ACG 2023: CORPORATE GROWTH & M&A

CORPORATE GROWTH & M&A

PRESIDENT’S LETTER

ACG Cleveland fuels dealmaking momentum

Last year, then-President Cheryl Strom titled her community letter “ACG Cleveland: moving beyond your expectations.” One year later, I can only marvel at the trajectory of this chapter and the opportunity that lies before us. This past year, the chapter celebrated its 40th anniversary, a remarkable milestone paved by literally thousands of transactions and relationships too extensive to measure. It is no surprise to this readership that Cleveland has a long history as a hotspot for M&A dealmaking. Our ACG members are at the center of that dealmaking community, supplying the knowledge, talent and energy behind this achievement.

Membership is at an all-time high, with more than 570 members! The membership base remains the sole focus of the ACG Board and supporting committees. The Cleveland chapter not only delivers exceptional networking through

annual marquee events such as the 26th Annual Deal Makers Awards, Deal Source, the Summer Social at Shoreby Club, the annual golf outing at Firestone and the ACG Cup, but also delivers highly valuable and innovative content year-round on a smaller, more personalized scale.

These large-format, marquee events are the cornerstones of our offering, but there is so much more. Surely something will appeal to everyone. Programming, Women in Transactions (WIT), Young ACG (YACG) and Akron are all “networks within the network” that regularly feature topics and events yearround that are tailored for more individual interests.

I have been an ACG member for more than 15 years. I now

have the honor and privilege of leading the chapter through this evolving landscape, with the intentions to continue to innovate in pursuit of a diverse and inclusive network.

Undoubtedly, we each have had an ACG interaction or two that stands out as remarkable. For me, it was standing before the guests at the 40th anniversary celebration, facing literally decades of ACG achievers. Re ecting on the membership’s accomplishments and considering the prospects of the future was a testament to the incredibly strong network of professionals who were integral to the successes of the past 40 years.

Here’s to the next 40 years!

Tricia L. Balser is managing director and head of Ohio Commercial Banking. Contact her at 216-456-2985 or tricia.balser@cibc.com.

ACG is a global organization focused on driving middle-market growth. Its 15,000-plus members include professionals from private equity rms, corporations and lenders that invest in middlemarket companies, as well as experts from law, accounting, investment banking and other rms that provide advisory services. Learn more at www.acg.org. ACG Cleveland serves professionals in Northeast Ohio and has about 500 members. For more information, visit www.ACGcleveland.org.

CONTENTS

Quality companies and thoughtful advisory reign during uncertainty S2

Placing growth at the center of your business

Amy Ann Stoessel, Associate Publisher | astoessel@crain.com

Conner Howard, Custom Content Coordinator | conner.howard@crain.com

Kathy Ames Carr, Project editor

For more information about custom publishing opportunities, please contact Conner Howard.

This advertising-supported section/feature is produced by Crain’s Content Studio-Cleveland, the marketing storytelling arm of Crain’s Cleveland Business. The Crain’s Cleveland Business newsroom is not involved in creating Crain’s Content Studio content.

Balser

Quality companies and thoughtful advisory reign during uncertainty

By Andrew K. Petryk

2022 has been a tale of two cities in the M&A market. The year started out strong and had buyers, sellers and deal professionals expecting the momentum from the previous year to propel M&A activity even further in 2022 and beyond. While down from the boom of 2021, middle-market* deal ow held steady through the rst half of the year, with transaction value surpassing $122 billion on 1,085 transactions, according to S&P CapitalIQ. In some M&A markets, sentiment shifted in the early summer under the weight of rising interest rates, in ation, recessionary fears and geopolitical uncertainties, with investors exuding more caution, driving transaction activity down in the third quarter. The market is evolving, and buyers are coming to the table with a different lens on acquisitions with resiliency and stability in focus.

A ight to quality is fueling a bifurcation of the “haves” and “have nots,” with capital chasing fewer quality deals hitting the market.

As lower-quality businesses wait on the sidelines, high-quality, marketleading businesses command even greater attention from buyers and may see valuations increase as the law of supply and demand prevails.

Strong activity and strong valuations remain within certain industry niches, and buyers are picking their spots.

Healthcare remains a robust sector for M&A activity, with the industry overall expected to be relatively insulated from recessionary pressures. Given the

complexity of payor reimbursement and the need to drive ef ciency in health care payment processes, Revenue Cycle Management (RCM) is ideally positioned to bene t from a level of demand that should be more stable than many other areas of the economy. Over the last 12 months, we have seen several large RCM platforms merge or be acquired and expect more private equity investments and strategic consolidations in the sector as companies look to expand their scale to meet the strong demand.

Industrial manufacturing, distribution, automotive and engineered materials have experienced slowing growth as supply chain challenges continue and in ation stresses margins. Industrial technology that drives ef ciency in the manufacturing process, lls the gaps between a tight labor market and expanding production capacity, or improves overall quality control and

quality of output is very attractive and garnering considerable interest from buyers.

The M&A market continues to exhibit caution, particularly in cyclical industries. Building products has seen the pressures of a near-term housing market slowdown exacerbated by rising mortgage rates, in ation and more cautious consumer spending. While industry players continue to pursue acquisitions that are in line with their long-term strategies, acquisition activity is expected to be dominated by strategic buyers going into 2023.

Debt markets

While ample capital availability exists, leverage appetite is discerning, and pricing has increased compared to 2021 and early 2022. All-in borrowing cost for oating rate loans has

with greater diligence and caution. Many relationship-oriented banks and middle-market lenders view the environment as an opportunity to build new relationships, while larger asset managers and credit investors are more focused on relative value and asset allocation given broader market volatility. Fixed-rate mezzanine debt has re-emerged as a potentially attractive form of nancing in certain circumstances, particularly where oating rate lenders are pulling back.

Valuation

Broadly, valuations are moderating, and although not as aggressive as earlier in 2022, they remain attractive. Strong niche players with revenue predictability and a visible growth story are attracting signi cant attention from buyers at above-average valuations. At BGL, we are leveraging our deep industry expertise and creative capital market solutions to drive results for our clients in the developing M&A and capital raising markets.

Author’s note: The middle market is de ned as enterprise values of $25 million to $500 million.

risen 300 to 400 basis points when accounting for rising reference rates and higher pricing spreads. Resilient, stable businesses are in favor, while businesses with signi cant disruption or cyclicality are being evaluated

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

Petryk

The market is evolving, and buyers are coming to the table with a different lens on acquisitions with resiliency and stability in focus.

Placing growth at the center of your business

By Brandon H. Fredericks

Managing a middle-market business is all-encompassing.

The owner often wears many hats, including hiring employees, purchasing, posting social media content, planning employee events and direct sales with customers. While intricately operating the day-to-day aspect of the business, the most important role a business owner has is ultimately driving the company’s growth. Consistently reflecting, strategizing, planning and acting on growth cannot take a backseat to the daily tasks, which could consume an owner’s time and thought process if not carefully disciplined. Leaders will be successful in growing their businesses by equally balancing the ability to work on the business while in the business. Let’s discuss a roadmap for business owners to achieve middle-market growth.

The brains of growth

For middle-market businesses to achieve growth, the company’s vision must be well-thought out, outlined, and, most importantly, communicated. As the head of the company, the owner must clearly articulate a sustainable growth path for critical leadership roles, then ultimately, all employees. Commitment and buy-in are a must; a plan without

proper execution from lack of understanding will fail fast. Strong leaders must first recognize the power of developing and cultivating a highpowered team to help achieve growth goals.

For employees to authentically understand and support the organization’s goals, the leader must set a clear vision from the top, which includes aligning leaders, departments and people to avoid silos. Ensuring all employees are aiming towards the same goal is not just a playbook for success but also establishes a healthy communication method within the organization, free and clear of “ivory tower” resentment when a leader is fully engaged with communicating the vision of the company.

A key role directly impacting a growth plan’s sustainability is the chief financial officer. Recognizing the CFO role as the first line of strategic vision within the organization grants the company insight into cash flow, working capital, ability to secure capital and overall financial health within the business to achieve the pillars of the growth plan.

The heart of growth

The heart of any successful business is that of the employees. Adapting a “people-first” mentality is a responsibility all leaders should commit to, recognizing that hiring and working with the right people will improve the organization’s overall culture, which results in the best customer experience. In the last year, companies of all sizes and industries have reported difficulties with talent retention and engagement; if a business wants to grow, it can only do so if the right people are hired and, more importantly, retained.

The company’s strategic plan can also frame how employees are hired. What qualities best align with the growth vision of the business? How can the business attract the right employees? How do the company’s benefits packages exceed the needs of working professionals? These questions are critical in attracting and retaining top talent, including establishing a thorough onboarding process to ensure success upon a new hire.

