is not ance with all laws, and McDonald handicap compliant, and ■ The financial stateHopkins LLC the required remedial ments were accurately work will shut down XYZ prepared in accordance for a week, resulting in lost profits. with generally accepted accountYou also discover that XYZ’s ing principles.

By MICHAEL J. MEANEY

Y Contact Mark Kiskorna at 216-222-8506 or mark.kiskorna@pnc.com to find out how PNC can get you the capital you need.

PNC and ACHIEVEMENT are registered marks of The PNC Financial Services Group, Inc. (“PNC”). PNC Business Credit is the asset-based lending division of PNC Bank, National Association, a wholly owned subsidiary of PNC. In Canada, PNC provides asset-based lending through PNC Bank Canada Branch.

In the U.K., loans are provided by PNC Financial Services UK Ltd., which is an indirectly wholly owned subsidiary of PNC Bank, National Association. Lending products and services require credit approval. *A portion of the financing provided by Steel Cit y Capital Funding, a division of PNC Bank N.A. ©2012 The PNC Financial Services Group, Inc. All rights reserved.

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Then you read in the back of the purchase agreement that the “losses” that you are able to recover do not include “consequential damages, lost profits or diminution in value.” Such disclaimers are not unusual. According to a recent study, 55% of private company deals contained a disclaimer of the right to recover “consequential damages” and 17% of deals contained a disclaimer of the right to recover “diminution in value.”

The term “consequential damages” does not have a precise legal definition but is commonly understood to mean those damages that do not ordinarily result from a breach of the contract and thus were not reasonably foreseeable.

A court might conclude that the profits lost during the week XYZ is shut down for construction were reasonably foreseeable and therefore, would not be considered “consequential damages.” However, depending upon how the term is interpreted, the profits lost as a result of the plant shutdown may or may not be considered “consequential damages,” and therefore, might not be recoverable.

Moreover, if the contract contained an exclusion from recovery of “lost profits,” the buyer would be out of luck. A buyer would likely be very surprised that a purchase agreement would prevent recovery of such clearly provable losses that directly resulted from the seller’s breach.

Turning to the $1 million overstatement of EBITDA, the buyer may assume that he can recover $5 million in damages – an amount equal to the product of the EBITDA overstatement ($1 million) times the EBITDA multiple (5) used to value the deal. Although this may seem to be the best way of measuring buyer’s loss, such recovery may be prevented by an exclusion for “diminution in value” damages.

Thus, the buyer may be deprived of any effective remedy for breach of the most important representation in the entire purchase agreement – the accuracy of the financial statements.

The definition of “losses” is typically found deep in the fine print of the purchase agreement. These terms should be carefully reviewed to make sure they do not defeat the reasonable expectations of the buyer.

■

Michael J. Meaney is co-chair, Mergers and Acquisitions Practice, at McDonald Hopkins LLC. Contact him at 216-348-5411 or mmeaney@ mcdonaldhopkins.com.

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80/20 rule applies in deals, too

chase price was agreed upon? How are accounts receivable and inventory to be valued? What happens to obsolete or damaged inventory or past due or uncollectible receivables?

Detail on payment terms other than cash. If a seller note is “subordinated,� what does that mean? When can buyer’s lender stop seller from receiving note payments? Is the buyer credit worthy? Is there any security for payment?

Rights of offset. Can the buyer stop seller note payments if it “believes� seller has breached the agreement, or should the buyer be required to get the approval of a third party? If a party can simply withhold payment to make itself whole there is the potential for unfair leverage in a dispute.

In that endless indemnity provision, go right to the “basket.� The dollar threshold for making a claim and whether the basket is a true “deductible� typiSTEVE ELLIS cally have financial consequence Tucker Ellis LLP far more often than how long representations survive or the “cap� on total claims.

Focus on provisions with financial impact

By STEVE ELLIS and JENNY BERLIN

T

he “80/20� rule appears in business all the time.

Twenty percent of your customers produce 80% of your profit, 80% of your complaints, etc. You get the idea.

We believe something close to the same ratio applies to most acquisition agreements, at least in terms of where clients might best focus their attention. Your business lawyer needs to be an expert on 100% of the deal documents, and every provision has to be analyzed; but under the 80/20 rule, a client should initially focus on the key provisions that, in most instances, are likely to have the most meaningful financial consequence.

3

4

5

Focus on the real money issues and let your lawyer advise you on the rest. Every deal has unique facts and risk allocation issues, all of which are important, but they also typiJENNY BERLIN cally have a fairly standard set of Tucker Ellis LLP alternative solutions that any good deal lawyer is well equipped to Liabilities assumed. Paying the sellhandle. We suggest that you focus on the 20% er’s bills (e.g., accounts payable and that is likely to make the most difference. ■accrued expenses) is the same as paying cash. It all counts as purchase price.

Steve Ellis is a partner with Tucker Ellis LLP. Jenny Adjustment for changes in working Berlin is counsel with Tucker Ellis LLP. Contact Ellis capital. What happens if the amount at 216-696-2435 or stephen.ellis@tuckerellis.com. of working capital at closing is less than Contact Berlin at 216-696-5482 or the amount that existed when the purjennifer.berlin@tuckerellis.com.

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S-7

Primary care revolution leads to market consolidation

By SEAN DORSEY

T

he passing of the Patient Protection and Affordable Care Act of 2010 (PPACA), commonly known as “Obamacare,� is accelerating healthcare provider consolidation, particularly with respect to primary care physicians.

The reasons for this acceleration are complex, yet vital in understanding the expected wave of M&A activity.

An outcome of the PPACA has been the formation of new delivery models, including Accountable Care Organizations (ACOs).

These new models of care, in conjunction with the shift from inpatient settings toward outpatient care, are underscoring the role of primary care physicians as the clinical center of care. The economic value of primary care physicians, therefore, is increasing. A typical primary care physician provides approximately $1 million of downstream referral revenue for hospitals and controls just over $12 million of healthcare expenditures for every 2,000 patients.

At the same time, primary care practices are experiencing dramatic cost pressures, because smaller independently owned practices are often unable to keep pace with increased regulation and challenging reimbursement trends. According to Accenture, 12 years ago 57% of all physicians owned their own practices. Today, independent physicians account for less than 39% of the total.

As a result, acquiring primary care practices has become a critical strategic objective for hospitals and health systems. Potential buyers recognize that a well-

SEAN DORSEY League Park Advisors

aligned primary care network will provide significant cost advantages across the continuum of care, as reimbursement models evolve from historical fee-for-service schemes to bundled payment models. Hospitals lacking a strong primary care foundation will be challenged to compete in the current environment of evolving risk sharing.

Increasingly, physician groups and hospitals are seeking the expertise of dedicated health care investment bankers to help navigate the acquisition process. These transactions require a unique understanding of the complexities associated with Medicare and Medicaid reimbursement, fair market valuation requirements and a rapidly evolving regulatory environment.

With the re-election of President Obama, health care reform is here to stay. The new economic realities of the health care marketplace will drive a sustained period of ongoing provider consolidation. â–

Sean Dorsey is founder and CEO of League Park Advisors. Contact him at 216-455-9990 or email sdorsey@leaguepark.com.

Announcing a merger between FRQÄ&#x;GHQFH DQG YDOXH M & A is one of the quickest paths to growth. But it’s not always the surest.

That’s why at PwC, we help you understand the risks in your transactions, so \RX FDQ EH FRQÄ&#x;GHQW WKDW \RX DUH PDNLQJ LQIRUPHG VWUDWHJLF GHFLVLRQV )URP your deal negotiations, to capturing synergies during integration, we help FOLHQWV JDLQ YDOXH $QG XOWLPDWHO\ GHOLYHU WKLV YDOXH WR VWDNHKROGHUV /LNH ZHĹ‚YH GRQH IRU WKH PDMRULW\ RI WKH WRS JOREDO SULYDWH HTXLW\ DQG )RUWXQH FRPSDQLHV /HYHUDJH WKH H[SHULHQFH RI RXU JOREDO QHWZRUN RI Ä&#x;UPV Learn how at pwc.com/us/deals

Š 2012 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member ďŹ rms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Crain’s Cleveland Business Custom Publishing

Physician groups and hospitals are seeking the expertise of ... health care investment bankers to help navigate the acquisition process.

