Middle Market Growth - January 2014 by Association for Corporate Growth

Growth MIDDLE MARKET

// JANUARY 2014

THE RIGHT TIME FOR A CHANGE? A QUALIFIED OPINION: AN INTERVIEW WITH PITCHBOOK FOUNDER JOHN GABBERT

A New Year Big Ideas for the Middle Market in 2014

A publication of

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EXECUTIVE SUMMARY PAM HENDRICKSON // ACG Global Board Chairman and COO, The Riverside Company

ACG Adapting to Meet Members’ Needs

appy New Year! It’s already been a thrilling ride for me after just a few months as ACG chairman. I have spoken about all the work being done to better serve ACG members and pro-

mote our collective interests, but now that I have seen it up close, I am especially proud to be part of this organization. I recently attended ACG’s inaugural EuroGrowth® meeting in London. The event was an unqualified success, delivering the same value, networking opportunity and dealmaking power as ACG’s popular InterGrowth® meetings. We are just getting started. For 2014, we have even more programming and informational opportunities lined up, including Middle Market Insights, the new ACG webinar series, which many of you have been enjoying. ACG continues to expand content that is relevant, useful and valuable, and thanks to our partners, free for all members. Those sponsors have been getting a bang for their buck as well, because we have helped them deliver messages and position themselves as thought leaders among our influential members. Contact Kaitlin McAuley to learn more. In 2014, we will continue to deliver ACG’s publications through frequent digital content accessible from a variety of platforms. That content features growth stories, interesting chapter events and the progress of ACG’s advocacy work. ACG’s public policy efforts are succeeding, as shown by the bipartisan approval of HR 1101 in the U.S. House of Representatives. ACG, also is now officially registered as a federal lobbying organization and actively engaged on the issues impacting the middle market. Learn more at middlemarketvoice.org. At the same time, we have focused on strengthening local chapters because we know a good experience on a local level is where everything starts. ACG’s Chapter Innovation Fund provides one-time grants of up to $10,000 per chapter annually to seed or support new chapter-based initiatives. Grant applications are accepted and reviewed in January and June. I continue to look forward to an exciting tenure as chairman, and I’m eager to watch our evolution as an organization, the premier event being InterGrowth 2014, April 28 through May 1, in Las Vegas. We are working to make it the best ever by responding to your requests for more networking opportunities and reserved access to small working and meeting spaces. It promises to be a busy, productive and fun four days! Much of our best work has come from members like you, so please keep interacting with us and sharing your feedback. We take it to heart. Here’s to a great 2014! Sincerely, Pam Hendrickson

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Growth MIDDLE MARKET

// JANUARY 2014

GROWTH STORY

Bold Vision

Los Angeles-based Brentwood Associates has made a science of spotting lesser-known consumer concepts with staying power and turning them into more profitable powerhouse brands, increasing demand with fine-tuned marketing and broader distribution. Learn how they do it in this month’s cover story. Read more.

“THERE’S A REAL SOUL BEHIND THE CONCEPT, WHICH IS KIND OF AN UNDERRATED THING IN OUR BUSINESS.”//RAHUL AGGARWAL, BRENTWOOD MANAGING DIRECTOR

TABLE OF CONTENTS

PRESIDENT & CEO Gary LaBranche, FASAE, CAE glabranche@acg.og

VICE PRESIDENT, COMMUNICATIONS & MARKETING Christine Melendes, CAE cmelendes@acg.org

EDITOR-IN-CHIEF Kristin Gomez kgomez@acg.org

FEATURE

The Right Time for a Change A slow-growing economy has increased the popularity of spinoffs and the opportunity for companies to refocus their business. The same goes for PE as carve-out momentum grows in 2014. Read more.

IN EVERY ISSUE Executive Summary

MANAGER, CREATIVE AND BRANDING

The Ladder

Brian Lubluban blubluban@acg.org

The Leadership

• Q&A with U.S. Rep. Robert Hurt. • Opportunities Abound in Europe. • Strategic Marketing in Due Diligence. • The First 100 Days: Now What? Read more.

An interview with John Gabbert, CEO and founder of PitchBook Data, Inc., on the value of good data to private equity and venture capital professionals. Read more.

VICE PRESIDENT, STRATEGIC DEVELOPMENT Ellen Moore emoore@acg.org FOR ADVERTISING OPPORTUNITIES

DEPARTMENTS A QUALIFIED OPINION

Larry Guthrie lguthrie@acg.org

Face-to-Face

It’s the Small Things

THE ROUND

MANAGER, COMMUNICATIONS & MARKETING

DIRECTOR, STRATEGIC DEVELOPMENT

ACG@WORK

THE PORTFOLIO

• EuroGrowth The latest Recap. middle-market • ACG Western Michigan Hosts trends and thought leader Congressman. ship written • ‘Taste of exclusively by New Orleans’ our team of with ACG expert ACG Louisiana. Partners. • 11th Annual Read more. M&A East Conference. Read more.

Meredith Rollins mrollins@acg.org Custom media services provided by Network Media Partners, Inc.

Association for Corporate Growth 125 South Wacker Drive, Suite 3100 Chicago, IL 60606 ACG Membership: membership@acg.org www.acg.org Copyright 2014 Middle Market Growth, InterGrowth and the Association for Corporate Growth, Inc. All rights reserved.

Reason says: go with the well-known. Instinct says: go with the know-how.

One of the six largest global professional services firm, Grant Thornton specializes in helping private equity firms and their portfolio companies realize their potential. We have the industry knowledge and breadth of resources to advise on all aspects of the private equity transaction from deal origination, through structuring and value creation to exit planning and execution â&#x20AC;&#x201C; all delivered quickly through a single point of contact who has the experience and know-how that complements your expertise. To help unlock your potential, visit GrantThornton.com/Growth.

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

FACE-TO-FACE CONNECT TO YOUR NEXT DEAL CELEBRATE! // ACG’s 60th Anniversary Reception & Dinner FEB. 4, 2014 6:30-9:30 P.M. The Hay Adams Hotel Washington, D.C. COST: $250 per seat/ $2,500 for a table of 10. Tickets must be purchased here.

Join ACG for Middle Market Policy Summit this February It’s often said in Washington, D.C., that “if you aren’t at the table, you’re what’s for lunch.” ACG invites you to take your seat at the table along with colleagues, members of Congress, regulators from key federal agencies, and other influential policy leaders at its Middle Market Public Policy Summit. The summit, held annually in Washington, will take place Wednesday, February 5, at the Grand Hyatt Hotel and is an opportunity to hear from and interact with important policymakers about the latest developments affecting the middle market. Read on to see the list of confirmed and invited speakers. Attendees of the summit hail from a wide spectrum of the financial world, including private equity, investment banking, lending and affiliated service providers, bringing a wealth of experience and knowledge to engage in dialogue with lawmakers on the most pressing issues of the day. These issues include changes in tax policy, the hefty burden of Dodd-Frank compliance, the JOBS Act and more. Lawmakers need and want to hear from Continued on next page

FACE-TO-FACE CONNECT TO YOUR NEXT DEAL you, their constituents, to learn how the middle market is the solution—not the problem—to adding both economic growth and jobs. ACG continues to be the voice of the middle market and your participation is critical to safeguarding the future of the middle market. See you in Washington. The Middle Market Public Policy Summit is made possible by the support of Founding Champions, Duane Morris LLP, Grant Thornton LLP, and the Middle Market Leadership Circle.