One technique for incorporating a healthy onboarding strategy for new hires is shifting the mindset from “training” to “preparing.” Explaining corporate policies and procedures in the form of

traditional training may discourage or bore new employees, missing out on the opportunity to engage in communicating the vision of the organization. A “preparing” mindset enables new hires to envision themselves on the path within the company as active players in the results.

Leaders are also responsible for maintaining the engagement of all employees. Staying in tune with situational changes (i.e., inflation) for employees outside of the executive salary package is critical for maintaining competitive and fair wages, establishing a rewards program to celebrate wins and a leadership education program to encourage ongoing professional development.

The soul of growth

Establishing the company’s “brains” and “heart” will allow a synergistic move into market growth and planning. Strategic planning should focus on how and where teams should be spending their time and energy. Is the company’s strategy more focused on organic market growth or acquisition strategies? Are teams seeking new market expansions or exploring new products/ services to further meet your customer needs? Far too often, businesses say

“yes” to all without truly understanding how to achieve success.

How do leaders combat these risks? It comes back to involving the right people. Asking great questions, as we move in the direction of our questions. Having a clear vision of where we are going. Embracing the strategic planning process is dynamic.

Executing a growth plan

Let’s address the elephant in the room — it takes extreme discipline, focus, time and energy to successfully work on the business while in the business. Leaders should align the company and its strategic vision with forward-thinking business advisers to ensure the plan’s execution can be achieved and acted on. A plan is only as good if it’s thoroughly followed-through, which can be the most intimidating action item on a business owner’s long list of “to-dos.”

Establishing a trusting relationship with qualified and experienced accountants and business advisers results in the added support in the owner’s corner to achieve sustainable growth.

Brandon H. Fredericks, CPA, is principal of Advisory and Growth at Apple Growth Partners. Contact him at bfredericks@applegrowth.com.

Fredericks

Valuation trends and expectations for 2023

By Albert D. Melchiorre

As we look back over the last year, the M&A markets and overall economy have experienced significant changes and challenges. All industries have been impacted by the constantly changing markets caused by a number of factors, including geopolitical uncertainty (e.g., Ukraine war, contentious elections, U.S. – China tensions, etc.), economic difficulties such as inflation and rising interest

rates, continued strain on supply chains and the difficulties in maintaining a strong workforce.

The public markets have been unpredictable as well, with the S&P 500 starting the year at a record high but dropping by nearly 15% through November. We’ve also seen significant

performance fluctuations in the middle market, as businesses struggle to react to changes in the broader marketplace.

The uncertainty creates risk but also opportunity for strategic and financial buyers to realize value through M&A.

From an M&A perspective, overall 2022 deal activity was down from record highs in 2021 in terms of both value and volume. In 2021, we were coming off of the first year of the pandemic, so that

year’s M&A activity was artificially high due to pent-up demand. As a result, and in comparison, 2022 is down. According to S&P CapIQ, total volume of closed U.S. deals through November was 14,028, which is down approximately 11% from 15,719 during the like period of 2021. With respect to deal value, and based on transactions where deal values were disclosed, total 2022 deal value in the U.S. was down approximately 21%, to $1.4 trillion as compared to $1.8 trillion in 2021, according to

S&P CapIQ. Drilling down closer to home, deal volume in the Great Lakes region through November decreased approximately 27%, to 221 from 302 during the like period of 2021. Great Lakes deal value also declined about 8%, to $143 billion from $155 billion in 2021.

Due to the challenges all businesses have been facing, buyers are more interested in well-performing companies as the pool of quality deals has shrunk relative to the amount of capital looking to be deployed.

As a result, there continues to be a “flight to quality” for the acquisition of businesses and management teams that have exhibited recurring revenues, strong margin profiles and minimal cyclicality over the past 12 months. With that being said, private equity buyers still have an abundance of liquidity in the form of “dry powder,” or uninvested capital, that will be strategically deployed at valuation levels that mirror the current economic outlook.

As we stray further away from the unprecedented M&A activity and valuations experienced over the past 24 months, sellers will encounter the challenges of navigating a buyer’s market in 2023. Excluding premium businesses or businesses in an emerging industry, sellers can expect lower valuation multiples stemming from a more selective buyer process. While this may take some time to accept, a point of intersection between buyer and seller expectations is anticipated to occur early in 2023. As a result, sellers will have the option of either accepting lower valuations, often in cases where a transaction is absolutely necessary, or to wait for a better opportunity in the future.

As we look into 2023, and with all of the uncertainties in the market, we still expect the M&A markets to be resilient and continue to be active, albeit at lower levels. Until there is a significant liquidity gap in the markets if, and when, strategic cash and private equity dry power drop to historically lower levels, we still expect solid M&A activity in 2023. From a valuation perspective, however, we expect values to continue to level off but not dramatically. We expect 2023 to be another one of those dynamic years, one with plenty of challenges but opportunities as well.

Stay nimble and be ready to adapt to changes. Use technology and data to make well-informed decisions so that your businesses can perform at their highest levels.

Al Melchiorre is president and founder of MelCap Partners, LLC. Contact him at al@melcap.com.

Melchiorre

As we look into 2023, and with all of the uncertainties in the market, we still expect the M&A markets to be resilient and continue to be active, albeit at lower levels.

Family office pitfalls

By Douglas McCreery

When one or more family members hold ownership and control of a successful business or concentration of investment assets, at some point, a conversation will start about what comes next. What should be done to protect and grow the family’s assets as control and wealth transmits to the next generations? What can be done to better separate individual family members’ business and personal service needs?

Often, the conversation turns to the idea of establishing a family office. If the family controls an operating business, there may be some elements such as bill paying and personal office support already in place. But a comprehensive family office entails a much more diverse set of skills. Some of these service needs include:

• investment management

• performance metrics and evaluation

• trust and estate planning

• trust and distribution administration

• insurance reviews

• accounting and bookkeeping

• tax planning

• tax return preparation

• family education

• family governance

As a result, appropriate staffing for a single-family office requires recruiting skilled individuals with different training and backgrounds.

Annual staffing and overhead costs are a significant consideration. For example, a seasoned investment manager will earn at least $300,000 more with substantial private equity experience. A recent study concluded that even a small single-family office with two professionals and four support staff carried an annual cost approaching $2 million.

Also, contracting out functions such as tax preparation incurs outside professional services costs while the time costs and burden of record-keeping and document assembly must still be performed internally. Many types of services such as tax return preparation have concentrated time periods in which work must be performed, followed by periods of inaction, which is a costly inefficiency.

Keep in mind that, at its core, a single-family office is a small business

comparable to any small enterprise. Unexpected personnel issues, inner office politics, compensation issues and succession planning are all part of the routine. Few individuals who have the benefit of substantial wealth find it enjoyable or rewarding to be the central responsible party for managing these issues.

Another aspect is developing and retaining professional, independent counsel. Single-family offices tend to become intellectual cocoons in which group think may flourish. This can result in unfortunate outcomes, such as not fully appreciating the impact of income, capital gains and transfer tax costs in a wealth management or transfer strategy and/or not recognizing investment concentrations where objective analysis would recommend greater diversification to protect accumulated wealth.

An important wealth management tool that can guide a family is the development of one or more written investment policy statements to match specific objectives of various beneficiaries and evaluate performance over time. For example, money set aside when grandchildren are young to pay for higher education should have very different investment guidelines than investing to ensure routine income

flow to an older relative. Developing effective investment policy statements and selecting objective investment benchmarks can be highly complex and warrants a considerable amount of experienced professional input.

Similarly, if a family wishes to promote charitable causes, developing a policy to focus these efforts and have staff organized to evaluate and screen requests for gifts should be part of the family office mandate.

The multi-family office

Because of the many interlocking service needs and objectives for a wealthy family, highly developed multi-family offices are better suited to providing integrated solutions for wealthy families than single-family offices. The key here is solutions, not just services. Because needs vary over a year and dynamically change with the passage of longer periods of time, a high-quality boutique multi-family office will house highly skilled and experienced professionals to fulfill client family needs over multiple generations.

A key factor to selecting a multifamily office is to evaluate the reputation of the firm, the experience of its leadership and support staff, its commitment to independence, firm sustainability over time and its range of available in-house services. These should include legal support, family

governance assistance, philanthropic support, and investment and wealth management advice. A fully developed multi-family office should not be overly focused on gaining custody of a family’s assets for management.

It should offer a wide range of services for either a negotiated annual fixed fee or a fee-based asset under management or administration. With this approach, the range of services provided to a specific family should be varied over time as family service requirements expand or contract. The ability to deliver integrated advisory and management solutions, blending investment management and advice on family matters on a fully objective basis is a defining characteristic of highperforming multi-family offices.