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Advice for first-time buyers Understand the complexities of completing a deal their family and what they hope to enjoy in retirement. enry Ford famously said, Successful transactions, there“Whether you think fore, must meet the personal you can or can’t, you’re goals of sellers while protecting right.� When it the financial goals of comes to buying a busibuyers. ness, the ability to effecBuyers also tend to tively run a business is a underestimate how long different skill set than it will take to successfully what is required to comclose a transaction. Not plete an acquisition. As only does it take a signifia result, many successful cant amount of time to companies and/or execufind the appropriate tives underestimate target company, but the LLOYD BELL the complexities amount of time required Meaden & involved in closing a to woo and then wed will Moore LTD transaction. probably take longer than By far the largest hurdle that buyers anticipate, for a number buyers need to understand is that of reasons. sellers don’t have to be rational.

If outside financing will be Buyers can develop all sorts of required, buyers may find that financial models projecting cerbanks are a little more measured tain rates of return on various in their approach then they had capital structures, but sellers been a few years ago. If real estate rarely care. Their internal rate of is involved in the deal, the cast of return is not calculated on a characters now includes engispreadsheet, but rather by what neers and appraisers who may they’ve been able to provide for not share in the sense of urgency.

By LLOYD BELL

H

Finally, while legal and accounting advisers of buyers will be quick to respond, advisers for sellers, who will likely be losing a client as a result of the transaction, may find compelling reasons why a deal just isn’t right.

While the closing of acquisitions will likely veer from original plans, buyers must remember to stick to the program as closely as possible. If specific steps drag on, it’s better to close later than to take short-cuts on due diligence.

If the economics change either because of performance issues by sellers or the capital being made available, buyers must stop and make sure that they are working to close a deal that still makes sense, not just working to close a deal. â–

Lloyd Bell is the director of the corporate finance practice at Meaden & Moore.

Contact him at 216-241-3272 or email lbell@meadenmoore.com.

WE ARE ROETZEL.

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Addressing conflicts through an earn-out contingent consideration multiple of the target company’s historical EBITDA (earnings before hen acquirers and interest, taxes, depreciation and sellers don’t agree on amortization) of $10 million. The the value of the tarseller, however, believes that the get company, the gap acquirer’s price significantly unis almost always based on dervalues the company, the parties’ differing exbecause the seller is cerpectations with respect to tain it will land a major the future earnings — customer that will insellers being more opticrease its EBITDA by mistic than acquirers. $3 million. The acquirer is One way to bridge the not willing to pay for an gap is through a continuncertain future revenue gent consideration mechstream that it may have MICHAEL TUCCI little control over. The anism, the most popular Mansour, Gavin seller, on the other hand, being the “earn-out.�

Gerlack & With an earn-out, the wants to enjoy the upside Manos Co. LPA amount of some portion on the resources it exof the purchase price is pended in securing the contingent on the future earnings customer. This disparity can be of the company or the achievealigned through an earn-out, ment of certain milestones and which would allow for the purbecomes payable at a specified fuchase price to be increased to reture date. flect the new revenue if and For example, say the acquirer when it happens. This eliminates has priced the target by using a the acquirer’s risk if the target

By MICHAEL TUCCI

W

Wherever your journey may lead, take along someone who can provide a true sense of direction.

In transactions, the goal is to maximize value and minimize risk.

Choosing the right professionals to perform quality of earnings/ due diligence is crucial to the success of your acquisition.

Led by Mark B. Bober, CPA/ABV, CFF, CVA, BMF’s Transaction Services Group is a dedicated team of professionals that supports private equity groups nationwide.

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Crain’s Cleveland Business Custom Publishing

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S-9

Controlling the uncontrollable

By TOM BECHTEL

M

aking an acquisition or selling a company is as much a game of timing as it is anything else, and having the right fit at the wrong time is particularly frustrating. Generally, poor timing boils down to one or more of the following constraints: ■ Funding Advanced Notice: While the credit freeze has started to thaw, it is difficult to rush a transaction through. Proper due diligence by the buyer and the bank or equity source is critical, especially when maximizing the use of leverage in an acquisition.

isn’t really what they are ■ Seller Preparation: looking for to achieve Private companies can be specific strategic objeccaught off guard by due tives. From the seller’s diligence. Without outperspective, there is too side pressure, statements much anticipated growth may be prepared on anto sell now. other accounting method What to do when not in accordance with faced with the right deal GAAP, interim reports can TOM BECHTEL at the wrong time? be irregular and certain Cohen & Co. ■ Be patient: Utilize activities may be driven quality advisers and give the othprimarily by tax benefits. Such er side time to prepare for due practices are fine for a private diligence. company but can lead to deals ■ Find solutions: If a seller being delayed or halted due to wants to keep milking the “cash the lack of understanding of recow” for a few more years, offer sults from the buyer’s perspective. insight as to the potential down■ Strategic Priorities: From the side implications, particularly if buyer’s perspective, the deal just

customer isn’t landed and allows the seller to realize the upside if it is.

Earn-outs, however, have risks.

A business litigator I know once told me, “I’ve never met an earnout I didn’t like.” They are often contested and end up in court for resolution, which greatly helped his revenue. To avoid problems at payout time, the parties should carefully craft an earn-out provision up front in the purchase agreement keeping the following in mind:

1

Earn-outs work best when the seller stays involved with the target company after the sale.

2

Keep the financial structure simple. For example, a flat percentage of earnings or revenue is easier to calculate and less likely to lead to disputes than complicated formulas.

3

Make milestones and metrics as objective as possible. For example, gross earnings are a more objective metric than net earnings, because net earnings provide the opportunity to fight over how expenses and write-offs are calculated and applied.

4

For a seller, it is important that it has control over the contingencies that affect the goals, such as making sure the acquirer has and is willing to commit sufficient resources. On the other hand, the acquirer needs to protect its flexibility to change its overall business objectives.

5

Keep the earn-out period as short as possible. Longer periods provide more time for disputes as well as diluting the value of the target company as it becomes more integrated into the acquirer’s business, making payout calculations more difficult.

In short, earn-outs can provide an effective way for acquirers and sellers to bridge valuation gaps provided that they are well crafted and carefully documented up front.

■

Michael R. Tucci is an attorney with Mansour, Gavin Gerlack & Manos Co., LPA and counsels his clients on business and intellectual property matters. Contact him at 216-523-1500. More information is available at www.mggmlpa.com.

Crain’s Cleveland Business Custom Publishing

the key owner does not have a solid succession plan.

■ Be flexible: Not every buyer or seller is going to fit with all the desired criteria. If the ideal isn’t there when wanted, don’t ignore strategic priorities and take whatever is available.

The more prepared you are as a seller and the more qualified opportunities you have in your pipeline as a buyer, the better positioned you are to hedge against the timing issue that may hinder a great potential opportunity.

■

Tom Bechtel is a CPA and director of transaction services at Cohen & Co. Contact him at tbechtel@cohencpa.com.

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Tax considerations for carve-out financial statements the carved-out business. Identifying these assets upfront facilitates s companies focus on core allocating the deferred tax-related strategies to sustain future items associated with the assets to growth, many are finding be bifurcated. Further, careful examthe divestiture ination of the legal entity component of transacstructure helps identify tions has grown in size the particular jurisdicand complexity. Synthetions where the carve-out sizing information relatbusiness will operate, proed to tax provisions is ofviding guidance as to the ten one of the most appropriate statutory tax complex aspects of rates and compliance preparing carve-out fiwith applicable tax laws.