SUMMIT AGENDA WEDNESDAY, FEBRUARY 5, 2014 7:30 - 8:15 a.m.

10:45 - 11:15 a.m.

8:15 - 8:30 a.m.

Guest Speaker—Domestic Finance: Mary Miller, U.S. Department of the Treasury’s Under Secretary for Domestic Finance.

Breakfast

Welcome and ACG Updates: Pam Hendrickson, ACG Global Board Chairman and COO, The Riverside Company.

8:30 - 9:00 a.m. Guest Speaker—Tax Reform: Sen. Orrin Hatch, R-Utah.

9:00 - 9:30 a.m. Guest Speaker—Financial Service Issues: Sen. Mark Warner,* D-Va.

9:30 - 10:15 a.m. Guest Speakers—How the Regulatory Climate Impacts the Middle Market: HFS Chairman Scott Garrett,* R-N.J., and Rep. Kyrsten Sinema,* D-Ariz. Moderator: Doug Tatum, Newport Board Group.

10:15 - 10:45 a.m. Guest Speaker—Building Grassroots: Public Affairs Council.

11:15 - 11:45 a.m. Guest Speaker Panel—SEC and Regulatory Affairs: David Blass, Chief Counsel, Division of Trading and Markets, SEC; Moderator: Chuck Morton, Venable LLP.

11:45 - 12:15 p.m. Accelerated Growth in the Middle Market: OSU and the National Center for the Middle Market to present case study from the fall research.

12:30 - 1:00 p.m. The Beltway—“What’s Hot” Press Panel: Moderator: Julianna Goldman, Chief White House Correspondent, Bloomberg News and Bloomberg Businessweek. Panelists include reporter Neil Irwin, Washington Post; and invited reporters from the Wall Street Journal and Politico.

*Invited speaker

Registration is open to all ACG members and is free. Register today at www.acg.org.

FACE-TO-FACE CONNECT TO YOUR NEXT DEAL

CHAPTER EVENTS JANUARY 23, 2014 ACG SOUTH FLORIDA LEGENDS OF BUSINESS FAU Freiberg Auditorium Boca Raton, Florida More Info

JANUARY 13, 2014 ACG BOSTON THE BIG DEAL Legal Harborside Boston, Massachusetts More info

JANUARY 23, 2014 ACG BOSTON CHALLENGES AND OPPORTUNITIES FOR U.S. MANUFACTURINGâ&#x20AC;&#x201D; A JOINT EVENT WITH TMA NORTHEAST The Langham Hotel Boston, Massachusetts More Info

Visit www.acg.org for an up-todate list of events in your area.

JANUARY 15, 2014 ACG CINCINNATI MONTHLY LUNCHEON WITH KEVIN KABAT OF FIFTH THIRD BANK Hyatt Regency Cincinnati Ballroom Cincinnati, Ohio More info JANUARY 20, 2014 ACG SAN DIEGO REAL ESTATE DONE REALLY WELL: AN OVERVIEW OF RECENT SUCCESS IN THE MARKET Marriott Del Mar San Diego, California More info To include upcoming chapter events in Middle Market Growth, please send the details to Editor-in-Chief Kristin Gomez. Be sure to include the name of the event, time, date, location, cost and link to register.

FACE-TO-FACE CONNECT TO YOUR NEXT DEAL

CHAPTER EVENTS

ACG GLOBAL EVENTS FEBRUARY 4, 2014 CHAPTER LEADERSHIP MEETING Grand Hyatt Washington Washington, D.C.

JANUARY 29, 2014 ACG ATLANTA ATLANTA ACG CAPITAL CONNECTION: REVERSE CAPITAL CONNECTION®—INVESTMENT BANKERS Cobb Galleria Centre Atlanta, Georgia More info

FEBRUARY 5, 2014 ACG PUBLIC POLICY SUMMIT 2014 Grand Hyatt Washington Washington, D.C. Register now

Visit www.acg.org for an up-todate list of events in your area.

APRIL 28–MAY 1, 2014 INTERGROWTH 2014® ARIA Las Vegas, Nevada Register now

JANUARY 30, 2014 ACG CLEVELAND 18TH ANNUAL DEAL MAKER EVENT Cleveland Convention Center Cleveland, Ohio More Info

To include upcoming chapter events in Middle Market Growth, please send the details to Editor-in-Chief Kristin Gomez. Be sure to include the name of the event, time, date, location, cost and link to register.

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THE ROUND NEWS THAT MATTERS

Don’t miss the Middle-Market Growth Policy Summit, Feb. 5, in Washington, D.C.

On the Issues: An Interview with U.S. Rep. Robert Hurt Middle Market Growth recently interviewed U.S. Rep. Robert Hurt, R-Va., on his views of the state of the economy, fiscal policy and the misperceptions of private equity. He serves on the influential House Financial Services Committee that has jurisdiction over many aspects of the nation’s financial and housing sectors and also is the vice chairman of the Capital Markets and Government Sponsored Enterprises Subcommittee. Rep. Hurt spoke at the first ACG Public Policy Summit in February 2012 and continues to provide support to ACG and its initiatives to bring the voice of the middle market to Capitol Hill. MMG: What contributions do you see the private equity industry making to the U.S. economy? Rep. Hurt: Private equity is a critical source of capital investment in our economy that benefits companies, employees, pensioners and others throughout the country. In Virginia’s 5th District, companies backed by private equity firms employ more than 2,500 people. Statewide, 352 Virginia-based companies that have received private-equity investment employ more than 205,300 people. I have seen how private equity has made a real difference in my district from investing in companies to providing investment returns for pensions and endowments. Unfortunately, Continued on next page

THE ROUND NEWS THAT MATTERS Washington continues to heap unnecessary regulations that will adversely impact these benefits. In order to increase private equity’s impact, we need to remove unnecessary reguTo find out more about ACG’s public policy initiatives, or to learn about the next ACG Middle Market Public Policy Summit on Feb. 5, 2014, please contact Amber Landis, Manager, Policy Communications.