In a successful partnership of a family with a multi-family office, a small team within the office will develop a deep understanding of the goals and aspirations and challenges within the client family. This will enable the professional advisers to “stand in the shoes” of the family’s leaders so that the advisers offer objective and carefully considered guidance to the client family.

Douglas McCreery is CEO and managing member at CM Wealth Advisors. Contact him at 216-831-4149 or dmccreery@cmwealthadvisors.com.

McCreery

A proactive approach to selling your company

By Jim Lisy

The U.S. economy is in the midst of a massive intergenerational transfer of wealth involving privately held companies. Many were established in the post-war period and passed onto baby boomers, only to nd subsequent generations had no interest in the family business. As an owner looking for liquidity and succession planning alternatives, it’s important to plan for your path to a successful exit.

A realistic look at private equity

Enormous amounts of capital have been raised to facilitate the generational transfer of wealth in process, with much of the funding coming from private equity groups and banks. While private equity groups often have a reputation for a singular focus on nancial engineering and investment returns with little regard for collateral damage, such as the effect on employees, it’s simply not the case.

Private equity has evolved greatly over the last two decades, focusing on creating value in acquisitions by providing growth capital and strategic direction, along with management expertise and

Lisy

structure. When you embark on the process to obtain liquidity and transition ownership, understand that having private equity involved in your deal is highly likely and often bene cial.

Evolution of alternatives

Along with the growth and evolution of private equity, the range of nancing and structuring solutions available to private companies has also evolved in recent years. For example, mezzanine investors and minority equity funds can provide liquidity without a change in control, while setting the stage for subsequent transactions. In deals that do involve a change in control, you have the opportunity to roll over a portion of your proceeds to reinvest in the company as a way to stay involved and preserve the potential to earn future additional returns on your investment.

3 questions to help you plan

Along with more alternatives, you have many more complex decisions to make.

Below are three basic, but critical, questions to address early on:

1. What are your objectives for the sale?

2. When should you exit the company?

3. Who can add value to the process?

1. What are your objectives? The rst step in the planning process is to establish your objectives. Are you seeking full or partial liquidity, and how much do you want to be involved in the business after the transaction closes? Determining objectives is obviously more complicated in a company with multiple shareholders across generations. For example, a shareholder nearing retirement may want full and immediate liquidity, while children involved in the business may want to continue their careers and reinvest in the business.

In setting objectives, it’s important to understand different scenarios impact the value of the company in various ways. For example, a shareholder who has been very active in managing the company but now wants to sell 100% of their holdings and have nothing to do with the business after closing will nd valuations disappointing. Most buyers will value the business more generously if they know you will stay involved post-closing. In fact, if you decide to roll over part of your proceeds to reinvest in the company, a buyer will view that as skin in the game, which reduces their risk and further enhances value. From a seller’s perspective, the rollover investment provides an opportunity for a second bite of the apple, generating additional returns if the acquisition proves successful.

2. When should you exit? As with timing the public equity markets, trying to determine the absolute optimal timing to embark on an M&A transaction is often a fool’s game. Ideally, the time to initiate a transaction is when earnings are good and growing, and valuations are generous. At the end of the day, the answer to “when” is often a very personal decision, but the key is to plan ahead and be ready. Begin identifying your objectives and creating a realistic timetable for the transition three to ve years before the sale process actually begins.

3. Who can add value to the process? While many businesspeople are adept at building high-value companies, leading the charge to sell your company involves a different, and very speci c, skill set.

Involving the right attorneys, investment bankers, accountants and valuation experts in your planning process — well before the sale — to help you formulate objectives, analyze alternatives, market your company and implement solutions will maximize your efforts and provide value well in excess of the cost of a highly skilled team.

Jim Lisy is a managing director of M&A Advisory at Cohen & Company. Contact him at 216-774-1153 or jlisy@ cohenconsulting.com.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this article is considered accurate as of the date of publishing. Any action taken based on information in this article should be taken only after a detailed review of the speci c facts, circumstances and current law.

Private equity shows resilience amid 2022 tumult

By Dick Hollington

2022 has been a challenging year on many fronts. The pandemic impacts on supply chain, labor and global market shutdowns are still being felt after 2½ years. Fortyyear highs in in ation have led the Federal Reserve to raise rates by 375 basis points in six months, one of the fastest paces in history. A modest or deep recession in 2023 would not be surprising. Add to these factors the geopolitical risks posed by Russia’s invasion of Ukraine, China’s aggressive stance in the South China Sea and other hot spots in the world, and you have a tumultuous environment.

With that backdrop, you would expect private equity deal activity, valuations and leverage levels all to be negatively affected. On the contrary, U.S. private equity deal activity through the third

quarter has remained robust and on pace with 2021, which was a record year. This is quite surprising as, anecdotally, leverage lending has largely come to a halt. Other sources of credit have lled the void.

We have seen a shift to higher-quality businesses. GF Data sources indicate that 71% of the completed 2022 transactions below $250 million of total enterprise value were with aboveaverage companies, vs historical levels of 56%. This indicates that with the surplus of dry powder among private equity rms, quality businesses are yielding premium values, even in these uncertain times. GF Data indicates valuations of buyouts have risen from 7.4x to 7.5x EBITDA year over year. For below-average businesses, processes are being extended as private equity rms are raising their level of scrutiny around sustainable earnings

and often lowering values below which sellers are willing to transact.

We expect to see the impact of rising interest rates, lack-of-available leverage lending and economic uncertainty on valuations and leverage levels in 2023. The level of private equity liquidity available to pursue businesses is not abating; however, the cost of borrowing and availability of credit will certainly begin to impact valuations. With seller expectations remaining high, deal activity will likely fall. The private equity industry has shown great resilience in the immediate post-pandemic period and faces increased challenges as 2023 gets underway.

Opinions expressed in this commentary re ect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice.

Dick Hollington is a managing partner at CW Industrial Partners. Contact him at dhollington@cwindustrials.com. For informational purposes only.

Hahn Loeser provides tailored solutions for our clients looking to grow. We have years of experience representing businesses selling to private equity, and our responsive team is committed to getting the deal done for our clients. Whatever your legal needs are, we are here to help.

Hollington

2023 ushers in challenges that will test tenacity

Programmatic M&A key to sustainable and intentional growth

By Jason Stevens

Acquisitions should be a tool in every growth company’s toolkit. Of course, an acquisition is not something you reach for in every instance — you still need to focus on delivering a great product at the right price to the right customers. But when you need to juice growth, expand to new markets or fill out a product line, acquisitions can deliver superior results relative to in-house investment.

Like any discipline, doing M&A well

requires practice.

According to ongoing research by McKinsey, firms that make a commitment to integrate M&A into their growth strategies can generate and sustain higher shareholder returns. They found that firms that embrace what they term “programmatic M&A,” or pursuing and executing multiple smaller deals a year,

generate higher excess total shareholder returns, with a lower deviation, than firms closing one-off acquisitions.

This makes sense to us. When you practice any skill, you get better at it. Firms that close multiple deals a year are going to develop the essential skills of target selection, negotiation and integration that drive accretive acquisitions, while companies practicing less often don’t. But what really stands out to us is that the riskiest growth strategy, McKinsey finds, is relying solely on organic growth, doing

zero acquisitions. These firms as a whole underperformed their acquisitive peers, and the range of outcomes is wider than for serial acquirers.

We see direct evidence for the value of programmatic M&A when looking at successful private equity firms. Long gone are the days of the corporate raider / LBO stigma, where private equity rides in with a big offer, fires everyone and tries to make a return through cost cuts. Today we see private equity firms selectively searching for a platform

investment in an attractive industry, run by capable management teams with a commitment to growth. Together with their private equity sponsor, these teams systematically pursue tuck-in acquisitions that align with the strategies, product lines and geographies of the platform company. By embracing M&A as a routine part of the business, these companies get really good at growth, topand bottom-line.

For instance, one private equity firm we work with, Rockbridge Growth Equity out of Detroit, has used this playbook to build a national leader in radon detection and mitigation. Following its acquisition of Protect Environmental in 2020, Rockbridge has closed five additional add-ons, expanding the geographical reach and service offerings of its platform investment. The integration of these six companies plus some additional acquisitions into a single national player has boosted sales and created a national presence.

This playbook works across borders as well. Ryan, LLC, a tax services and software provider, is the world’s largest firm dedicated exclusively to business taxes. Most of Ryan’s revenue is generated from North American operations. In 2020, Ryan made a plan to expand its operations in the European and Australian markets. Ryan identified and approached over 110 targets fitting its criteria in those markets. After careful vetting, analysis and negotiation, Copper Run assisted Ryan in making two acquisitions in the Australian and European markets, significantly expanding Ryan’s presence in each market.