GIOVANNI F. nancial statements in Calculating and reportconjunction with a diing deferred tax assets DI CENSO vestiture. Among the spe- Deloitte Tax LLP associated with the comcific tax areas to consider pany’s attributes, such as are the legal entity structure and denet operating losses and various termination of tax attributes. credits, poses distinct challenges Accounting data used in tax rewhen preparing carve-out stateturns are prepared on a legal-entiments. A company should start by ty basis. Consequently, determintracking the attributes and related ing which legal entities comprise deferred items associated with the the business segments or divisions legal entities that comprise the to be carved out will help detercarve-out statements. These attribmine whether relevant tax inforutes may be adjusted for any acmation exists for these entities counting push-down adjustments and how to extract needed data. that are recorded as part of the Sometimes only a part of a legal carve-out process. entity’s net assets are included in Further carve-out adjustments

By GIOVANNI F. DI CENSO

A

may be needed to show how the company would look if operating on a stand-alone basis. If the tax attributes recorded in the carve-out financial statements are materially different from those actually assigned to legal entities that comprise the carve-out group, it may be necessary to add comments in the tax footnote to explain the discrepancies.

Finally, the company should determine the likelihood that the carved-out operations will realize deferred tax assets in the future and assess the need for an appropriate valuation allowance.

For divestitures requiring carveout financial statements, companies should seek the upfront involvement of tax professionals to address the key tax matters that may ultimately increase the likelihood of a successful transaction. ■

Giovanni F. Di Censo is a principal in M&A Transaction Services at Deloitte Tax LLP. Contact him at 216-589-5150 or email gdicenso@deloitte.com.

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Four principles can help guide a successful divestiture

B

uying or selling a company is a complex process, fraught with risk and uncertainty. That’s why buyers have historically used due diligence to help reveal hidden risks or opportunities that will help them negotiate a better price.

The frenzied markets of the past put the seller at an advantage, because heavy competition for businesses hampered the buyer’s due diligence process.

Now, in a tougher, post-Great Recession deal market, the smaller pool of likely buyers and increased demands from banks heighten the need for extensive buyer due diligence and lengthen closing time frames. Now more than ever, the seller shoulders the burden of being prepared. You must know what the buyer will need to know or risk deal failure, missed value targets or stumbling along a protracted timeline.

While sellers may think they know their divestiture target’s operations inside and out, they are usually too close to the business to look at it from a buyer’s perspective, making it difficult to clearly understand its value and viability on a stand-alone basis.

This is particularly true when the target is part of a division or a product line, especially if the business has been ignored or is underperforming.

Failure to see the target through the buyer’s lens increases the odds that the buyer’s diligence findings will derail the transac-

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tion, weakening the seller’s hand at the negotiating table and destroying value while employees, customers and stakeholders jump ship and head for safer ground.

A robust divestiture preparation process can help sellers successfully exit their businesses in a shorter time frame, avoid sale price erosion at the negotiating table, minimize distractions to the core business, and ultimately derive the desired value from the sale.

In a divestiture setting, one way to avoid value erosion is to design and implement a process that supports rapid deal completion. To accomplish this, most successful sellers in today’s market use a thorough process that follows the four guiding principles of successful divestitures:

1

Plan for all aspects of the divestiture process

■ Establish scope, goals and objectives of the transaction ■ Develop a divestiture project plan ■ Determine what’s left behind

2

Present financial information tailored for the deal

■ Evaluate information requirements and articulate a “bridge” ■ Describe the business in a clear and cohesive manner ■ Address the potential need for carve-out audited financial statements See DIVESTITURE Page S11

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S-11

M&A fees: How much will this trophy cost me?

Proper game management can keep costs under control

By CHRISTOPHER REUSCHER and SARAH BAKER

“Individual commitment to a group effort – that is what makes a team work, a company work, a society work, a civilization work.” — Vince Lombardi

I

f closing a transaction is akin to winning the Super Bowl, then all of the players need to work as a team to keep legal fees under the proverbial salary cap.

HALFTIME: due diligence An essential part of a transaction for a buyer, due diligence also presents the seller with an opportunity to keep legal fees in check.

The level of the client’s preparation for, and participation in, the diligence process has a direct correlation to the amount of time and fees saved during, for example, the preparation of the schedules to the purchase agreement.

SECOND HALF: the definitive agreement The other side cannot be fully

driven toward the ultimate goal.

Withholding information and re-trading on issues is costly and erodes trust between the parties.

Stay focused and keep attitudes in check.

CHRISTOPHER REUSCHER Roetzel & Andress

SARAH BAKER Roetzel & Andress

controlled; however, understanding your opponent’s tendencies and motivations avoids “reactive” and inefficient negotiating. Furthermore, fair play keeps the players

VICTORY

TWO-MINUTE WARNING: agreement to closing

With any luck, the teams have avoided overtime for post-closing issues. While both sides emerge successful, the real winner will be the team that followed the game plan that was put in place early in the process. Celebrate with a trip to Disneyland, and get ready for next season.

■

The agreement is signed, but what conditions must be fulfilled prior to closing? Again, preparation is key to keeping costs at or below budget. Have a closing agenda prepared and a twominute drill in place for any last-minute obstacles.

Christopher Reuscher is a partner at Roetzel & Andress. Contact him at 330-762-7994 or email creuscher@ralaw.com. Sarah Baker is an associate at the firm. Contact her at 330-762-7985 or email sbaker@ralaw.com.

PRESEASON: engaging counsel The first step in managing legal fees is to engage experienced counsel prior to drafting the letter of intent. The likelihood of a successful transaction is exponentially higher and a seller’s leverage typically strongest if counsel is involved at this juncture.

FIRST HALF: communication and fee structures Candid communication is crucial to developing a game plan focused on client objectives, resources and expectations. All players should consider alternative fee structures such as fixed fees per deliverable, capped fees, flat fees per period (i.e. monthly or quarterly), and/or discounted hourly rates with a performance-based holdback. Legal fees generally escalate later in the game unless the team has previously implemented a strategy to manage such costs.

Divestiture continued from Page S10

3

Prepare, prepare, prepare

■ Identify operational issues/opportunities and anticipate questions/requests ■ Plan for key terms in the purchase agreement ■ Validate forecast assumptions and bridge to historical results ■ Provide stand-alone cost estimates

4

Position for the exit and execute ■ Managing the process ■ Drafting of transition service agreements ■ Tax structuring ■ Maintaining a competitive process A thorough preparation process is crucial to a successful divestiture in today’s market. Such process arms a seller with the critical information needed to present the business most effectively, address deal issues early on, answer challenging questions and boost value for the assets in play.

■

Brian Kelly is the PwC Cleveland Deals partner. Contact him at 216-875-3121 or email brian.kelly@us.pwc.com.

Crain’s Cleveland Business Custom Publishing

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Sophisticated buyers on the hunt

By ANDREW K. PETRYK

Financial performance

B

Buyers seek stable and predictable revenue and cash flow — a performance profile that indicates a company has outperformed its competition. Outperformance typically means a resilient top line — a higher rate of growth in strong markets or a slower rate of decline in weak markets — and a strong EBITDA margin. Depending on the industry, the EBITDA margin threshold for many buyers of manufacturing companies is 15% or higher. Companies with an accelerating trend in margin performance receive significant interest.

ƐǁĂƌĚΛďůƵĞƉŽŝŶƚĐĂƉŝƚĂů͘ĐŽŵ

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SS&G is pleased to welcome

ROSS VOZAR. Ross joins the transaction advisory services team as an associate director focusing on advising private equity and corporate clients with acquisition and divestiture activity, including ■ ■ ■ ■ ■

Flight to quality continuing into the New Year

due diligence integration planning and implementation synergy identification and capture valuation divestiture planning

eauty is in the eye of the beholder, and sophisticated buyers know quality when they see it. High quality companies command the attention of buyers and lenders and stir up a feeding frenzy when they come to market, driving attractive deal terms and premium valuations.

High quality companies possess four common characteristics — seasoned, forward-thinking management teams; a culture of innovation; strong financial performance and visible and quantifiable growth opportunities:

Leadership

ANDREW K. PETRYK

Buyers are looking for Buyers want companies strong leadership at the Brown Gibbons that can substantiate prohelm and a deep bench of Lang & Co. LLC jections with quantifiable senior executives with a growth opportunities. global perspective. Quality manNew product launches, new cusagement teams have demonstrattomers under contract, detailed ed the ability to navigate through backlogs and completed cost redifferent business and economic duction initiatives are some of cycles and to identify, motivate, the tangible improvements buyand retain top talent. They have ers look for to support financial invested in the necessary inforprojections. The more “real” fumation systems to measure and ture growth looks and feels to buymonitor operating performance. ers, the more aggressive they are They are committed to the future in the bidding process. growth of business.