latory impediments to private capital formation so that small businesses have access to the resources necessary to hire, innovate and expand. MMG: Private equity firms are facing tremendous scrutiny from the public and from regulators. Do you see any opportunities for the industry in this environment? RH: I believe there is a real opportunity for the industry to educate the public about the benefits of private equity and how they are making a difference in individual communities. Unfortunately, there are a number of false perceptions about private equity, both in the public and in Congress, which lead to errant conclusions. I have found that once you bring to light the investments private equity is making in communities—specifically detailing portfolio company investments that are familiar to individuals and members of Congress alike—they have a new appreciation for the importance of private equity in their local economies. By narrowing the frame from one focusing on an entire industry to making it about individual companies, employees and other beneficiaries, people will begin to fully understand the importance of private equity and the benefits it brings. MMG: Why did you introduce H.R. 1105? RH: Shortly after coming to Congress in 2011, I heard from a number of financial services professionals about the impact the new regulations required by Dodd Frank would have on private equity. Despite private equity not contributing to the financial crisis and continuing to invest during that time, Dodd Frank targeted the industry for increased regulation. Much of it is unnecessary, however, as the regulations for private equity do nothing to address systemic risk or lead to greater investor protection. As I spoke to private equity executives in my district, I heard how these increased regulations would have a real impact on their ability to invest and manage their funds. There are thousands of jobs in my rural district that would not exist if not for private equity. From candle makers to window film manufacturers, private equity portfolio compa-

Editor’s Note: As of the publication date, H.R. 1105 passed the full House of Representatives on Dec. 4 with bipartisan support. Find out more here.

nies are in many communities of Virginia’s 5th District. During the recession, when areas of my district had unemployment over 20 percent, private equity was still investing in companies and creating jobs at a time when hardly anyone else was. I saw the need to ensure that we are not piling more unnecessary regulatory burdens on sources of private capital when these investments are critically important to our nation’s economic recovery. I have appreciated the support of colleagues, especially Reps. Jim Himes, D-Conn., and Jim Cooper, D-Tenn., who have helped create strong, bipartisan support for the legislation moving forward.

THE ROUND NEWS THAT MATTERS

Deal Opportunities Abound in Europe U.S. corporations, including Microsoft, and private equity firms, such as the Riverside Co., are finding valuable targets across the pond, say participants in EuroGrowth 2013. American corporations and private equity firms are increasingly casting wide geographic nets in their searches for targets to buy and back, and Europe is proving a particularly fertile breeding ground. Consider Reima Oy, a children’s wear brand founded in 1944 in Vantaa, Finland. The company has long been known in Northern Europe for high-quality outdoor clothing, which it sells under brands including Reima, Lassie, Tutta and Progress. But the company wanted to expand into other regions of the world. Enter the Riverside Co., which bought the clothing maker from Finnish PE firm Vaaka Partners and the management team in 2011. Since becoming a portfolio company of Riverside, Reima Oy has “opened 10 stores in China and increased sales growth by 40 percent,” says Pam Hendrickson, chief operating officer of the PE firm, which is headquartered in Cleveland and New York. Hendrickson, who also serves as the chairman of ACG Global, spoke at the inaugural EuroGrowth 2013 conference. Held at the Sheraton Park Lane Hotel Piccadilly in London on 12-13 Nov., the gathering drew 200 participants from all over the world. Technology, media and telecommunications was one sector identified at the conference as flourishing in Europe. One recent deal discussed was the announcement made by Microsoft Corp. that it would buy Espoo, Finland-based Nokia Corp.’s devices and services business in a transaction expected to close in 2014. It’s not the first time Microsoft has turned to Europe for targets. Another well-known example is the Redmond, Wash.-based software giant’s acquisition of Internet communications provider Skype Global SA, based in Luxembourg, for $8.5 billion in cash from an investor group led by PE firm Silver Lake in 2011. “We’ve found great technical talent in Europe,” said Marc Brown, Microsoft’s global head of M&A and strategic investments, speaking on a panel. For San Francisco-based PE firm Francisco Partners, opportunities have come from taking private several public tech companies in Europe, reports Matt Spetzler, a principal with the firm who works out of the London office. One example is Kewill, a provider of transportation and logistics software based in Manchester, U.K., that Francisco took private in 2012. Unlike tech entrepreneurs in the United States, the founders of tech companies in Europe don’t necessarily have their sights set on going public, says Neville Davis, an executive who has led many technology companies in the U.K. and currently serves on the boards of IT companies Fourth, SecureData and Trustmarque. M&A is seen as an attractive exit, which bodes well for future deals. –Mary Kathleen Flynn, Editor-in-Chief, Mergers & Acquisitions

THE ROUND NEWS THAT MATTERS

Fresh Ideas: Strategic Marketing Crucial to Due Diligence Success Progressive middle-market firms have increasingly incorporated strategic marketing concepts into their due diligence process—and now the race is on. While some are further down the road than others, firms see strategic marketing as an opportunity to further minimize risk, maximize returns and differentiate themselves in a highly competitive market—with both the portfolio companies they are looking to invest in and the LPs they are looking to raise capital from. The trick is the sooner you start, the better off you’ll be. To begin, consider including one or more of these marketing actions as part of your regular diligence routine: Internal-Facing Commercial Diligence

• The current marketing processes and

Amid the hectic timetables and rapid work of

systems: Are they scalable and sufficient

a deal, the main priorities of diligence are on

to meet the growth projected?

the financials. While cash flows and capital

• The future marketing strategy: Is it likely to

structure are certainly the central compo-

generate the revenue forecasted?

nents of a transaction, neglecting to formally assess the strategic marketing, sales effectiveness and pricing opportunities of a business (the primary commercial components) can result in sub-optimal returns. On the flip side, making a point to explore these areas during the diligence process could help you identify game-changing assets ahead of time, negotiate a better deal at close and capture significant enterprise value upon exit. Take Action Internal-Facing Commercial Diligence requires assessing historical results, the current situation and future plans. This includes looking at:

By considering questions like these, your firm can arrive at a more holistic valuation of the target company and determine to what extent it is really a good investment. Learn more about Internal-Facing Commercial Diligence, with this real-life example. External-Facing Commercial Diligence Acquiring a company is a huge decision. Firms spend countless hours analyzing financials, operations and the management team and, even if they do conduct an analysis of marketing, sales and pricing, they can miss the external market risks, threats and opportunities. Without thoroughly examining the intricacies of an industry, it can be dif-

• The historical productivity of the company’s

ficult to properly assess the potential pitfalls

traditional and digital marketing campaigns:

associated with a transaction—or the addi-

Have they generated sufficient ROI?

tional upside not included in the company’s

Continued on next page

THE ROUND NEWS THAT MATTERS

projections. This is where an External-Facing

solved for: How many companies do you ad-

Market Assessment comes in.

mire that haven’t made a single improvement, launched a new product, or changed some

Take Action

aspect of their business in the last few years?