In our experience, most firms with revenue over $20 million can benefit from following a similar playbook. Start with your strategic objectives and make sure an acquisition aligns with your growth strategy. Geographic expansion, product line extension, new customer relationships, vertical integration and expense consolidation are all viable reasons to consider an acquisition.

The next step is to get very clear on what you’re looking for. Defining your acquisition criteria upfront is a key part to successful dealmaking. Integration challenges scale quickly. In most cases, you’ll want to look for targets no larger than a third your size if not smaller.

The goal of programmatic acquisitions is growth through multiple smaller deals, allowing your team to practice identifying, closing and integrating acquisition targets. One-off mergers can make strategic sense, but over the long run a programmatic approach to dealmaking will generate the greatest returns.

We find that the most successful acquirers view the dealmaking process as part of ongoing operations, constantly evaluating the market for opportunities, building relationships and pursuing off-market transactions. Programmatic M&A requires a well-designed plan and discipline. It takes a willingness to pursue multiple smaller deals over several years rather than relying on episodic “big-bang” transactions. The upfront investment of time and energy may deter some, but acquirers that maintain a programmatic approach will be rewarded in the long run.

Jason Stevens is COO at Copper Run. Contact him at 614-888-1786 or jstevens@copperruncap.com.

Christal Contini

David Agay

Patrick Berry

Jacob

Debus

David Kall

Andrew

Kulpa

Francis Massaro

Benjamin Panter

Vanessa Bailey

Jacob Schmalz

John Wirtshafter

Adam Baginski

Kathryn Hickey

David Shafer

Laura Sims

Amy Willey

Chair

mcdonaldhopkins.com

Stevens

Workforce,

By Brian Stovsky

Today’s headlines are lled with talk about in ation and rising prices. Although the recent Consumer Price Index reporting has showed a slight curve in trend, businesses will continue to deal with the balancing act of absorbing cost increases while retaining employees.

The cost of labor and bene ts continues to rise, putting pressure on buyers to perform more in-depth reviews of these cost items pre-closing, and to have a thoughtful postclosing plan to tackle any issues found.

Health insurance market

The cost of health insurance saw an uptick as 2023 drew near. The average increase for fully insured plans, with no plan design changes, ranges from 6% to 8%, year-overyear, according to the Society for Human Resource Management and the Kaiser Family Foundation. That’s a full percent higher than increases experienced a year earlier.

The increases are due to myriad factors. Over the previous 24 months, the pandemic hindered members’ ability to see health care providers for procedures deemed nonessential and, while claims reduced during the lockdown, they rapidly bounced back once providers’ doors re-opened.

Further, the severity of claims increased. Many conditions worsened over the period when users were unable to see providers in-person. Claims data experiences a lag in reporting, and we expect the increase in claims trend to continue into 2023.

Providers are also putting more pressure on insurance carriers during contract negotiations, particularly regarding provider reimbursements. All indications show that it will cost carriers more in the future to maintain their relationships with hospital systems. Those increases will be felt by consumers in the upcoming years, including the most recent fully insured renewals released on Jan. 1.

How buyers can adapt

Buyers should be cognizant of market trends when looking at a target during due diligence and include assumptions based on trends when developing proforma nancials to gain a more accurate picture of the ongoing cost of insurance. To combat the trend, buyers can work with their bene ts/risk adviser to analyze current bene t plan designs, costs and claims data (if available) during due diligence and determine options to control costs and atten the curve.

A few options that have been successful.

• Introduce self-insured plans or hybridfunded plans (including HRA wrap plans) to reduce xed costs while taking on some additional variable liability. Self-insuring a plan enables buyers to carve out prescription drug or disease management, giving employers more control over their costs.

• Educate employees on lower-cost provider options, such as telemedicine and virtual visits when appropriate. Additionally, direct primary care or a narrower provider network are available options. Advisers can determine the adequacy of such options through a provider disruption analysis. Any of these options directly impacts claims, thus mitigating the impact of trend.

• Education and engagement can also be used as a retention tool, speci cally after an ownership transition, easing the integration

Stovsky

process. Employees tend to respond well when given more education around their bene ts, which reinforces a positive company culture.

The role of human capital

Employees are the primary drivers of a business, but they are also a leading expense. Identifying key employees and understanding processes to hire, retain and

ensure employees reach their potential are all imperative to successful transactions.

An evaluation of internal processes to assess bene ts and compensation, as well as compliance, should be a consistent practice for businesses. The stress on businesses to provide competitive compensation and bene ts packages to their employees persists and will continue to play a factor in keeping key employees and improving retention, speci cally through a transition of ownership.

Human resources and human capital due

diligence assess the value of a population or employee base of a target and will assist a buyer in identifying key employees as well as any red ags or shortcomings in terms of their processes. An HR advisory team can also review targets for discrimination or compliance issues among employees and identify employees who are pertinent to the business continuing on a consistent trajectory. Alternatively, an HR due diligence adviser can help a buyer identify areas where additional employees may be needed moving forward.

Buyers can also use an HR due diligence

adviser to assist in creating a change management strategy during closing and post-closing planning. Change management involves communicating with groups of employees to ease the transition process and reduce anxieties employees may feel upon the completion of a transaction. During their post-closing planning, change management can be a great tool for buyers to use to obtain a consensus among employees on where meaningful improvements can be made. This will increase the goodwill among employees.

Brian Stovsky is the private equity business development leader at Oswald Companies. Contact him at 216-777-6114 or bstovsky@oswaldcompanies.com.

Advice to sellers: maximizing company value ahead of a sale

By Brent M. Pietrafese and Margaret T. Ahern

Whether the seller is an individual entrepreneur, a private equity fund or a public company, selling a business can be time-consuming, frustrating and, at times, extremely stressful. However, developing a strategic plan early in the process can dramatically reduce those factors and, most importantly, result in a more profitable exit. There are four steps sellers can take to maximize company value ahead of a sale.

1. Start preparations early

It is never too early to begin preparations for the sale of a company. Taking steps in advance, as outlined below, will help ensure that the company’s legal and financial house is in order, which will maximize the company’s value and make for a more efficient sale process.

2. Select the appropriate transaction team.

Sellers should begin to build their transaction team once they start thinking about a sale to ensure all team members are familiar with the business. The transaction team is typically composed of the seller’s internal management team and external specialists such as lawyers, investment bankers and accountants.

Before starting a sale process, the seller should take steps to ensure its internal management team is equipped to handle an M&A transaction.

The management team members routinely include the seller’s CEO or president, CFO, vice president of sales, operations, etc. Prior M&A experience is particularly useful for those members of the deal team because they serve as the primary link between the company and its transaction team and are involved in all aspects of the sale process.

The management team will need to outsource certain tasks, which will require the assistance of an outside law firm, investment banker, accountant and other strategic advisers. Together, the management team and external specialists form the transaction team. When assembling the transaction team, sellers should select advisers with significant and successful M&A

experience selling businesses similar in size to the seller’s business.

3. Conduct internal due diligence.

Before a prospective buyer conducts its due diligence, sellers should conduct their own to confirm there are no problems that could delay or otherwise adversely impact the sale. If sellers discover any issues during this stage, they will have time to cure or develop negotiating strategies to deal with them. An experienced transaction team is essential for this process as they can identify common issues on the front end and then help correct them.

Areas inspected and information gathered during a seller’s internal due diligence should include:

• Financial statements and other financial information

• Corporate records

• Material contracts, paying special attention for change-of-control or antiassignment provisions

• Material third-party relationships

• HR and employee benefits

• Permits/licenses

• Pending or threatened legal claims

• Real estate issues

• Environmental issues

• Insurance coverage

Over the past few years, more sellers have decided to perform their own quality of earnings (QofE) and Phase I environmental reports before going to market. While the costs for those reviews are not immaterial,

early identification of issues typically uncovered by those processes can go a long way to limiting or eliminating those issues’ negative impacts on price or deal certainly (or both). There is some risk that a buyer will still want to have their own reports done, but if sellers choose a well-regarded firm to perform the work, there is less chance of that occurring.

4. Formulate a strategic sale strategy

With the transaction team’s help, sellers should generate a strategic sale strategy. To do so, the team should review market conditions for the company’s industry from an M&A perspective to help gauge expectations and decide the best time to sell. Determining whether the target buyer will be strategic or financial also provides helpful guidance on how sellers should position their business, as the two types of buyers value different

aspects of the business. Sellers must also identify how to approach buyers — either individually or through an auction.

Additionally, sellers will need to prepare a Confidential Information Memorandum (CIM) to provide prospective buyers with enough information about the seller to elicit meaningful bids. The CIM usually contains a description of the company’s industry, business, history and principal assets, as well as information about its management and employees, and depending on the sensitivity of the information, major customers and contracts. Before distributing the CIM to any prospective buyer, sellers should ensure that the buyer executes a confidentiality agreement.