Culture of Innovation

SS&G TAS is growing to meet the increasing needs of clients and the marketplace. To learn more, please contact Scott McRill at 440-248-8787 or visit www.SSandG.com/TAS.

www.SSandG.com

Visible and quantifiable growth

Globalization has made attaining and maintaining a marketleading position increasingly challenging. The ability to grow market share through the introduction of new products and services, market expansion and customer diversification is essential. High quality companies routinely refresh product and service offerings to remain relevant and competitive. Innovation leaders strive to have 25% or more of annual revenues from products and services that are less than 3 years old.

Crain’s Cleveland Business Custom Publishing

A finite number of high quality companies are in the market today, so buyers are paying up to win auctions. Strategic acquirers have stockpiles of cash at the ready, private equity firms have billions in dry powder to deploy, and lenders are supporting both groups with aggressive debt packages. This confluence of available capital will drive deal activity and values well into 2013 and beyond for high quality companies.

■

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

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S-13

Sell-side due diligence Requirements of becoming more common purchase accounting fore going to market. Every company has its strengths, weaknesses, hether it’s the single risks and opportunities. When a owner of a family busiseller identifies and confronts the ness preparing for reissues ahead of time, it can better tirement or a large cormanage the discussion around poration pursuing strategic these topics, present them to the alternatives through the divestibuyers in a light that is most favorture of a business unit, the sale of a BRIAN LEONARD able to the company and focus the business is a complex transaction negotiations on the entity’s Grant Thornton filled with uncertainty. While acstrengths and opportunities.

LLP quirers have traditionally engaged The sell-side due diligence an army of professional service providers process can also help assemble to perform due diligence, identify risks and financial information that is complete and strengthen their negotiating position, soaccurate. Financial information that is phisticated sellers are increasingly engagtransparent and reconciles to the underlying ing these advisers to perform sell-side due financial records lends credibility to mandiligence prior to opening up the business agement, minimizes surprises during buyfor sale. side diligence and provides the seller Sell-side due diligence involves the seller with a dress rehearsal prior to its interactaking an objective look at the quality and tions with the advisers of the potential sustainability of its earnings, determining buyer. This effort can expedite the sales the reasonableness of its forecasts, underprocess by streamlining the buyer’s due standing its historical working capital rediligence, thereby protecting shareholder quirements and identifying potential tax value. exposures by standing in the shoes of Sell-side due diligence is just one facet of potential suitors. While nobody knows the a transaction readiness strategy that many business better than the business owner, sophisticated sellers effectively employ. By many sellers may be too close to the busiidentifying and getting ahead of the issues ness to identify risk areas that may comearly in the process, sellers can proactively promise valuation or certainty to close. Sellmanage the discussions and drive efficiency, ers are increasingly looking outside in certainty and value throughout the transperforming this critical assessment. action.

■ Sell-side due diligence procedures assist a seller in understanding financial and tax Brian Leonard is director, Transaction Advisory exposures and opportunities, and proacServices, with Grant Thornton LLP. Contact him at tively addressing these identified issues be216-858-3539 or brian.leonard@us.gt.com.

By BRIAN LEONARD

W

By PAUL WOZNICKI

I

property, plant, and equipment are identified as part of a business combination, they are measured as of the transaction date at fair value in accordance with the principles of ASC 820 — in essence, the value that would be received in an armslength transaction.

n the U.S., whenever a company experiences a business combination or event whereby the acquirer obtains effective control of another business, the acquirer is subject to generally accepted accounting principles (GAAP) that require the allocation of the purchase price under Intangible asset valuations: The the requirements of purchase accounting identification and subsequent valuation of ASC 805 (formerly SFAS 141r). intangible assets can be significantIn simplest terms, ASC 805 rely more complex and require the quires all consideration transferred use of a wide range of valuation (i.e. “purchase price”) to be meamethods. When valuing intangible sured at the acquisition date at fair assets, the acquirer must consider value. This includes any and all assets asset characteristics such as separatransferred, liabilities assumed (inbility and/or contractual or legal cluding contingent liability considright considerations. Typical intanerations), and if applicable, any equity gible assets with finite lives might PAUL WOZNICKI include trademarks, brand names, interests issued by the acquirer.

SS&G non-compete agreements, cusPurchase price allocation: tomer lists, and patents.

Although a fairly complex process in pracThe application of purchase accounting tice, the allocation of purchase price in its with all its nuisance and ultimate determimost basic form generally involves three steps: nation of value of purchased assets is a Identifying and assigning a fair value highly sophisticated process that requires a to all tangible assets acquired sound understanding of accounting princiIdentifying and assigning a fair value ples. Companies often need the assistance to all identifiable intangible assets of professional accountants experienced in with finite lives valuation services to properly identify and Determining the residual positive or determine acquired-asset values.

■ negative “goodwill” associated with the transaction Paul Woznicki, CPA, is a director in the Transaction Advisory Services department Tangible asset valuations: Once tanof SS&G. Contact him at 330-668-9696 or gible assets such as working capital or email PWoznicki@SSandG.com.

1 2 3

is proud to join ACG in recognizing our longstanding client

and the other 2013 Deal Maker Award Winners.

We are honored to have been legal counsel to RPM for more than 40 years, including the 2011-2012 acquisitions of Synta, Inc., Kirker Enterprises, Inc., and Multicolor Specialties, Inc. Calfee’s Corporate/M&A Group: Helping deal makers get deals done for 110 years.

Calfee, Halter & Griswold LLP Calfee.com 216.622.8200 The Calfee Building, 1405 East Sixth Street, Cleveland, Ohio 44114

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What is your corporate M.P.G.?

Indicators show which firms get better mileage

By MICHAEL F. PAPARELLA

C

orporate M.P.G., as defined here, is different from what might first come to mind. It is not a reference to the average miles per gallon of your corporate fleet.

Instead it is a high level indication of the quality of your company as perceived by the marketplace.

In Corporate M.P.G., M denotes management team, P indicates past performance, and G repre-

sents growth potential. Most investors and lenders look to these attributes when assessing quality companies.

Quality of the MICHAEL F. management PAPARELLA team is most Candlewood important. In Partners LLC the ideal situation, each member of the management team is a strong performer and each highly important position among the management roster is occupied. The highly important slots include the CEO, CFO, COO and head of sales and marketing.

The quality of these performers

Most investors and lenders look to (the M.P.G.) attributes when assessing quality companies. can be assessed in the quality of P and G, and it is rare that P and G will be high without a strong management team.

Past performance is the most often cited attribute when assessing an investment. It is natural to infer that past performance indicates future results. However, we all know that is not true. Nonetheless, understanding the company’s past business plans and goals and assessing the management team’s See M.P.G. Page S16

Carefully prepare for selling family held businesses

By ALBERT D. MELCHIORRE

T

he sale of a business is a once-in-a-lifetime endeavor for most family held business owners. I would like to offer some advice to the owners of family held businesses about having a successful merger and acquisition (M&A) sales process.

To begin, it is important that you are prepared and have your house in order. This preparation

starts first with the business. There are areas to focus on that will result in a smoother process and help maximize the value of the business. These include improving operational efficiencies, complying with environmental laws and regulations, having accurately prepared monthly and yearly financials (review or audit),

ALBERT D. MELCHIORRE MelCap Partners LLC

ensuring the right management personnel are in the right positions, and if retiring after the sale, identifying your successor.

The M&A process will be a distraction to your business as the process can take between 6 to 12 months from the time your investment banker is hired. It is important

that you manage your business through this process in order to avoid negative surprises. You want to make sure the business is performing at optimal capacity throughout the process.