Every company faces changing competition,

That’s right—none.

a dynamic marketplace, shifting customer preferences and more. This exposes weak-

Take Action

nesses and creates risk. On the other hand,

So how can you make sure the company

there are often untapped opportunities: It is

isn’t going to jeopardize existing customer

rare for a company to compete in a market

relationships and/or miss new opportuni-

where there are no customer segments left

ties? Conduct a Customer Segment Diag-

to serve, no new products or services left to

nostic as part of the diligence process to un-

introduce, and no additional sales channels.

derstand what makes your customers tick,

By conducting an External-Facing Market

and make sure potential changes won’t cost

Assessment related to these topics and

you customers. If your customers are price

exploring them further, firms can determine

sensitive, you’d be ill-advised to start rais-

what actions they should take to mitigate the

ing prices; instead, make improvements or

associated risks, shore up the relevant weak-

changes to the value proposition based on

nesses and take advantage of the compelling

customer preferences. Does your customer

opportunities. Read about this case where

value variety? Introducing new product lines

an External-Facing Market Assessment was

could be a good idea. Is product quality their

central to the evaluation of an investment in a

highest priority? Think twice before choos-

healthcare SaaS company.

ing that new low-cost supplier. Check out this detailed approach related to the buyout

Customer Segment Diagnostic Is the portfolio company planning on embark-

of a quick-service restaurant company. Executing a thorough due diligence pro-

ing on a new strategy, but you worry it might

cess is critical to minimizing risk, maximizing

alienate a core customer segment? Perhaps

returns and differentiating your firm. Learn

your concern is the company hasn’t done

more about how the Commercial Diligence,

enough market research? These are impor-

Market Assessments and Customer Seg-

tant issues to consider when evaluating the

ment Diagnostics can ensure your next deal

growth prospects of an investment—in ad-

is a success.

dition to the many other questions and considerations that exist specific to a company’s customer base. Regardless of the complexity, these need to be understood and, ideally,

–Todd Redmon, Senior Director and Private Equity Practice Lead with CMG Partners

THE ROUND NEWS THAT MATTERS

“UNLESS YOU’RE RUNNING SCARED ALL THE TIME, YOU’RE GONE.” –Bill Gates, Founder of Microsoft

Lifelong Lessons from 25 Years of Dealmaking “What makes a great dealmaker?” Some of the most important business lessons come from these famous quotes. MURPHY WAS AN OPTIMIST

“YOU HAVE TO HAVE A LOT OF PASSION FOR WHAT YOU ARE DOING BECAUSE IT IS SO HARD… IF YOU DON’T, ANY RATIONAL PERSON WOULD GIVE UP.” –Steve Jobs, Founder of Apple, Inc.

“IT IS A TERRIBLE THING TO SEE AND HAVE NO VISION.“ –Helen Keller, Activist

M&A transactions and capital raises are always complex, with many moving parts, involving thousands of hours of emails, phone calls, meetings and analysis. Murphy’s Law surrounds every deal because in today’s environment, there is so much that can go wrong. But how much that impacts a deal is up to you. Obviously, quality work is a given, but one needs to surround this work with quality control. Continually assess risk and have a contingent “Plan B.”

PASSION If there is one trait that separates entrepreneurs and business owners from mere mortals it’s passion. Passion is a prerequisite to being an effective leader along with the ability to keep their eyes peeled on the mission even when they are dealing with the daily distractions, hurdles and frustrations of running a business. They empower everyone around them, including shareholders, customers, employees and vendors. Their enthusiasm is infectious and a team is excited to work for this type of leader.

VISION MATTERS Successful transactions are the result of selling a vision. Successful entrepreneurs have an intuitive and contagious belief that their company is special. They often see a higher purpose then simply building a company. The most successful transactions have been the result of buyers becoming convinced that the entrepreneur’s vision is achievable and will translate to future financial results, for which they are prepared to pay a premium.

INTEGRITY AND CHARACTER

“IT TAKES 20 YEARS TO BUILD A REPUTATION AND FIVE MINUTES TO RUIN IT.” –Warren Buffett, Businessman and Philanthropist

Once trust is broken, the building blocks of a transaction are severely undermined. In daily interactions, be careful not to skew the truth, exaggerate or omit a key fact. This way, in the midst of a transaction, you don’t have to change behavior to accomplish a result. It’s easy to remember the truth. When sellers overstate their company’s capabilities, they are sowing the seeds of an unhappy ending. Continued on next page

THE ROUND NEWS THAT MATTERS PRACTICE & PLANNING “FORTUNE FAVORS THE PREPARED MIND.” –Louis Pasteur, Chemist and Microbiologist

In our business that means prepare, prepare, prepare. Years ago we represented a selling company that was 50/50 owned by the founders. One owner did some careful estate planning before the transaction and the other didn’t. The result was that upon the sale of the company, the planner got to keep almost twice the after-tax proceeds that his unprepared partner got. In dealmaking there is no substitute for preparation. One needs to be one step ahead of the purchaser. Companies don’t think twice about a yearlong product roll out, while their preparation for raising capital is often done at one meeting with their management team.

UNDERSTAND WHY THE BUYER IS BUYING

“DETERMINE WHAT YOUR CUSTOMERS NEED AND WORK BACKWARD.” –Jeff Bezos, Amazon CEO and Founder

DO YOU WISH MEN TO SPEAK WELL OF YOU? THEN NEVER SPEAK WELL OF YOURSELF.” –Blaise Pascal, Mathematician, Physicist, Inventor and Writer

Once you understand why buyers are interested in investing, you can better position your company and the benefits your company offers to that buyer. The best dealmakers understand that the ultimate value is the value of their business plus the buyer’s confidence in the perceived value they bring to the transaction. One needs to understand the buyer’s strengths, their needs and then build their confidence.

CHECK YOUR EGO AT THE DOOR Successful entrepreneurs recognize their company must take precedence over their ego. This is easier said than done. Investors want to buy great companies not one superstar. Outstanding entrepreneurial businesses are often the outgrowth of one brilliant technology or product oriented individual with a passion to fill a perceived market need and to build a great company. The challenge for maximizing value is to highlight the value of the company, its brand, the management team, while institutionalizing the founder’s drive and passion. –Michael Carter, Managing Director, Carter Morse & Mathias, and a member of ACG Connecticut

THE ROUND NEWS THAT MATTERS

The First 100 Days: The Deal Is Closed…So Now What? The devil is in the details and because of lackluster integration plans many organizations struggle to achieve the goals envisioned during deal conception. However, with a robust 100-day plan in place any deal is more likely to come out on top.

Ensure A Balanced View of Due Diligence Too often, the initial project team fails to consider voices outside the legal and financial realm. For example, relegating HR’s role to a purely tactical focus or not getting them substantively involved during due diligence can considerably reduce the probability of a successful deal. HR should provide a full suite of M&A capabilities that include: organization structure review, talent retention, leadership assessment, manpower redeployment strategy, culture assessment and alignment, benefits and compensation practices analysis, change management. Involving HR can help avoid getting blindsided by costly factors that are not always visible on the balance sheet.

Develop and Follow a Robust Integration Process To be successful, project leaders should develop a three-part integration playbook that includes the following: Phase I. Integration Project Planning: Have an overall integration plan at the conclusion of due diligence and include these three parts: • Step 1: Develop Project Governance. Develop common processes and templates

such as risk management, issue escalation, progress reporting and variance analysis.