Though the steps described above require extra time and preparation, adhering to them will maximize company value ahead of a sale and make for a much more efficient (and less stressful) sale process.

Brent M. Pietrafese is co-chair of the Corporate and Finance Practice Group at Calfee. Contact him at 216-622-8623 or bpietrafese@calfee.com. Margaret T. Ahern is a Corporate and Finance associate attorney at Calfee. Contact her at 216-622-8369 or mahern@calfee.com.

BY HEDGEWEEK

Pietrafese

Ahern

It is never too early to begin preparations for the sale of a company.

Strategies to ensure a gratifying business sale

By Christopher S.W. Blake and John Paul Lucci

Selling a business can represent the pinnacle of a life’s work, provide the ability to diversify assets and the opportunity to create generational wealth. Preparation and planning will streamline the process and increase the likelihood of success.

As any successful seller will attest, selling a business can be an all-consuming process, equivalent to a second full-time job for the owner and key executives. While daunting, we set forth seven proven strategies to prepare your business for sale that will reduce transaction expenses, maximize proceeds and increase the odds of closing.

Before we present our list, sellers should be aware of an evolving trend in corporate transactions. In recent years, more buyers and sellers purchase representation and warranty insurance (RWI) to cover-post closing indemni cation obligations. While RWI bene ts sellers because it decreases the size of escrows and other holdbacks and limits sellers’ post-closure exposure, RWI carriers require buyers to conduct very thorough due diligence, increasing the diligence burden on buyer.

The seven proven strategies are: 1. Advisers. Selling a business is a

highly technical legal, tax and accounting exercise that requires experienced professionals who understand market terms and transactions. Some of the most expensive deals we have worked on involved unsophisticated seller advisers. Save yourself money, hassle and delay by hiring experienced deal lawyers, investment bankers and accountants.

2. Financial statements. Before you begin the sale process, be sure your nancial statements are up to date and accurate. If personal or family expenses that have been run through the business could be questioned, we strongly recommend working with your advisers to address those issues before diligence begins.

3. Conduct lien searches. While banks and nance companies are quick to place liens on assets, removing liens can be

cumbersome. Often owners never know about certain liens, banks neglect to release liens and, in some instances, the secured party that led the liens has ceased to exist or is part of a different company where the business owner no longer has any contacts. These “phantom liens” create unique challenges. Generally, a buyer — and, more importantly, its lender — will not close a transaction when relevant assets are encumbered by liens. While active liens can be paid off at closing, phantom liens can take weeks to release. By conducting lien searches early in the process, you can “scare away” phantom liens.

4. Good standings. We recommend verifying the good standing of your legal entity in its state of incorporation/ formation and in each state where your business is quali ed to transact business. It is very easy — and shockingly common — for an entity to fall out of good standing or even have its charter revoked for failure to le state tax returns or annual reports. For a business with a complex entity structure or that les consolidated tax returns, taxing authorities often misapply tax payments or report a return missing for a subsidiary that is part of a consolidated return. The process of correcting these errors is cumbersome, often requiring

someone with a power of attorney to remain on the phone for hours. In addition, reviving an entity after revocation of status is not an automatic process in many states.

5. Contracts and other business records. Buyers will not purchase a business without completing due diligence, which is more involved in the era of RWI. You can streamline that diligence by locating and assembling fully executed electronic copies of all business records. This statement seems overly broad and burdensome — because it is. Tackling this chore on the front end, though, can expedite diligence and thus your closing.

As a start, you should obtain fully executed copies of all contracts, such as customer and vendor agreements, leases, software agreements and bene t plan documentation. Furthermore, you should assemble all stock certi cates and ledgers, minutes and other governing documents. Finally, you should gather all tax returns for the business and your bene t plans, including related form 5500s. The list of documents that must be disclosed can seem endless. Sellers often tell us documents do not exist or cannot be located. Buyers will not accept that excuse. A seasoned transactional lawyer can provide you with a standard diligence

checklist to jumpstart this process.

6. Declutter. Many businesses have obsolete, slow-moving or other unsaleable inventory. Rather than debating the value of such material, disposing of such items will make physical inventory counts easier and reduce post-closing working capital disputes.

7 Ordinary course. As a seller, you should run your business like you own it until the moment you have the sale proceeds. Not only will Letters of Intent and purchase agreements require sellers to operate the business in the ordinary course consistent with past practice, but the risk remains that a deal falls apart at the eleventh hour. Therefore, continue to maintain inventory, process payables and take other customary actions until the end.

These few action items will save you time, money and make that celebratory bourbon cocktail taste so much sweeter at the closing dinner. And if you hire the right advisers, they will buy.

Christopher S.W. Blake is a partner at Hahn Loeser & Parks LLP. Contact him at 216-274-2552 or cswblake@hahnlaw. com. John Paul Lucci is a partner at Hahn Loeser & Parks LLP. Contact him at 216-274-2310 or jlucci@hahnlaw.com.

INSURING INVESTMENTS. Enhancing Returns.

In large, complex transactions like mergers and acquisitions, what you don’t know can really hurt you. That’s why Hylant offers clients the expertise of a dedicated M&A and Transaction Solutions team

Let us help you reduce the uncertainty of complex transactions, protect your investments and enhance your returns. Learn more at hylanttransactionsolutions.com.

Blake

Lucci

By Frank Wardega

Despite concerns in the U.S. and globally about general market conditions and a recession potentially on the horizon, as of this writing we remain in what could be described as a period of “peak M&A,” with private middle-market M&A transactions as active or busy as any market within the last 20 years. (For reference, middlemarket M&A usually means transactions between parties with annualized revenues of at least $5 million but below $1 billion.)

While the actual recent peak moment for middle-market M&A likely occurred sometime in late 2021 or early 2022, there is no saying when this high volume will substantially decrease. This article explains what today’s peak M&A environment means for the market, for legal and other

deal advisory services and for business owners looking to sell.

The pace of negotiated transactions, practice of law and M&A work seem to accelerate with each passing year. With deals at such a very high volume, one might think that deal pace would have to be tempered somewhat given that business development leaders, investment bankers, lawyers, accountants and others involved in deals are ostensibly nite resources. And given that bandwidth and hours in the day are a nite resource as well, one might also expect that time from execution of a letter of intent to closing may be longer in comparison with less active periods. That has not been the case during this period of peak M&A. There has not been any tempering whatsoever of deal pace, expectations or in particular “speed to close.”

To the contrary, the heightened activity during this peak M&A period has led to an even more accelerated pace due to a desire on the part of sellers and buyers to get transactions done even more expeditiously. This is undoubtedly due in part by a desire to get the deal done and funded before general conditions, and in particular credit markets, potentially materially worsen. Essentially, it seems we are in something of a FOMO (fear of missing out) market.

For sellers, this means that is has become important to be ready to manage the inherit distraction and challenges of running a business concurrently with being involved in a sale process, with accelerated due diligence expectations and an accelerated transaction timeline turning up the heat. Making sure that you have the internal resources suf cient to handle the accelerated due diligence and negotiation process while running your day-to-day business has never been more important.

M&A market

Additionally, choosing the right advisers and deal team is critical in this period of peak M&A. While interviewing potential counsel (or investment bankers and other advisers), clients need advisers with the right skill set, experience, marketable fees and capacity to get the deal done. An honest conversation about capacity with prospective advisers has never been more critical. Here, as always, sellers want to engage with advisers that are in demand because if a rm is not in demand (particularly during peak M&A), it does not speak very well of the rm.

Sellers should also ensure the attorneys or other advisers pitching the deal will actually be working on the transaction and available to them as a priority – not just delegating the le to less-experienced attorneys or advisers. That is why nding the right adviser with the requisite level of sophistication, who also has suf cient capacity, is so critical. Simply put, business owners engaging advisers need to ensure they are not being marketed and sold the “A” team while actually getting the “B” team. They also need to ensure they pick advisers who will consider them a priority client.

Notwithstanding the concerns about general economic conditions, the current

middle-market M&A environment remains an attractive landscape for sellers who are considering a sales process. Sellers need to be nimble and ready to act quickly, be able to manage the inherent distractions when going to market and choose legal and other advisers more carefully than ever to ensure that they are able to take advantage of conditions that remain favorable for sellers seeking a potential exit.

Frank Wardega is a member in the Mergers and Acquisitions Practice Group at McDonald Hopkins. Contact him fwardega@mcdonaldhopkins.com. To learn more, visit mcdonaldhopkins.com.

This content is copyrighted to McDonald Hopkins LLC All Rights Reserved. This article is designed to provide current information regarding important legal developments. The foregoing discussion is general information rather than speci c legal advice. Because it is necessary to apply legal principles to speci c facts, always consult your legal adviser before using this discussion as a basis for a speci c action. This material is not intended to create, and your receipt of it does not constitute, an attorney-client relationship with McDonald Hopkins LLC.