Once you have your house in order, and before you begin the process, assemble a strong M&A deal team. This will include an experienced M&A attorney, accountant, investment banker and investment adviser. Based on

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the input of this team, it is important to determine whether your valuation goals and objectives can be met given the current state of the M&A market.

You will also need to make sure you have thoroughly thought out what you would like your role to be post-closing. The following are important questions to think through carefully: Are you looking to retire immediately after closing?

Do you have your successor in place? Would you like to roll over a small portion of your proceeds to participate in the future growth

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M&A outcome depends on company quality

By KEVIN WHITE

T

hroughout 2012 and into 2013, Western Reserve Partners has seen “A Tale of Two M&A Markets.” For companies with good market positions, solid margins, strong management teams and steady performance through the recent downturn, it has been the best of times, with strong buyer interest and high multiples paid.

For companies with elements of weakness, such as succession issues, high capital intensity, customer concentration or exposure to recession-sensitive end markets, the M&A market has been dramatically different, with far less buyer interest and relatively low prices paid.

Buyers remain concerned Strategic and financial buyers about the strength and have both been very durability of the current active. For the best comrecovery. Without confipanies, financial buyers dence in a rising ecohave shown a willingness nomic tide to lift all to pay prices normally ships, buyers are engagseen only from strategics. ing in rigorous due diliIn instances where strategence. Target companies’ gic buyers are confident results are being monithat they have found the KEVIN WHITE tored very carefully durright fit, they are willing Western Reserve ing the course of the deal to outbid the financial Partners process to maintain asbuyers by paying the surance that the business is seller for a portion of the expected performing to plan. Those that synergies. But when the fit isn’t don’t are being hit hard, with quite right, they are quite conserdeals being re-cut or called off vative, choosing instead to due to relatively modest misses. maintain their current large cash

balances.

Financial sponsors have also become more active sellers of businesses over the past year, with the healthy M&A environment, relatively strong portfolio company financial performance and impending tax changes making this a good time to sell.

Nonetheless, a significant portion of those sell-sides have been to other financial sponsors, implying ongoing caution on the part of corporate acquirers.

While expected changes in the tax environment helped spur a significant portion of 2012’s M&A activity, tax remains funda-

of the business in order to get a “second bite of the apple?”

Finally, try to keep an open mind. You do need to keep your eyes focused on the end game of achieving your goals and objectives and need to treat each interested buyer as if they are “the one.” With that being said, make sure you perform your own due diligence on the buyer to ensure it is a good fit. ■

Albert D. Melchiorre is president and founder of MelCap Partners, LLC, a middle market investment banking firm. Contact him at 330-239-1990 or al@melcap.co.

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mentally a secondary driver. Other drivers, such as owner retirement and the need to realize returns for private equity investors, continue to bring new supply to the market regardless of the tax environment. Western Reserve expects 2013 to be no different in this regard. Based on current pitch activity and new deal generation, we are optimistic that 2013 will be another solid — if not strong — year in the M&A market.

■

Kevin White is a director with Western Reserve Partners. Contact him at 216-589-9536 or email kwhite@ wesrespartners.com.

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Benefits of combining asset-based lending and syndicated financing for M&A

M.P.G. continued from Page S14

By LAURIE MULLER-GIRARD and AMY CARLSON

T

he combination of historically low interest rates and waning enthusiasm for waiting out the sluggish economy could mean increased merger and acquisition activity in 2013. Prospective buyers, with asset-rich balance sheets, may wish to consider financing strategies that combine an asset-based working capital revolver with longer term debt via the syndicated term loan or high-yield bond market.

Asset-based loans (ABL) are offered on a revolving basis and are collateralized by a companyâ&#x20AC;&#x2122;s assets, including accounts receivable and inventory. A syndicated loan is typically structured and priced by a lead arranger or agent who then sells portions of the credit to other lenders or investors under terms negotiated by the agent. Todayâ&#x20AC;&#x2122;s more diverse investor base often requires that a loan be structured to meet the needs of the market.

Syndicating asset-based deals requires a particular set of skills â&#x20AC;&#x201D; a combination of expertise in both asset valuation and syndication.

Borrowers should look for lenders who understand their industry and business strategy and offer integrated asset-based lending,

LAURIE MULLERGIRARD KeyBank Business Capital

AMY K. CARLSON KeyBanc Capital Markets

debt capital market offerings and sector expertise.

In some cases, a borrower could rely on ABL only. Larger transactions may require a different approach. For example, a wellknown retail company considering expansion may benefit by using an ABL collateralized by its receivables and inventory as well as the brand nameâ&#x20AC;&#x2122;s appraised value. The ABL facility offers low pricing and flexibility.

If the business requires more debt financing than is available through a standard ABL, it may need to layer in another form of debt such as subordinated or mezzanine debt, institutional term loans or high-yield bonds.

Financing through subordinated or mezzanine debt could fill a hole in the capital structure and is less expensive than equity. An institutional term loan with a second

lien on working capital assets and a first lien on property and equipment could also bridge the gap.

This financing has variable rates and can be pre-paid, sometimes with minimal cost. If the business generates strong excess cash flow, this option enables the business owner to reduce debt quickly.

A high-yield bond offering may be the best option for a borrower that needs more than $150 million in additional financing. The offering could be unsecured or have the previously described second lien structure. High-yield bonds are fixed rate, offer long tenors and no amoritization; however, they require public debt ratings and can be expensive to prepay.

Regardless of the final financing solution, combining ABL and syndicated term loans or high yield bonds gives borrowers additional flexibility to make deals in both the highs and lows of the economic cycle. â&#x2013;

This article is designed to provide general information only. Before entering into any financing arrangement, please consult your own competent professional financial, tax and legal advisors.

KeyBanc Capital Markets Inc., Member NYSE/FINRA/SIPC, and KeyBank National Association (KeyBank N.A.) are separate but affiliated companies. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives. Banking products and services are offered

by KeyBank N.A. Member FDIC and Equal Housing Lender. Credit products are subject to credit approval.

Laurie Muller-Girard is national director of KeyBank Business Capital. Contact her at 216-689-7941 or laurie.mullergirard@keybank.com. Amy K. Carlson is head of Debt Capital Markets, KeyBanc Capital Markets, Inc. Contact her at 216-689-4227 or acarlson@key.com.

ability to perform over a 3- to 10year period can give some comfort that the performance was not a random occurrence and should, with reasonable expectation, continue into the future.

The growth prospects provide the â&#x20AC;&#x153;sizzle.â&#x20AC;? It seems that most middle market companies lack a well articulated, implementable and measurable 3-year growth plan. Investors and lenders take comfort in, and will generally attach value to, a sound, well thought out plan that can serve as the roadmap to get from current revenue and profitability to projected revenue and profitability.

Ideally, this plan should allow for revenue and profits to grow at 10% per year or more.

Whatever the projected growth rate, it must be supportable to be believable.

In the best case, the M will have the P to support the G. When this comes together, investors and lenders get excited about the opportunities that lie ahead of such a well-managed business.

Sellers and borrowers get excited because the â&#x20AC;&#x153;marketâ&#x20AC;? is eager to invest alongside the team and their vision.

Ultimately, companies with good past performance, offering a good â&#x20AC;&#x153;plug-and-playâ&#x20AC;? growth strategy, and managed by a high performing team (i.e. high M.P.G.) are in high demand in good economic times and bad. â&#x2013;

Michael F. Paparella is managing director for Candlewood Partners, LLC. Contact him at 216-472-6640 or email mfp@candlewoodpartners.com.

Innovative solutions Throughout the M&A lifecycle Deloitteâ&#x20AC;&#x2122;s step-by-step services are designed to provide assistance to you through every phase of the deal. From strategy to post-merger integration and divestitures, we can help you in your efforts to get through each critical juncture of the transaction process. We are the only professional services organization with world-class capabilities across the entire M&A deal cycle and on either side of a transaction.