Make sure you have provided enough structure and have developed common

processes and templates for the entire range of PMO functionality. • Step 2: Create Project Structure. Identify the number and type of integration teams;

clarify roles, responsibilities and decision-making authority, and developing formal

charters for each. • Step 3: Develop/Finalize Integration Strategy. Confirm/update the deal drivers,

developing/confirming an integration strategy, translating the strategy into an overall

scorecard, and cascading that down to each integration team. Continued on next page

Grant Thornton LLP recently released a report in partnership with PitchBook Data, Inc. on the first 100 days after the acquisition of a company. The report identified keys to a successful integration process. Read here.

THE ROUND NEWS THAT MATTERS Phase II. Develop 100-Day Plan for Acquisition Integration: The first thing a seasoned integration leader needs to do is create an overall integration roadmap, which includes the major activities that occur across each of the integration teams. The 100-day plan should focus on the specific activities and deliverables that must be completed in order for the team to capture the targeted synergies in their respective integration team scorecards. The transfer of ownership and executive line management should be included in the the 100-day plan. Phase III. Stabilize and Handoff to Leadership Team: Stabilization occurs on two levels: ensuring the acquired company achieves its business plan and ensuring the acquiring organization achieves anticipated deal synergies. Monitoring benefits realization is a function of enforcing progress reporting where actual integration performance is compared to targeted performance. This should occur at an overall integration level and then at each integration team level. Whenever a variance occurs, data should be collected and analyzed to fully understand the cause of the performance gap and indicate which remedial actions to undertake. Successfully navigating acquisition integration depends on solid planning and swift action. When you mind both the art and science of M&A, your transaction has a greater chance of capturing targeted synergies. â&#x20AC;&#x201C;Ronald J. Recardo, Managing Partner of The Catalyst Consulting Group LLC. â&#x20AC;&#x201C;Tim Toterhi, an organization development professional for a major health care company based in North Carolina.

Watch this video from Privcap to learn more about the first 100 days.

THE ROUND NEWS THAT MATTERS

Prepare for the Sale: Get Your Financial House in Order With the ever-presence of stringent financial and reporting laws, the need for accurate, reliable and timely financial statements, accounting and tax records has never been greater. Since Sarbanes-Oxley, publicly traded acquirers have significantly increased the scope of their M&A-related financial and accounting due diligence activities—as have private equity groups (PEGs). Inaccurate or unreliable financial and accounting records can be a major concern in an M&A transaction—both pre- and post-transaction. Poor financial records are a leading cause of: (i) costly M&A process delays, (ii) heightened buyer concerns about the competency of the selling company’s managers, (iii) “busted” M&A processes, (iv) unfavorable post-closing balance sheet adjustments and (v) post-closing indemnification claims. In connection with an M&A transaction, sellers typically represent and warrant that their financial and accounting records are prepared in accordance with generally accepted accounting principles. Moreover, although financial records’ due diligence may uncover both positive and negative aspects, it is not uncommon for buyers to point out only the negative aspects and negotiate a lower price based on a “one-sided” view of the financial records. Obtaining an audit by a reputable CPA firm is perhaps the best way to address this risk. Establishing and maintaining sound financial records might entail the following: 1. Hiring a controller or CFO with M&A experience. 2. Implementing and fully utilizing a state-of-the-art financial software package/ERP system. 3. Developing and measuring performance against financial and operating metrics. 4. Developing financial forecasts (12-month budget and three-year forecast). 5. Understanding gross margin by customer, product or service line. 6. Maintaining a strong cash management system and cash position, along with

back-up lines of credit. If a buyer senses cash constraints on the part of the seller,

the valuation tends to drop significantly. 7. Employing outside accounting, tax and investment banking advisers early

on—preferably at least 12-24 months ahead of a contemplated transaction. At a minimum, a seller should have an accounting firm witness and test the company’s

end-of-the-year inventory count. This single step can save a substantial amount of time and money for those contemplating an M&A transaction. –Stephen Perry, Managing Director and Co-founder of Janes Capital Partners in Irvine, Calif., and a member of ACG Orange County

THE ROUND NEWS THAT MATTERS Kristin Gomez, editor-in-chief of Middle Market Growth, interviews Rob Chesney, COO of Trunk Club.

LISTEN Never face a clothing crisis again Trunk Club is changing the way men shop and dress by making choosing what to wear merely a click away. Offering personal stylists and fashion brought directly to your home, private capital-backed Trunk Club is growing rapidly. Kristin Gomez, editor-in-chief of Middle Market Growth, recently sat down with Rob Chesney, chief operating officer of the Chicago-based tech start up. Listen to how Trunk Club is is revolutionizing the online shopping experience. Listen to the podcast.

MIDDLE-MARKET INSIGHTS Webinar on Banking, Lending and the Impact on M&A. Five years after the financial crisis of 2008, the U.S. banking industry faces a new economic reality. While conditions today are favorable for a re-energized M&A environment, challenges still exist, including a growing commoditization and convergence of capital in the middle market, high valuations and aggressive structures, and a shift in how deals are being sourced and funded. Meanwhile, banks and lenders are faced with the challenge of differentiating themselves as funds question the traditional lending structures and systems to thrive in the current low interest rate environment. Compounded by new challenges for private equity fundraising, the face of lending is rapidly changing with major implications for middle-market M&A. This webcast features a panel of top banking and middle-market executives discussing how they are working through these changes.

THE ROUND NEWS THAT MATTERS

VERTICAL VIEW // MIDDLE-MARKET DEAL STATS OF 2013

941 DEALS

While widely considered a growing industry, healthcare only saw 12.75 percent of the deal flow in 2013.

closed as of November, down from 1,274 the year prior.

4Q of 2012 saw the greatest amount of deal flow in the last three years at 448 deals closed.

3Q 2013

Of the top deals in 2013, commercial productsâ&#x20AC;&#x201D; including building products, SaaS and media and information servicesâ&#x20AC;&#x201D; ranked in the top three.

In 3Q 2013, 320 deals closed with $75.93 billion invested, compared with $60.51 billion in 3Q in 2012.

IT saw 18.20 percent

of the total amount invested in deals for 2013.

$224.8 billion

in capital was invested in the deals that closed in 2013.

B2B is 36.13 percent of the deal flow in 2013

All statistics are from PitchBook for the middle market (deal values from $25 million to $1 billion).

60TH ANNIVERSARY RECEPTION AND DINNER SIX-THIRTY UNTIL NINE-THIRTY IN THE EVENING TUESDAY, THE FOURTH OF FEBRUARY, TWO THOUSAND FOURTEEN

TOP OF THE HAY ADAMS HOTEL, WASHINGTON D.C.