By Michael W. Schauer and Maggie Jones

Cybersecurity sounds intimidating, and rightly so. U.S. buyers and sellers are subject to a patchwork of legal and regulatory requirements due to a lack of national legislation. While the enactment of new and/or updated comprehensive data privacy laws in California, Colorado, Connecticut, Utah and Virginia in 2023 offers some hope for greater uniformity in the future, buyers and sellers need to start at the basics. Speci cally, the parties need to understand how a data breach is de ned and what seller-collected data is at risk.

The rst step in understanding what data a seller collects boils down to a handful of questions. These are:

• What data is collected?

• How is data stored and secured?

• With whom is the data shared? These questions sound rudimentary, but they de ne the basic scope for what everyone should be concerned about.

Consequently, these questions should be asked early in due diligence (or before soliciting an offer if companies plan to solicit a purchaser) as the answers are fundamental in understanding the risks involved for all parties.

Sellers with sensitive data, such as cardholder data, social security numbers and con dential information of clients and vendors will face a higher degree of scrutiny. Sellers should expect — and buyers should ask— pointed questions about what safeguards are in place such as how data is encrypted, who manages rewalls and how penetration tests are conducted. Buyers should also

ask who data is shared with and what assurances a seller has that shared data is being treated appropriately.

While the above inquiries are agnostic on what law applies, buyers and sellers also need to consider how they will de ne a data breach for representations and warranties.

As noted above, different states take different approaches to data security. Those differences extend to the de nitions of data breaches.

As an example, Ohio requires both unauthorized access and acquisition of data, but other states only require unauthorized access to data.

Buyers and sellers likely will differ on the appropriate de nition of a data breach. More sophisticated buyers would be welladvised to understand what the governing law of the de nitive agreements views as a “data breach” and consider substituting a broader de nition.

While cybersecurity can sound daunting, starting at the basics can make all the difference.

Michael W. Schauer is partner at SSSB. Contact him at mschauer@sssb-law.com. Maggie Jones is associate attorney at SSSB. Contact her at mjones@sssb-law.com.

Wardega

Jones

Schauer

By Kip Irle

An iceberg’s size is deceiving if viewed only from above the water’s surface. Similarly, a carve-out acquisition’s stated value also can be misleading if signi cant costs and operational challenges are unrecognized.

Experienced risk and insurance advisers view deals through a unique lens. They surface risk-related issues, quantify their nancial and operational impacts, and arm acquirers with vital information to negotiate a fair sale price and understand their actual operating costs.

Take a closer look at some potential issues through an M&A risk management lens.

The carve-out’s risk pro le is different from the parent company’s.

A conglomerate might be known for investing in its people, processes and property. However, it might not invest in businesses it intends to sell.

For example, a global manufacturer decided to divest a plant. The buyer’s risk adviser discovered the company

had underinvested in the operation’s maintenance CapEx for years.

Equipment was old, poorly maintained and lacked safety controls. The plant’s experience modi cation rating (MOD) was above 1, meaning it experienced more claims than industry peers. Further, the workforce’s average age was 58, and the plant had higher medical claims than its peers.

When a carve-out’s risks are worse than those of its peers, it impacts the cost of and the buyer’s ability to obtain workers’ compensation insurance, product liability insurance, general liability insurance, employment practices liability insurance and employee bene ts. A risk adviser can quantify those impacts for the buyer.

The carve-out’s stand-alone operating costs may not be accurately represented.

Consider this. A large corporation had self-insured retentions for its workers’ compensation. When a claim came

in, they paid it. They didn’t report claims to the insurance company until they met the threshold. The quality of earnings report identified only a portion of the claims and premium running through the income statement, with much of the information coming from the seller’s accounting department.

The buyer’s risk adviser discovered the actual cost to insure the carve-out was underrepresented by 35%, or about $2.5 million. The buyer was paying a 10x multiple to secure the business. Armed with accurate insurance expense estimates, the acquirer reduced its offer by $22.5 million.

Accurately valuing a carve-out’s stand-alone “cost to insure” is critical. It can mean the difference between a profitable acquisition or an unprofitable deal. Management incentives may be impacted if pro forma operating costs vary significantly from the initial plan.

Viewing carve-out acquisitions through a risk management lens can reveal critical information for understanding the actual value and operating costs of a purchase target.

The carve-out transaction may contain hidden liabilities.

Sometimes untrained eyes don’t see signi cant issues. For example, a sale agreement required the buyer to assume nancial responsibility for insurance claims as of the sale date. The acquirer thought it was reasonable until a risk adviser explained they would be liable for any claims made as of the sale and any unresolved claims made before the sale.

Fully understanding the nancial rami cations, the buyer negotiated this requirement out of the deal. The seller had to establish an escrow account to cover potential liabilities.

Buyers must be aware of all sorts of transitional risks. For example, as part

of a large corporation, the carve-out likely provides robust health bene ts that the new entity may not be able to offer employees. The acquirer must determine how to transition and pay for the services until the next enrollment cycle while satisfying compliance requirements. There can be diseconomies of scale within the insurance and risk markets.

An eye for value

Viewing carve-out acquisitions through a risk management lens can reveal critical information for understanding the actual value and operating costs of a purchase target.

Kip Irle is senior vice president of transactional risk at Hylant. Contact him at 312-283-1339 or kip.irle@hylant.com.

By Michael Southard

Family business succession is the process of transitioning administration or ownership — or both — of a family owned business.

Family succession planning is unique because it involves not only choosing a course of action to secure the future of a company, but also decision-making that can affect familial relationships and the futures of loyal employees.

For those ready to face the challenge of succession planning, here are ve key questions to consider.

1. When will a transition take place?

The answer to this question may include a date or set of circumstances under which the succession plan will be enacted. Desired retirement age, readiness of family members to take over the business, and current economic and market conditions should all be taken into consideration.

2. Who will take the reins?

Power struggles are distracting. Avoid them by identifying the next generation of leadership. Doing so will be much easier during good times than during a period of unexpected, unplanned-for transition.

3. What happens to employees?

A family business owner desiring to reward employees for contributions and loyalty should include details about those desires in a written succession plan document.

4. How will compensation change or continue?

Succession plans should address whether the retiring generation will remain

active within the business and, if so, how those participants will be compensated.

Compensation should also be addressed for anyone taking over, taking on new responsibilities or continuing with the company through the transition.

5. What is the contingency plan?

Suppose transition is thrust upon a company sooner than the family imagined? What is the contingency for when succession comes early, or plans don’t pan out? If this seems like a plan within a plan, it is. Succession plans should not assume transitions will be ideal.

Other considerations

Sometimes your best succession planning could be to sell the rm to an outsider like a private equity business or family of ce. At times, this is the best option for maintaining the family legacy while ensuring nancial solvency. When considering this option, know the speci cs of the deal terms and type of funding, holding period, future of current employees and your level of involvement after transfer of ownership.

At Elvisridge Capital, our intention is to hold for the long-term, maintain current management and ownership involvement, and focus on revenue growth through focused attention and applied strategic resources.

Michael Southard is managing director at Elvisridge Capital, LLC. Contact him at 216-678-9900 or michael@ elvisridgecapital.com.

Irle

Southard

2022 Year in Review Creating

Private equity rms can craft a compelling ESG story

By Brad Kostka

For the last decade, environmental, social, and governance (ESG) matters have come to the forefront of the nancial industry. However, truly integrating ESG into asset allocation decisions within private equity rms often has been the exception rather than the rule.

But that may be changing. With a greater investor focus on sustainability, social justice and corporate governance issues, many companies now realize the material risks ignoring these issues could pose to their nancial performance, operational resilience and reputation in the marketplace.

At the same time, ESG-focused investing continues to grow. ESG investments now make up 36% of private capital under management. Within the private equity sector, asset managers invested more than $1.82 trillion in ESG funds as of 2021, according to Preqin.

As ESG momentum steadily builds, it’s crucial for private equity rms to tell an accurate and compelling ESG story — one that focuses on value creation for investors and larger societal impact. Here’s why it’s so critical for private

equity rms to ne-tune their ESG messaging and how they can do it.

Why ESG now?

ESG has moved from a concern at the margins to a central consideration for many investors and limited partners.

Kostka

Recent joint research from the Institutional Limited Partners Association (ILPA) and Bain & Co. indicates the larger role ESG plays in structuring portfolios. About 70% of limited partner organizations Bain and ILPA surveyed said their organizations’ investment policies factored in ESG. These ESG investment policies affected 76% of private equity assets under management.