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John Stipkovich Director | M&A Transaction Services Deloitte & Touche LLP +1 216 589 1408 jstipkovich@deloitte.com

Our attorneys work with deal makers to design and implement WUDQVDFWLRQ VWUXFWXUHV WD[ HIÂżFLHQFLHV ULVN PDQDJHPHQW measures and negotiating strategies. We bring together tax, antitrust, environmental, international, real estate, employee EHQHÂżWV HPSOR\PHQW H[HFXWLYH FRPSHQVDWLRQ LQWHOOHFWXDO property, technology and litigation lawyers to provide the necessary breadth and depth of representation.

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Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member ďŹ rms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member ďŹ rms.

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JANUARY 28 - FEBRUARY 3, 2013

S-17

Noncorrelated investments: narwhal or unicorn? drive financial markets. With noncorrelated investments, the oth the narwhal and the risks for which investors are unicorn are fantastical compensated are dissimilar to elsecreatures — one real and where in their portfolios. Examone mythical. In the case ples of noncorrelated investments of noncorrelated investments, include reinsurance, water rights, one must ask the question, “Is it film rights, pharmaceutical copossible to find that rare investdevelopment and intellectual ment with returns independent property. There are other options, of the factors that move but the markets for many publicly traded debt, of them are too immature equity and real estate or the risks too difficult to markets?” The answer is quantify. yes … and no.

There are numerous Most publicly traded reasons to seek noncorreinvestments are in some lated investments, even way dependent on ecoif, like fantastical creanomic conditions. Equity tures, they are hard to returns are contingent on LINDA M. find. These investments a business’s prospects can be highly beneficial OLEJKO and profitability, and real Glenmede to portfolios since they estate values depend on provide a great deal of such factors as employment levels diversification for the dollar. An and the buildup of available inacademic using the risk/return ventory. From time to time, some profile of these investments in investments are negatively correa portfolio optimization program lated with economic conditions. may wish to take an extra In a recessionary environment, helping. for instance, an investment with Noncorrelated investments a fixed payment, such as Treasury have earned a place in sophistibonds, may increase in value as cated investment portfolios, but the values of equity securities as in the cases of the fantastical decline. This inverse correlation, narwhal and unicorn, careful however, may not persist as marstudy is required to separate the ket conditions change – for examreal from the mythological.

■ ple, if the economy improves.

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Lending alternative: How companies can use assets to finance strategic growth

By DOUG WINGET

F

or many companies, obtaining credit through conventional cash flow lending arrangements can be difficult. They may be having operational problems, undergoing rapid growth, dealing with an acquisition or their borrowing needs might reflect their cyclical or seasonal industries.

For those companies, assetbased lending, also known as ABL, provides an alternative to the traditional lending model.

Asset-based lenders specialize in providing secured financing to customers with limited access to capital.

Asset-based lending is senior secured lending that allows borrowers to leverage their receivables, inventory, equipment DOUG WINGET and real estate.

FirstMerit Bank Advances are based upon eli- Business Credit gible collateral, with formulas against receivables, inventory, equipment and real estate. The working capital line of credit is financed against eligible receivables and inventory. Typically, ABL has fewer covenants than a cash flow structure and more availability from the assets.

It also may not need a personal guarantee from the owner.

Companies that have sufficient receivables and inventory can leverage their working capital and receive higher advance rates.

They can use this for working capital financing, seasonal working capital borrowing needs, leveraged recaps, mergers and acquisition financing and turnaround financing.

If the company is looking for more availability from its working capital, that profile fits ABL,

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which offers advance rates that are higher against accounts receivable and inventory, providing more availability than a traditional middle market cash flow structure. Companies that have a strong EBITDA and earnings profile relative to working capital will likely have more availability from a cash flow product, but companies that are more assetintensive will benefit from an asset-based structure.

There are several differences between a cash flow structure and an asset-based structure. For example, ABL structures generally require cash dominion. This means a controlled account agreement is in place that requires the cash Asset-based receipts of a company to flow lending into a lockbox. provides an The funds then alternative are swept from the lockbox to the and are used to traditional pay down the lending revolving debt.

This is the most model. efficient treasury management structure to reduce leverage.

ABL covenant structures are generally not as leverage focused compared with cash flow structures. Typically, a cash flow structure may have three or four financial covenants and an ABL structure will have only one financial covenant. ABL groups are typically collateral focused, not leverage focused.

In summary, for companies with exposure to cyclical industries and markets, ABL can be a more patient financing solution since ABL groups will typically work with a borrower given sufficient availability and liquidity.

■

Doug Winget is president of FirstMerit Bank Business Credit. Contact him at 330-3847448 or email doug.winget@firstmerit.com.

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JANUARY 28 - FEBRUARY 3, 2013

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2013 looks promising for leveraged buyouts Equity overhang, deal creativity should widen deal pipeline

companies.

Limited partners have become far more scrutinizing of the cohesion of the private equity fund team, the operational abilities of at least some of that team versus financial capabilities, and have dissected the reasons for success behind large cash-on-cash returns

By JIM HILL in certain sale transactions.

With the re-election of Presiooking ahead to what 2013 dent Obama, the dialogue of taxing will bring, there are a the carried interest as ordinary number of trends that will income versus capital gains has impact the private equity once again become a hot topic. industry and leveraged buyouts Despite these challenges, there (LBO) in particular. First, the is a good deal of encouraging challenges: news: There is a $200 billion equity â&#x2013; LBO funds in 2012 overhang in private equity raised 24% more funds as worldwide that must new funds than in 2011, get spent in next 12 despite a downturn in months or be returned deal activity. to investors. General partâ&#x2013; Many pension plans ners of funds will not and endowments have receive their 2% asset largely abandoned venmanagement fee on ture capital investing due capital that is returned to the dismal returns of JIM HILL since it is not committed. the top 100 venture Benesch In 2007, private equity funds over the last consisted of 35% of total dollar decade. This has allowed private volume of transactions in the U.S. equity funds to gain a larger alloIn 2012, it consisted of approxication of asset employment. mately 15% of total dollar volume â&#x2013; Private equity has become of transactions. more creative in generating deal Worldwide, the level of transacflow through proprietary relationtional activity in 2012 was 50% ships, regional investment bankers what it was in 2007. (almost brokers) and utilizing buy There was a dearth of transacside investment bankers. Many tions in the U.S. in 2012 â&#x20AC;&#x201D; down funds now have dedicated â&#x20AC;&#x153;busi15% in transactional dollar volness development partnersâ&#x20AC;? who ume from 2011. The rush to the participate in the carried interest exits to avoid higher capital gains and are key to deal flow. rates did not really happen. The â&#x2013; Despite the current lack of primary reason was uncertainty classic auction deal flow, private of earnings and potential sellersâ&#x20AC;&#x2122; equity firms are anticipating 2013 performance during the sales will become a more seller-friendly process. environment as the fiscal cliff, There was also hope on the part while somewhat resolved, will not of some sellers that earnings create huge automatic cutbacks in would be higher in 2013, which government spending. Approxicaused them to hold off. With mately 67% of private equity sparse inventory, cash on stratefirmsâ&#x20AC;&#x2122; U.S. portfolio companies gicsâ&#x20AC;&#x2122; balance sheets and private have been owned for more than equity overhang, multiples for 6½ years, with the average fund high performing sellers were having a 10-year life. Obviously, staggering â&#x20AC;&#x201D; even higher than in delayed exits mean there have 2007 for comparably performing to be more exits in 2013 to get

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limited partners ready to invest in their next fund. â&#x2013; Few private equity funds still call themselves â&#x20AC;&#x153;agnosticâ&#x20AC;? as to industry choices with funds specializing in certain industries and having advisers who are heavily networked in those industries.

The most popular sectors today are energy services (albeit, it is somewhat slipping), business services (asset light), niche manufacturing requiring little capital expenditures annually, health care services and devices, consumer products, business-to-business distribution and logistics. â&#x2013; Leverage remains quite available for buyouts with equity residing on deals over $10 million of EBITDA between 33% and 43%, and rates remain very low. This tends to drive up multiples for pricing purposes but also allows private equity firms to be in the hunt against strategic acquirers.