PURCHASE TICKETS

Uncovering Diamonds in the Rough

Bold Vision BY DEBORAH L. COHEN

THE TEAM // From left: Steve Moore, Eric Reiter, Roger Goddu, Rahul Aggarwal, Bill Barnum and Anthony Choe

Photos by Mark Robert Halper

undance sells Western-inspired clothing and jewelry to affluent women. Fast casual restaurant chain Veggie Grill touts a plantbased menu popular with vegans and omnivores alike. Online educator The Teaching Company offers course topics as varied as medieval Europe and black holes, giving lifelong learners a chance to broaden their knowledge. The common threads in these seemingly disparate concepts may not be readily apparent. But look closely and the similarities become clear: They have each built a loyal customer base, strong repeat business and a brand sensibility that is hard to replicate. What they lacked was the capital and strategic direction to move beyond organic growth. Enter Brentwood Associates. The Los Angeles-based private equity firm has made a science of spotting lesser-known consumer concepts with staying power and turning them into more profitable powerhouse brands, increasing demand with fine-tuned marketing and broader distribution.

BRAND SPOTTER // Roger Goddu, partner at Brentwood Associates, in his Los Angeles office.

HISTORY OF SUCCESS // In its 30 year history, Brentwood’s private equity team has invested in 40 companies with an aggregate transaction value of more than $5 billion.

Consider Chicago-based Paper Source, an upscale retail chain selling artisanal stationery products, gifts and novelty items. Brentwood purchased the company in 2007 when it had just 21 stores. It sold the business in September 2013 to Investcorp for undisclosed terms after expanding nationally to 73 locations and boosting the online business. During the firm’s six-year investment period, sales at Paper Source tripled and profitability increased tenfold. Brentwood, which has roughly $650 million under management, had the first closing on its fifth private equity fund in June, with Dow Jones citing sources saying it was looking to raise $500 million. The portfolio companies held for more than a year in Brentwood’s fourth fund have averaged 127 percent growth since the firm acquired them. “The founders come up with unbelievably cool ideas and they execute the heck out of them, grow the business, and develop a relationship with their customers that is just really unique,” says partner Bill Barnum, (pictured above) who co-founded the firm’s private equity practice in 1984. “But most of them aren’t professional managers. They’re entrepreneurs.” Brentwood’s private equity portfolio now includes 10 companies, ranging from Zoës Kitchen, a restaurant chain with a Mediterranean menu, to Exhale Mind Body Spa, which operates urban day spas and luxury fitness

facilities. Besides loyal customers, the businesses have other unifying traits. Unlike makers of branded goods that wind up on the shelves of mass retailers, foremost is control over the relationship with their customers through some combination of catalog, online and proprietary store experiences. They typically sell products and services that weather economic cyclicality and are sought after by upscale, welleducated consumers—often women. At the time of investment, most would be defined as lower-tier middle-market businesses with annual revenues of no more than $50 million and no prior institutional investment, Barnum says. Over the course of the firm’s 30-year history, Brentwood’s dedicated private equity team has invested in 40 companies with an aggregate transaction value of more than $5 billion, including tennis racquet maker Prince Manufacturing and outdoor apparel company Filson Holdings. Brentwood usually takes a majority position, assigns partners to oversee corporate strategy and then unleashes its ample resources—everything from scientific analysis of potential real estate sites to psychographic review of the customer database. The result? Revenue growth usually at least doubles during the firm’s holding period, Barnum says. “This is where it becomes a very math-based exercise,” says Brentwood partner Anthony Choe. “This is a very specialized skill set that a lot of private equity firms don’t have in-house. We’ve done a lot of this so we kind of know where the bodies are buried.” Brentwood’s tendency in recent years to invest in direct marketing companies with significant catalog exposure might make onlookers scratch their heads; industry watchers predicted those businesses would be crippled by the rise of Internet sellers. But their contrarian position has paid off. Among Brentwood’s most noteworthy bets was Oriental Trading Company Inc., a direct marketer of novelties, toys, home décor and other items, which the firm purchased in 2000 for $58 million and sold in 2006 for gross proceeds of $527 million.

“THIS IS WHERE IT BECOMES A VERY MATH-BASED EXERCISE. THIS IS A VERY SPECIALIZED SKILL SET THAT A LOT OF PRIVATE EQUITY FIRMS DON’T HAVE IN-HOUSE. WE’VE DONE A LOT OF THIS SO WE KIND OF KNOW WHERE THE BODIES ARE BURIED.” Anthony Choe Brentwood Partner

PARTNERS // Eric Reiter, Brentwood Associates Partner, talks with Roger Goddu, also a Partner at the firm.

“Born-on-the-Web companies are having a hard time scaling to the profitability that we’re finding with our catalog companies,” says Eric Reiter, another Brentwood partner. “If you start an e-commerce business and it’s competing only based on emails and getting eyeballs to your site, there are challenges.” A better model, he contends, makes use of a multipronged approach. Sundance, which Brentwood acquired in July 2012, has various points of contact with customers, including its longstanding mainstay catalog, which features color photos of attractive models shot on location, often outdoors. The company also maintains a robust website and several retail stores. “The catalog comes; it’s the catalyst for purchase,” says Reiter, noting that more than 70 percent of Sundance transactions take place online. “The catalog is just part of the marketing machine.” Under Brentwood’s direction, Salt Lake City-based Sundance is planning to aggressively open more retail stores to increase opportunities for customers to experience its clothing, jewelry and home goods in distinctive aspirational settings. Sundance President and CEO Matey Erdos says Brentwood’s studied distribution tactics are closely aligned with those of the company, resulting in a comfortable and productive working relationship.

FINDING DEALS // Steve Moore, Brentwood Associates Partner, in his office.

“Just to grow for growth’s sake is not the name of the game at Sundance,” Erdos says. “The lifetime value of a customer is very important to us. That’s what Brentwood is about as well.” Corporate management teams such as hers also benefit from sharing ideas with other companies in the Brentwood portfolio, a practice the private equity firm encourages. Such collaboration goes a long way toward boosting management confidence and minimizing missteps, she says. At The Teaching Company, best known for its university-style Great Courses lectures, Brentwood’s marketing strategy includes creating course offerings that appeal to a wider, less erudite customer base to expand beyond the humanities. The company’s catalog now includes lifestyle topics such as gardening and fitness, giving existing customers more reasons to come back. “Post-Brentwood acquisition, we’re looking at a broader demographic,” says Teaching Company CEO Paul Suijk, noting the company aims to attract more women with courses that fall under its “Better Living” category. Boosting brand credibility is another component of the plan, so The Teaching Company is creating partnerships with industry leaders in specific content areas. It produced a cooking course with the Culinary Institute of America and a photography course with renowned National Geographic photographer Joel Sartore.