More leading private equity rms are publicly stating their ESG intentions and hiring ESG leaders. Blackstone now has a global head of ESG, while other rms have created new roles such as chief sustainability of cer. However, the industry still struggles with transparency around ESG, especially compared to public companies that have included ESG information in their lings for

several years. These challenges likely are a byproduct of inconsistent global standards around ESG. However, new Securities and Exchange Commission proposed regulations for climate-related disclosures and the EU’s Sustainable Finance Disclosure Regulation may lead to more visibility around ESG data.

As this landscape evolves, private equity rms must take actionable steps to give investors con dence in their ESG initiatives. Formulating a better, clear, compelling and transparent ESG story can help them build this bridge. Below are some strategies for developing your private equity rm’s ESG story.

Focus on value.

First, private equity rms need to consistently convey the message to limited partners and investors that funds can do well by doing good.

ESG isn’t solely about putting on a good public face. It can drive value creation and better performance. An ESG Book analysis of model portfolios even found that ESG-positive funds performed better globally, so there doesn’t have to be a con ict between positive returns and positive societal impact.

De ne ESG measurement.

Accurate tracking is crucial to make this value creation argument, so private equity rms must develop ESG tracking metrics, benchmarks and reporting mechanisms. Firms can look to frameworks from the Sustainability Accounting Standards Board and then further tailor their programs based on internal goals.

Establish an ESG communications strategy.

Next, private equity rms should integrate ESG data into limited partner and investor communications, whether via newsletters, quarterly reports or internal dashboards. Private equity rms also should embrace a multimedia approach and consider text-based thought leadership content, as well as video, datadriven graphics and presentations during virtual meetings to share their ESG story.

Be authentic

Authenticity is key to transparency. Greenwashing has become far too common. Outright deception is at play here, but inconsistent standards and different philosophies about how to achieve ESG within rms likely contributes more to this “faux sustainability.”

Firms need to be clear with investors and limited partners about their ESG investment criteria, how this criteria is integrated into the due diligence process, where their portfolio companies stand with ESG and how these companies plan to further integrate ESG to reduce their material risks.

One study by Broadridge found 3 out of 4 investors want information about ESG-related policies, and 48% of them want this information often. In particular, investors want information about regulatory compliance, board recruitment and overall diversity. Firms should keep these data points in mind as they develop their communications strategy. Further, they should continually collect feedback from investors about whether their communications approach is meeting their needs.

Building trust in ESG

To build trust and credibility in their ESG programs, private equity rms must continuously educate and engage investors about those practices.

This all starts with doing the inside-out work to establish their ESG policies, tracking and reporting infrastructure and then developing a complementary communications strategy. Investors are more focused on purpose-driven investing, but that doesn’t mean they’re willing to compromise returns. With a compelling ESG story, private equity rms can demonstrate to investors that ESG isn’t just about good PR — it’s vital for a better return on their capital.

Brad Kostka is president of Roop & Co. Contact him at 216-902-3800 or bkostka@roopco.com.

Want to sell your business? Here’s where to start

By Michael Makofsky

Owners looking to sell or exit their business should begin planning well in advance. The following are a few best practices that can lead to a successful transaction.

What’s it worth?

An owner needs to know the business’ value before trying to sell. That goes

beyond income, revenue, debts and expenses — it is understanding what the company is worth on the open market.

An owner may overestimate the value of their company, only to be disappointed with

lower offers from potential buyers. An owner should get a professional valuation from a quali ed adviser. There are many variables that go into a valuation so it may not be exact.

However, it provides an owner with a clearer view of the state of the business. With that frame of reference, an owner is more equipped to handle offers.

Dealmakers You Can Trust

Located in strategic cities nationwide, our trusted M&A advisers keep our clients protected in today’s everchanging and volatile climate. We take a creative, constructive approach to solve our clients’ toughest issues–and put them on solid ground.

Cleveland Jayne.Juvan@TuckerEllis.com

Arthur.Mertes@TuckerEllis.com

tuckerellis.com

Los Angeles

Kristen.Baracy@TuckerEllis.com

Jayne E. Juvan Chair, M&A and Securities & Capital Markets

Art Mertes Partner Chicago

Kristen Baracy Counsel

Makofsky

From previous page

Assemble your team.

Owners often try to sell their business by themselves. After all, they know their company better than anyone. However, an owner may not understand how to fairly value their company, how to market it, how to negotiate legal documents, what the tax implications may be or how to manage the proceeds. There are many complexities in an M&A transaction which, if not handled properly, can lead to unfortunate results. Further, an owner still needs to operate the business so that it remains attractive to a potential buyer. An owner should assemble a team of professionals who can guide them through the process. Experienced investment bankers, accountants, M&A attorneys and nancial advisers help an owner navigate their transaction, work through issues, and mitigate risks, all of which can lead to a successful transaction closing.

Understand your personal situation.

Selling a business will likely result in the largest liquidity event of an owner’s life. After debts are satis ed and taxes are paid, the owner will

Selling a business will likely result in the largest liquidity event of an owner’s life. After debts are satis ed and taxes are paid, the owner will need to live off the net proceeds for their remaining days.

need to live off the net proceeds for their remaining days. It is important to con rm there will be suf cient funds for an owner to maintain their lifestyle. If that will not be the case, an owner may need to adjust their plans to avoid an unwelcome situation after closing. It is also important for an owner to have a proper estate plan in place to account for the in ux of funds and make use of tax planning strategies.

Michael Makofsky is principal at McCarthy, Lebit, Crystal & Liffman Co., LPA. Contact him at 216-696-1422 or mdm@mccarthylebit.com.

GROWTH MARKETING FOR PRIVATE EQUITY

Looking to accelerate the growth of your portfolio companies? Need to tell a compelling story to investors? Or perhaps you require more qualified deal flow? We can help. For decades, Roop & Co. has generated top- and bottom-line results for private equity firms.

The Northern Ohio Chapter of the Turnaround Management Association congratulates Sally C. Barton, SVP at KeyBank, winner of the 2022 Lifetime Achievement Award.

We thank Sally for her leadership and the contributions she has made both in the turnaround industry and in our community.

Bringing

Time to restore integrity in business transactions

By Jayne E. Juvan and Christopher J. Hewitt

Times of crisis bring out either the good in people or the bad in people.

Multiple times during the Panic of 1907, J.P. Morgan was called upon to help avert disaster. In one particularly noteworthy episode, Morgan summoned the presidents of the largest New York City banks to raise $25 million in 10 minutes to save the New York Stock Exchange. Other than pledging what they could afford on a ledger with their bank’s name, none of this was documented.

Roll forward to the COVID-19 pandemic, and it seems very unlikely that this would happen today. Rather — whether it involves governance, commercial contracts or M&A transactions — a common theme we have seen emerge is parties trying to sidestep their duciary duties or contractual commitments. Perhaps the poster child for this mentality was Elon Musk’s attempt to submarine his Twitter acquisition. While ultimately unsuccessful, others have had better luck — one dated example is the way Ray Kroc pushed the McDonald brothers out of their eponymous business during his own time of personal crisis. (If you’re not aware of Kroc’s tactics, see The Founder {2016}).

Whatever the motivating factor — doing a bad deal, an uncontrolled

change in circumstances, using perceived leverage or general civil unrest that seems to absolve a lack of integrity — we have noticed an unfortunate rise in gamesmanship in business transactions of all types. Even more unfortunate has been the lack of supervision, or outright complacency or participation, by boards of directors in allowing this to happen.

Commercial transactions

Until very recently, rarely were we asked to look at a company’s basic commercial contracts other than in diligence. Now, we are routinely called in to help our clients defend against attempts to terminate agreements early without cause, reset prices or slow pay (or refuse to pay) legitimate invoices.

To be fair, we also have seen some constructive, business-oriented executives advance solutions in good faith. These executives understand that good decisionmaking leads to long-term growth.

M&A transactions

One area in M&A transactions where there is rampant gamesmanship is the working capital true-up. Instead of making sure the

target business has the right level of working capital so that it can operate without the infusion of outside capital, too many view this as an opportunity to renegotiate purchase price. Similarly, we see some parties interpreting other components of purchase price either to renegotiate price or as a tactic to gain other contractual concessions on unrelated post-closing matters.

We also have seen a rise in unsubstantiated indemnity claims. Until recently, we rarely saw indemni cation claims because parties tended to let immaterial breaches go. Nowadays, there is too much of a concerted effort to nd any conceivable indemnity claim before the survival period for the representations expires.

Tone at the top

Too often, we see that some boards of directors are themselves pushing the boundaries. We have witnessed directors completely disregard the rules governing their conduct and who brazenly proceed as if the rules do not apply to them.

When operating at their best, directors are self-regulating. Working collectively, they help one another stay in compliance, placing the interests of the organization above their own personal interests. They encourage one another to be good stewards of the organization by knowing and following the rules, coming prepared to meetings and engaging in meaningful debate and discussion. Those who operate in good faith, desiring to demonstrate the utmost integrity, keep the duciary duties of care and loyalty at the center of everything they do in their of cial capacities.