Given the low rates of returns on both public securities investment in the past several years and in many alternative private asset investments, many pension plans and endowments are now allocating a greater percentage of their assets to the private equity world. â&#x2013;

Jim Hill is executive chairman of Benesch, chair of the firmâ&#x20AC;&#x2122;s Private Equity Group and an active and practicing member of its Corporate & Securities Practice Group. Contact him at 216-363-4444 or email jhill@ beneschlaw.com.

ACCESS BEGINS WITH A CAPITAL â&#x20AC;&#x153;Gâ&#x20AC;?.

At Glenmede, we believe the best way to serve our clients is to give them direct access to our experts and best thinking â&#x20AC;&#x201D; with no barriers or bureaucracy. Our low client-to-staff ratio means youâ&#x20AC;&#x2122;ll always have our full attention.

www.glenmede.com Glenmedeâ&#x20AC;&#x2122;s services are best suited for those with $3 million or more to invest.

To learn more, please call Linda Olejko for a personal conversation at 216-514-7876. Â&#x2DC;Â&#x2DC;2Â&#x2DC;Â&#x2DC; Â&#x2DC;Â&#x2DC;2Â&#x2DC;Â&#x2DC; Â&#x2DC; Â&#x2DC;Â&#x2DC;2Â&#x2DC;Â&#x2DC;

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WE SHARE YOUR OBJECTIVES OF GROWTH AND BUSINESS SUCCESS. Each day, we collaborate with private equity funds, subordinated debt funds and a variety of companies to open new doors and move business forward. Through the tailored management of sophisticated mergers and acquisitions and corporate finance transactions, our performance enhances the value of your deals. For more information about our M&A and Corporate Finance practice areas, visit us at www.icemiller.com.

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Shrinking world expands global opportunities for private equity Conflict minerals rule impacts M&A Consider implications during acquisition due diligence determine whether and to the extent it is covn Aug. 22, 2012, ered by the rule. And rethe SEC issued member, you will need its long-awaited to consider all activities Conflict Minerals and revenue sources of the Rule. The rule does not target, not just those reprohibit the use of conlating to U.S. operations. flict minerals in products, DYNDA A. ■ What is the target’s but it does require public product? Consider any THOMAS disclosure of how conflict Squire Sanders business activity that inminerals are used by the troduces a product into LLP reporting company. More the stream of commerce. specifically, the rule requires any For example, do not simply conreporting company to determine clude that the target is generally if it has conflict minerals that are in a service industry but consider necessary to the functionality or any commercial activity, no matproduction of a product it manuter how small, and determine factures or contracts to be manuwhether a “product” is involved. factured. If it does, it must file a ■ What is the financial model specialized report with the SEC. impact of the rule? Consider the A company would be wise to impact of your own conflict take the conflict minerals rule minerals policy on the target’s into account when considering materials costs, procurement and an acquisition. The following are sourcing and include those conseveral key questions a company clusions in your financial model. should ask about any target: ■ How might the acquiring company’s ■ Is the target covered by the rule? conflict minerals policy change?

Undertake a detailed review of the Customer requirements and sharebusiness activities of the target, holders’ reactions to conflict its affiliates and its subsidiaries to minerals disclosures could lead to

By DYNDA A. THOMAS

O

changes in policies and procurement activities. Consider any consequences of these changes in your financial planning and modeling.

The good news is that if a company that was not previously required to file any conflict minerals disclosure reports is acquired by a reporting company, the acquiring company is given a short grace period before it is required to undertake and complete conflict minerals diligence and disclosure about the acquired company.

Visit the conflict minerals page on the Squire Sanders website: www.squiresanders.com/ conflict_minerals/ and the firm’s conflict minerals blog at www.conflictmineralslaw.com to learn more about due diligence and to view sample representations and warranties. We also invite you to experience our interactive flowchart tool to help you in your conflict minerals analysis.

■

Dynda A. Thomas is a partner with Squire Sanders (US) LLP. Contact her at 216-479-8583 or email dynda.thomas@squiresanders.com.

beneficial to both the private equity industry and economies or years now, we’ve heard around the world. As private about the globalization of equity matures, firms have world economies become savvier about and certainly felt capturing opportunities plenty of effects from it. It wherever they may be, may come as a surprise to then growing them hear that the private equity using global resources industry has largely lagged and connections. on that trend, but that has For Riverside, globalbeen changing rapidly in ization means more recent years. than investing and runWhen the Riverside Co. ning offices on four conSTEWART KOHL launched a European fund Riverside Co. tinents. It means using in the 1990s, we were one teams staffed with locals of only a handful of firms working to source deals and operate comin Europe. Regulations and the panies in various regions while immaturity of the industry in applying talent and know-how to Europe meant that few firms did open new markets and maximize private equity deals there, but value for each company in our that changed quickly. portfolio.

We’ve seen the same shift in The effects of these efforts on the Asia-Pacific region, where prithe small companies in which vate equity was virtually nonexisRiverside typically invests can tent in many countries just a be profound. Riverside owns a handful of years ago. Now, we’re small company in Georgia that seeing dramatically increased acmanufactures products that make tivity overall and some of our animal feed safer. Riverside best opportunities as a firm. has used its Hong Kong-based These trends are healthy and Asian Strategy office to help that

By STEWART KOHL

F

Private equity survey reveals best investment practices

By MARK BRANDT

Creating Value.

R

ecently, McGladrey teamed with PitchBook to conduct a survey of seniorlevel executives who lead private equity firms focused on the middle market. More than 95%

MARK BRANDT McGladrey

the 109 private equity firms surveyed reported that the management team was a primary driver of both successful and unsuccessful portfolio investments.

One of the reasons management is so important is the intimate

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We expect globalization to be a valuable tool in opening markets.

company navigate the complex regulations and relationships of China, allowing the company to sell its products in the fastestgrowing livestock feed market in the world. Meanwhile, Riverside’s teams in Europe have helped navigate regulatory hurdles there, helping maintain access to another huge market.

This is just one example among thousands of small and large steps that private equity firms are taking as the industry becomes truly global. Ultimately, it’s about finding the best opportunities for growth and using every tool possible — everywhere possible — to accelerate that growth in a sustainable manner. The financial world has been “shrinking” for decades. As private equity catches up, we expect globalization to be a valuable tool in opening markets and helping companies thrive for years to come.

■

Stewart Kohl is co-CEO of The Riverside Co., a global private equity firm focused on acquiring growing enterprises valued at up to $200 million. Contact him at 216-344-1040 or skohl@ riversidecompany.com.

role these executives play in formulating the performance improvement plan and developing the overall strategy at portfolio companies.

Understanding external influences, implementing performance improvement strategies and establishing detailed progress tracking for each portfolio investment will be essential to generating strong investment returns and maximizing profitability:

External factors Influencing deal making While private equity firms would prefer to have control over all aspects of their businesses, taxes provide a high level of uncertainty. Firms are now concentrating their attention on tax-efficient structures that provide future benefits through the use of a step-up in tax basis, the deductibility of interest expense and similar strategies.

Only 17% of firms say the looming threat of a hike in the tax rate for carried interest will affect how they invest and operate their portfolio.

Creating performance improvement Performance improvement plans have long been a standard for most private equity firms when making new portfolio investments. More than half of the firms surveyed reported the utilization of plans laying out clear short- and long-term game plans.

Interestingly, the management

JANUARY 28 - FEBRUARY 3, 2013

How to judge a PE firm Making firms better a common industry goal

the challenge of working with good managers to help their companies grow. The professionals in our firm are gratified that we could help the managers of QSR, a Twinsburg-based manufacturer of silicon products, grow their busiBy CHIP CHAIKIN ness both in the medical industry and in China by more than four hanks to the recent electimes. tion, for the first time in We are proud that we could my professional career help the managers of PSSI, a when asked, Twinsburg-based cleaning “What do you do for a services provider, grow living?” I can answer revenues by 150%. “private equity,” using We are energized by the same number of syllathe fact that we have bles as a dermatologist, helped the managers of trial attorney or offensive AWP, a Kent-based traffic line coach. No longer safety company, double do private equity their business. We are far professionals require a CHIP CHAIKIN from alone — one of 30-minute treatise on Blue Point Cleveland’s jewels is the Adam Smith and BarbarCapital Partners size and professionalism ians at the Gate to of its private equity explain what we do. industry, which is recognized The flip side of that notoriety is nationally. that now the conversation often At its best, private equity can goes directly to questions about provide company managers with job creation or tax rates. growth capital and a knowledgeWhile these are certainly imporable, active partner. Whether or tant questions, they have overnot we are truly playing the latter whelmed the most salient quesrole is how we should be judged. tion about our industry, the one that gets at the heart of whether we succeed at our most basic undertaking: Do we help make better companies?