Partly as a result of these moves, sales at the company, which is based outside of Washington, D.C., have grown 10 to 20 percent per year since Brentwood’s investment in 2006, says Suijk, noting that the Sartore photography course has become one of the best sellers. Still, he adds: “Even in some of the bad times they (Brentwood Associates) don’t come over here, clobber your head and say, ‘What are you doing?’ They treat the investment on a longer-term basis.” To be sure, Brentwood typically holds investments for five to six years. And the firm is not shy about deploying capital when it sees potential for long-term growth. That is readily apparent with its restaurant holdings, which require significant cash outlays to support build-outs of new locations, as well as the hiring of staff to run them. Brentwood pegged Zoës Kitchen, a Birmingham, Ala., concept offering fresh Greek-inspired menu items with a Southern twist, for rapid expansion, upping the store count to 100 from 19 since investing in November 2007. It has increased sales at individual restaurants by creating more items for the dinner menu, adding beer and wine, and improving restaurant ambience. “There’s a real soul behind the concept, which is kind of an underrated thing in our business,” says Rahul Aggarwal, the Brentwood managing director who oversees restaurant investments. “We were able to convince ourselves that this is going to work in a lot of other places. We’ve come quite a long way from a small regional concept.” Brentwood has similar hopes for Veggie Grill, the Southern California vegetarian menu chain it has expanded to 22 restaurants from six when it made an initial investment in August 2011. There are plans to add another seven or eight units next year. According to Aggarwal, there were clues that marked this purveyor of good-tasting vegetarian meals as a Brentwood target. For example, despite its small scale at the time of investment, Veggie Grill was among the top 10 restaurant brands in the United States on Twitter, with more than 70,000 followers. “They have a really good sense for a consumer-loyal brand that has a differentiation,” says Greg Dollarhyde, the restaurant executive who has co-invested with the firm on three deals including Zoës, where he serves as executive chairman, and Veggie Grill, which he now runs. Not surprisingly, Dollarhyde says, the majority of Veggie Grill’s customers also eat meat, a sign of the concept’s significant crossover appeal.

CHOOSE WISELY// To indentify diamonds in the rough, Brentwood reviews about 350 businesses a year, selecting just two to four that are worthy of investment.

WINNING STRATEGY // Rahul Aggarwal, Managing Director of Brentwood Associates, oversees restaurant investments.

“They like the food because it’s good healthy food,” he says. “They’re trying to eat something that is better for them.” To be sure, not every Brentwood investment is a winner. Monarch Designs, a luggage maker and distributor the firm purchased in 2000, was sold at a loss in 2008, hurt in part by a slowdown in travel following the Sept. 11 attacks and increased retail competition. “(Monarch) was an obvious example of what happens when you don’t have a brand—when your thesis is about sourcing and getting lower-price luggage,” Reiter says. He notes there were a few other laggards before Brentwood honed its portfolio selection strategy between 2000 and 2002. Still, it’s not easy picking portfolio gems in a market saturated with consumer choices. To identify diamonds in the rough, Brentwood reviews about 350 businesses a year, selecting just two to four that are worthy of investment. Due diligence can take anywhere from 90 days to a year. “We’re looking for really, really special companies,” Barnum says. “We like to say to people: ‘We have the greatest companies you’ve never heard of.’” // Deborah Cohen is a freelance writer and a contributor to Middle Market Growth.

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The

Right Time for a Change Proven Strategies to Reduce Risk, Cost and Time While Creating Value in a Corporate Divestiture

BY JOHN STIFFLER, KEITH CAMPBELL AND DON HARRINGTON

It may be 2014 but the writing was on the wall last summer when, according to RR Donnelley’s July 2013 Venue Market Spotlight study, 80 percent of respondents believed corporate divestiture activity would increase into 2014. This is not surprising. A slow-growing economy has increased the popularity of spinoffs and the opportunity for companies to refocus their business and, like many New Year’s resolutions to “shed the extra weight,” the same goes for PE as carve-out momentum grows in 2014. Beginning the process of divesture is complicated; however, a clear plan and a shared set of goals will engender a smooth transition. CARVE-OUT TRANSACTION LIFECYCLE

154154 + 154 + 154 + 154 + Pre Divestiture

Analysis

Separation Execution

Planning

Day 0 (Sign)

Day 1 (Close)

Value Creation

Day 5 (Exit TSA)

Identify Target & Develop Opportunity

Due Diligence

Establish Separation Management Office (SMO)

Design, Implement & Transition

Execute Investment Thesis Projects Identified in Diligence

Self-side Readiness & Diligence (Financials, IT, Operations, Legal)

Create Operational & Financial Models for Standalone Entity

Execute Day 1 Readiness Activities & Against Functional Work Plans/Milestones

Shared Services & Organizational Buildout

Process Improvement

Investment Thesis Development

Develop One-time Separation Costs

Interim Shared Services & Leadership

Carve Out Execution Plans

Optimization & Benefits Realization

Coordinate Strategic Advisors

Identify Day 1 Milestones, Critical Path & Risks

Marketing & Communications

TSA Operating Processes

Strategic Sourcing & Vendor Evaluation

Sign TSA & Purchase Agreement Document

Day 1 Contract Negotiations

Contract Negotiations & Execution Employee Communications

SEEK COMMON GROUND Let’s face it, in a corporate divestiture, carve-out or spin-off transaction, the corporate parent organization and buyer pursue different agendas. There is, however, one mutual objective that both parties pursue: Get the deal done quickly. Carve-outs can produce positive returns for both parties if managed and executed correctly from strategy through the execution phase, but pose many challenges to overcome in order to be successful. Remember that relationships matter: A strong relationship with the parent company and the assigned project leader is needed from the beginning to gather the right information, negotiate a fair TSA, and provide a central point of communication for issue escalation and resolution.

PRE-GAME STRATEGY: ARE YOU READY? From a seller’s perspective, when a future divested entity’s asset boundaries have been determined, conducting a sell-side readiness assessment is recommended. This helps identify the level of integration with the parent organization, stranded costs, areas of the business that may need to be pre-separated before the buyer starts due diligence, and develop a roadmap for full separation. Common areas for pre-separation activity include identifying the goforward management team, determining the level of support that needs to be provided at day one and through the separation period, and potentially preseparating business processes to operate more autonomously. Lastly, depending on security and regulatory policy requirements, pre-separating aspects of the business applications and the IT infrastructure, may be required. Understanding these items before any buyers start the diligence process will equip your organization with a plan.

DO YOUR HOMEWORK Surprisingly, some buyers tend to avoid some of the “must do” forms of due diligence in a carve-out transaction, such as employee benefits, operations and IT. Hiring functional experts with carve-out transaction experience is critical to identifying the level of integration with the parent, modeling “bottom-up” costs (both one-time separation and ongoing run rate) for negotiation with the parent, identifying the day one readiness milestones to mobilize, and developing plans to mitigate risk.

START WITH A VISION All recommendations should align with your investment thesis and guiding principles and be built to guide the recommendations during this phase. Typically, it is most important to minimize customer disruption and any potential risk to the business, but other areas should be discussed and prioritized in order of importance such as speed, cost and optimization.

DEVELOP ‘BOTTOMS UP’ OPERATING BUDGETS Corporate allocations provide a baseline for how a department was charged historically, but allocations often are based on a percentage of revenue or headcount that does not reflect how the business will operate as an independent entity. Experience proves a division is either over allocated (i.e. good news for buyer) or under allocated (i.e. bad news for buyer) given that there is not an accurate way to do allocations correctly.