It takes tremendous time, effort and good decision-making for an organization to reach its highest potential. While organizations may be able to sustain themselves for a short period of time under poor leadership, that luck always runs out. That’s why it is critical to take the utmost care in vetting directors for a track record of demonstrated integrity and to engage in ongoing training and education.

Conclusion

In 1923, following turbulence in the nancial markets stemming from World War I, the London Stock Exchange received its Coat of Arms from the College of Arms prominently displaying the motto “dictum meum pactum,” which translated from Latin to English means “my word is my bond.” It is well-known that, at its core, the phrase means that you can believe me when I say that I’m going to do something. Fear not, you can trust me to perform as promised.

Maybe it is asking too much from many of today’s market participants to act with the altruism demonstrated by business leaders during the Panic of 1907. And it’s probably naïve to think people can act without the rigor of a contract guiding their actions. But, hopefully, it’s not asking too much to have them honor their commitments. And hopefully it is also not asking too much for boards of directors to set an appropriate tone at the top for these matters.

Jayne Juvan is a co-chair of the M&A Group and chair of Securities & Capital Markets at Tucker Ellis. Contact her at jayne.juvan@tuckerellis.com.

Christopher Hewitt is a co-chair of the M&A Group and partner at Tucker Ellis. Contact him at christopher.hewitt@ tuckerellis.com.

By Ted Motheral

As we leap into a new year, many M&A professionals believe 2023 will be an uncertain market due to interest rate increases and continuing recession concerns. However, there are certain industries that are poised to outperform the market in the coming year. Based upon research and trends, those industries are nancial services and health care and pharmaceuticals. In addition, there will be a substantial advantage to private equity and institutional buyers who do not heavily rely on debt nancing (and rely on the “dry powder” in equity capital) available to them to take advantage of buying opportunities in these industries.

Financial services (namely wealth management, registered investment advisers and independent broker dealers) has seen a surge in roll-up acquisitions and minority private equity investments in the past few years. Although market volatility has seen a decrease in assets under management for a lot of the sell-side targets in the industry, the opportunity to invest in or acquire sophisticated nancial advisory rms (and the historical return on investment over the past few years) remains incredibly attractive to institutional and private equity buyers, as more of these buyers are entering the space.

Couple this with the fact that the majority of this industry is in the baby boomer generation and looking for a sound exit or succession plan, and you have the perfect recipe for continued growth (of volume and

deal size) in the M&A market.

With a recession looming and in ation still very much in the picture, experts always point to those industries that are “recession proof.” Health care and pharmaceuticals always seem to fall into that category. The demand for these industries is always constant, especially with the older generation. Experts believe revenues will not see a material change as long as demand holds. Therefore, these M&A market industries will remain constant or even outperform other industries that will more than likely see a substantial drop in deal volume in 2023.

Lastly, outside of industries to watch for, the buyer market will be interesting to watch as well, as those institutional and private equity buyers that usually rely on a debt-to-equity mix for their purchases may look to solely put their equity capital to work to avoid the increase in interest rates. If interest rates continue to rise, then this will put those buyers who have the capital to deploy at a distinct advantage in the market.

Ted Motheral is partner and section head of the Business Services Group at Walter Haver eld. He can be reached at 216-9282967 or at tmotheral@walterhav.com.

— Lee Burch, Co-Founder, BBS Tech/FINS Fishing

Juvan

Hewitt

Motheral

Northeast Ohio’s top deal makers to be honored

ACG Cleveland, Northeast Ohio’s leading organization for merger and acquisition and corporate growth professionals, will recognize the winners of its 26th Annual Deal Maker Awards. The event is scheduled for 5:30 p.m. to 8:30 p.m. on Jan. 19 at Hilton Cleveland Downtown.

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

Buyout Fund of the Year: Align Capital Partners

Align Capital Partners is a growth-oriented private equity firm that partners with business owners and management teams to create shared success. ACP manages $1.5 billion in committed capital with investment teams in Cleveland and Dallas. 2022 was the firm’s most active year yet, closing its third fund and completing over 25 transactions totaling greater than $1.8 billion of enterprise value.

Family Company Deal Maker of the Year: Prince & Izant

Prince & Izant provides brazing alloys and metal-joining products to the automotive, cutting tools, oil and gas exploration, HVACR and electrical manufacturing industries.

Prince & Izant, founded and headquartered in Cleveland, had been a family owned business for nearly 100 years prior to its recapitalization with Industrial Growth Partners in 2022.

The company has proudly served industrial manufacturing companies with brazing products since 1927.

Private Company Deal Maker of the Year: Universal Windows Direct & Great Day Improvements

Bedford Heights-based Universal Windows is one of the nation’s largest

and fastest growing distributors and installers of windows, doors and other home improvement products serving the custom repair and remodel market.

Macedonia-based Great Day Improvements LLC is a vertically integrated, direct-to-consumer provider of branded premium building products, including Patio Enclosures brand sunrooms, Champion brand windows, Stanek brand windows and patio doors, Apex Energy Solutions energy-efficient windows and doors and Hartshorn Custom Contracting pool enclosures.

Universal Windows Direct completed its company sale to Great Day in November 2021. Following the combination of UWD and Great Day, the combined team was able to acquire Champion Windows in December 2021 to quickly scale to a national powerhouse, ranking No. 4 on the Qualified Remodeler top 500 list in 2022.

Public Company Deal Maker of the Year: Avient Corp.

Avient Corp. was originally established as PolyOne Corp. in 2000 through the consolidation of two historic companies in the materials industry with a mission to become the world’s premier provider of specialized and sustainable solutions.

The company has a history of transformational acquisitions throughout its

20-year history. In 2022, Avient had another banner year with the acquisition of DSM Protective Materials (DPM) and the sale of Avient Distribution, transforming the company into a pure play specialty formulator.

Women in Transactions Award: Rebecca White, EVP, Strategy & Corporate Development, The Kenan Advantage Group

Leading strategy and corporate development, Rebecca oversees both organic and inorganic growth initiatives for The Kenan Advantage Group, which is the leading bulk liquid trucking and logistics company in North America. Since joining KAG in 2017, Rebecca has led the entire M&A process, sourcing, evaluating, executing and integrating acquisitions that have extended the company’s geographic presence and enhanced its service capabilities.

During this time, Rebecca has overseen more than 20 transactions, representing more than $375 million in transaction value and contributing revenue growth of nearly 25%. Rebecca has assumed a leadership role in KAG’s strategic planning efforts. Rebecca initiated, developed and manages KAG’s annual Leadership Summit. She also has developed and manages KAG’s ESG policy and reporting. Through 14 years of investment banking, Rebecca closed more than 35 sell-side M&A, divestiture, bankruptcy, restructuring and capital raising transactions, including cross border transactions, representing more than $1.8 billion of transaction value.

2022-23 Officers and Board of Directors

EXECUTIVE OFFICERS

President

Tricia Balser, CIBC

Past President Cheryl Strom, The Riverside Company

President Elect Jay Moroscak, Aon

Governance Charles Aquino, Western Reserve Partners

Treasurer Mark Heinrich, Plante & Moran

Executive Vice President — Annual Events Pillar Jonathan Ives, SCG Partners

Executive Vice President — Branding Pillar Matthew Roberts, Dorman Products

Executive Vice President — Innovation Pillar Beth Haas, Cyprium Partners

Executive Vice President — Programming Pillar

Thomas Libeg, Grant Thornton LLP

Executive Vice President — Membership Pillar Bryan Fialkowski, JP Morgan Chase

BOARD OF DIRECTORS

John Allotta, Baker

Robert Cheffins, CIBC

Mike Cottrill, NgageContent

J.R. Doolos, KeyBanc Capital Markets

David Fechter, Action Management Services

Michael Ferkovic, Sunvera Group

Sarita Gavhane, Edgewater Capital Partners

Joseph Hatina, Jones Day

Nicholas House, Vorys, Sater, Seymour and Pease LLP

Margaret Jordan, KIKO

Kathryn Kelly, Deloitte & Touche

Matthew Kolman, Deloitte & Touche LLP

Mindy Marsden, Bober, Markey, Fedorovich and Co.

Thorne Matteson, PricewaterhouseCoopers

Martin McCormick, FNB Mezzanine Ryan McGovern, Star Mountain Capital

Corrie Menary, Kirtland Capital Partners

Katie Noggle, Align Capital Partners Jim Rice, Ernst & Young LLP

Robert Ross, Benesch, Friedlander, Coplan & Aronoff LLP

Larissa Rozycki, Harris Williams

Thomas Welsh, Calfee, Halter & Griswold LLP

White