The days of relying on leverage or buying undervalued assets for success in private equity are in the past. For most in the industry, that is fine. We come to work for

T

One of Cleveland’s jewels is the size and professionalism of its private equity industry, which is recognized nationally.

If we are, we help create stronger companies that serve customers better, provide attractive platforms for employees, and, yes, create strong returns for investors. If we are not, then someone else will.

Capital is highly liquid and relentless in its search for a productive home.

Fortunately, the most productive home is often a fast-growing business, with all of the benefits that brings to employees, customers and cities. So the next time you see a private equity professional at a party, ask if he or she helps build better businesses. It is a far more enjoyable topic than our tax rates.

■

Chip Chaikin is a partner at Blue Point Capital Partners. Contact him at 216-535-4706 or email cchaikin@bluepointcapital.com.

Management determines the success or failure of portfolio investments. team takes on the primary responsibility for designing the performance improvement plan in roughly three out of every five cases. When the management team does not take the reins, a fund-level executive or member of the deal-making team typically takes control, underscoring the high premium placed on these plans and the intimate company and industry knowledge they require. There is an array of challenges during the implement of improvement plans, primarily centered on the establishment of internal systems and operating metrics.

Implementing performance improvement plans Most firms place a high priority on establishing robust financial reporting systems and requiring much more detailed data, with daily, weekly and monthly operating statistics. IT systems were regularly found to be insufficient as well.

To download the complete survey report, go to www.mcgladrey. com/peg. If you are interested in participating in the 2013 private equity survey, please contact Mark Brandt at Mark.Brandt@mcgladrey.com or 216-522-1124.

Crain’s Cleveland Business Custom Publishing

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S-22 JANUARY 28 - FEBRUARY 3, 2013

Power comes from being understood.

SM

When you trust the advice you’re getting, you know your next move is the right move.

That’s what you can expect from McGladrey—a partner with the in-depth experience to help private equity firms and strategic buyers optimize their portfolios. And one that can bring your organization global capabilities with a local touch. That’s the power of being understood.

To learn more, contact Mark Brandt at 216.522.1124 or visit www.mcgladrey.com.

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Transaction insurance demand surges Policies can help risk-averse deal makers overcome obstacles insuring off the remaining tail liabilities for all of the portfolio eal makers are increascompanies in a particular fund, ingly turning to transacenabling an earlier distribution or tional insurance prodredeployment of fund proceeds. ucts as risk mitigation Several other factors are contools in mergers and acquisitions. tributing to the growth in deIn the first six months of 2012, mand for transaction insurance. the total policy limits for transacIn general, deal makers are more tional insurance policies purrisk averse today than they were chased increased by 35% over the prior to the global financial crisis. same period in 2011, as In addition, the terms of reported by Marsh. the insurance products While successful prithemselves have imvate equity buyers have proved significantly since been using representathey were first introduced tions and warranties to the market. The coverinsurance to distinguish age has improved, there their bids in auctions for are fewer standard exclumany years, a growing sions, the pricing has STEVEN C. LEE percentage of policies come down, and the placed worldwide in 2012 Transactional underwriting process has were for corporate buyers. Risk Advisors been expedited.

Corporate acquirers are Technology and a typically more cautious than their higher level of sophistication are private equity counterparts on enabling the insurers to complete the amount of warranty protectheir underwriting and be in a tion they require in a transaction position to issue a policy within and often lose out on a deal bethe time frame of the overall deal cause of this aversion to risk. negotiations. This process is comThrough the use of transaction monly completed in two to three insurance, corporate buyers are weeks. Finally, a history of suchaving more success in winning cessful claims under these policies sought-after assets, especially has eliminated the early skeptioverseas targets, while at the cism expressed by some parties. same time satisfying their board’s While representations and requirements for risk mitigation warranties insurance is most comin the deal. monly used, contingent liability The surge in popularity is also insurance, tax liability insurance being fueled by sellers who are and litigation buyout insurance increasingly building representaare increasingly being used to tions and warranties insurance overcome specific deal obstacles into the M&A process from the the parties are unable to resolve beginning in order to minimize through traditional contractual their post-closing exposure, while indemnification.

■ maximizing purchase price.

Steven C. Lee, Esq., is a principal with Strategic private equity sponTransactional Risk Advisors. Contact sors are using transaction insurhim at 216-905-3350 or email ance policies to maximize the efslee@transactionalrisk.com. ficiency of capital structures, and

By STEVEN C. LEE

© 2012 McGladrey LLP. All Rights Reserved.

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Northern Ohio TMA President John Lane presenting the 2012 Lifetime Achievement Award winner Larry Goddard, Managing Director, of SS&G Parkland Consulting, LLC. We thank Larry for his leadership and the many contributions that he has made both in the turnaround industry and in our community.

D

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Asset-based lending option can work in private equity

By MARK KISKORNA

A

sset Based Lending (ABL), often referred to as Commercial Credit or Business Credit, has been a financing option for decades. Over the last 10 years, however, ABL has become an increasingly important financing strategy for middle market and large companies across a wide range of industries.

ABL structures can accommodate major cyclical or seasonal swings, commodity dependent industries, growth capital and companies in the midst of a turnaround or restructuring.

ABL provides creative and flexi-

Creative credit structures offer financing flexibility ble credit structures, monitoring and reporting with fewer financial requirements, it is less covenants, and in some sensitive to the ebbs and instances the ability to flows of a company’s have springing financial income statement. ABL covenants based on availstructures can be emability. In some situaployed in both stable and tions, ABL lenders can volatile markets (and ABL lend beyond the asset units often do not transformulas and have higher MARK KISKORNA fer troubled deals to a PNC Business credit holds, which can workout group).

Credit eliminate or reduce the Over the last few years, need for syndication.

M&A-focused strategic Finally, because ABL lending and financial buyers have befocuses heavily on collateral and come comfortable choosing an has more stringent and detailed ABL structure knowing that these

structures support more aggressive purchase price multiples.

Almost half of the PNC Business Credit deals sourced in 2012 were from private equity groups.

Corporate deal makers also recognize the versatility of ABL in addressing gaps in a transaction’s capital structure or in combining with junior capital. For example, PNC Business Credit, through its access to junior lender Steel City Capital Funding, both divisions of PNC Bank, National Association, can provide a seamless one stop, cash flow solution.

TOP DEAL MAKERS The winners of the 17th Annual ACG Cleveland Deal Maker Awards will be recognized on Thursday, January 31, 2013, at the Marriott at Key Center.

RPM INTERNATIONAL INC. RPM closed nine acquisitions during the last 18 months, including five outside the U.S., adding more than $400 million to annual revenues.

BLUE POINT CAPITAL PARTNERS Blue Point Capital Partners recently completed four platform acquisitions, three add-ons, and a significant plant expansion. It also made three divestitures that returned more than $300 million with an average in excess of four times cost.

STERIS CORPORATION Over the last 24 months, Steris has engaged in more than $425 million of M&A activity, most notably its acquisition of US Endoscopy.

US ENDOSCOPY INC. Privately held US Endoscopy, founded in 1991, sold its business to Steris in a $270 million all-cash transaction last year.

Crain’s Cleveland Business Custom Publishing

Corporate deal makers also recognize the versatility of ABL in addressing gaps in a transaction’s capital structure or in combining with junior capital.

If your current capital structure isn’t providing the flexibility you need to manage and grow your business, it may be time to look into ABL. ■

Mark Kiskorna is senior vice president & regional manager-Midwest Region, PNC Business Credit. Contact him at 216-222-8506 or visit pnc.com/abl.