Given that there is a small probability the allocation is accurate, instead focus your efforts on building a “bottoms-up” budget based on the investment thesis, information gathered during diligence, and functional experience. The sell-side analysis does not typically consider the buyer’s perspective and instead focuses on identifying cost savings opportunities (e.g., offshoring IT services) that may not be realistic. This analysis should identify the number of people needed to be hired to build-out the parent-shared services, as carve-out transactions create jobs.

THE DEVIL IS IN THE DETAILS A diligence report should identify the one-time separation projects, the estimated timeline, resources, costs and risks to be successful. If many options exist to separate a specific capability (e.g., outsourcing or managing e-commerce technology and fulfillment in house) present the options and make a decision during diligence to have a “going in” approach for the execution phase. From a buyer’s perspective, identifying the one-time separation costs is important to ensure successful purchase price negotiations.

TSA SCHEDULE: RUN, SEPARATE, GROW For each functional team, transitional service agreement (TSA) schedules should be separated into three sections that allow for adequate discussions and negotiations with the parent during the development of the TSA: • Run the Business – Services provided from parent in the past (i.e., corporate “shared services” such as legal, real estate, IT, accounting, HR, EHS, legal) that are required to continue to run the business. • Separate the Business – Services provided from parent that are required to help with the one-time “push” or separation of the business (e.g., providing data extraction to obtain employee data needed for the new payroll system, setting up IT network connectivity back to the parent) • Project Support – Services provided from parent for in-process projects that are not to be put on hold. This could be supporting an existing ERP implementation or setting up IT infrastructure for a new office location because the new infrastructure has not yet been migrated.

PLAN YOUR EXIT GOVERNANCE A fully dedicated separation management office (SMO) is necessary to promote transparency and collaboration, manage interdependencies between functional work streams, provide processes/tools to report on program health, and drive accountability. For each functional area, a “functional mirror” from parent and target should be assigned to lead the respective function. Lastly, the SMO should report to a steering committee, comprised of approximately three to five C-level executives and investors.

IDENTIFY INTERIM LEADERSHIP Based on parent’s shared services model, identify key interim leadership that might be needed prior to day one to fill organizational gaps that won’t be covered by parent in the TSA (e.g. Treasurer, CFO, CIO, VP of HR) Mobilize for Day 1 Readiness – An integrated parent/target meeting is recommended for all functional mirrors to develop day one milestones and potential risks to success. While day one strives to be “business as usual,” there are many common functions and processes that need to be separated and functional due to legal, tax, security policies, or other factors. Have discussions and plans for the items in Figure 2 below: FIGURE 2 Information Technology • IT contract transfers, negotiations, right to use (RTU) • Manage close “flip the switch” scenario (user access employee/contractor), AD/email changes • HR, Payroll, Time & Attendance system interface/ implementation • Circuit procurement (up to 90+ day lead time) • Server procurement (up to 90+ day lead time)

Accounting/Finance and Operations • • • • • •

Standup legal entities and treasury (bank accounts, cash management, credit card processing) Receivables, payable and inventory disposition Establish and distribute corporate p-card/credit cards Purchase risk and P&C insurance Interim ME close and financial consolidation process Establish corporate fleet program, carrier contracts

Human Resources • • • •

Benefit plan development, mapping, and employee enrollment – dependency with payroll system Agree upon payroll transfer (Parent vs. NewCo) schedule Establish HR functions internally or outsource (benefits administration, payroll, background checks, performance management, training, regulatory/ compliance, etc.) NewCo employee onboarding

Marketing and Communications • Develop and execute internal and external • Communication plans (e.g., FAQs, employee feedback channels) • Execute internal and external communication plans • Manage inquiries from employees and outside stakeholders

CLOSING THE DEAL By following the best practices described earlier, the execution phase will be well-positioned for success. However, even with a solid relationship, it is natural that the parent will focus on its internal controls/security, change processes, and impatience to get the entity divested. Thus, assume the “divorce from the parent” gets worse with time. To mitigate these issues, develop a “Carve-Out in a Box” framework (see Figure 3)—a unified network that provides our clients with service providers and best-of-breed technology partners that provide a pre-packaged business and technical architecture that can quickly standup the three most common shared services: human resources, finance and accounting, and IT. This framework and coordinated cross-functional team provides a more timely separation that can meet aggressive TSA timelines, has a predictable operating model, establishes accountability, manages interdependencies, and provides variable costs that can be modeled early in the analysis phase. There is simply no room for error or functional teams that operate in silos to successfully implement an employee benefits program and HRIS/payroll system in a short window between sign and close. Experience tells us that unnecessary time and money has traditionally been spent on vendor selection projects that did not deliver business value. We also observe that getting third-party providers accustomed to working with one another and understanding carve-out transaction nuances is time consuming, expensive and a barrier to cross-functional success. In the execution phase, decisions and tradeoffs need to be made related to the primary business applications and the migration strategy if currently shared with parent. If significant cost reductions can be met by rightsizing the applications, doing a “clone and go” of the parent’s systems may not be the best approach. These decisions should consider the guiding principles and carefully balance what can be achieved during the TSA period vs. what should occur post-separation. The Carve-Out-in a Box framework provides the greatest probability to facilitate a successful carve-out transaction and the quickest means to focus on value creation to meet the investment thesis objectives.

FIGURE 3

Minimize Risk

Decrease Timeline

Lower Cost

Successful Carve-Out

IT, Operational & Employee Benefits are “must do” forms of due diligence and result in bottom up one-time and operating cost models

Leverage “pre-packaged” service provider & technology solutions that meet 80% of the business needs

Avoid wasted/costly service provider & technology selection projects that don’t add value

Value creation earlier during the hold period

Strive for accountability

Avoid ramp up time with new service providers on each deal, act as a crossfunctional team that manages dependencies

Provide stable and appropriate partners and technologies with variable costs, providing guaranteed budgets

Utilize scalable foundation

Employ guiding principles and do no harm on Day 1

Focus on the critical path

Begin executing on optimization projects and realizing benefits

VALUE CREATION: WE’RE SEPARATED…NOW WHAT? All of the previous steps are intended to decrease the duration of the separation and lay the foundation to ultimately meet the investment objectives. In the value-creation phase, it is important to make sure the key leadership stays involved. It helps to drive revenue enhancement opportunities and cost savings by leveraging technology, vendor relationships with preferred pricing, and consolidation of sourcing necessary product and vendors (e.g. shipping, telecommunications, employee benefits). Again, it’s all about relationships and even though you’re leaving this one, the goodwill and trust you put in this divesture will pay off in value added at the end. –John Stiffler is a Director in West Monroe Partners’ M&A practice. –Keith Campbell is a Manager in West Monroe Partners’ M&A practice. –Don Harrington is a Senior Vice President of Willis Mergers & Acquisitions group.

PRIVATE CAPITAL. PUBLIC GOOD. SM

J O I N T H E C O N V E R S AT I O N .

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A QUALIFIED OPINION JOHN GABBERT // CEO and Founder of PitchBook

ohn Gabbert is the CEO and founder of Seattle-based PitchBook Data, Inc., a private equity and venture capital research firm that offers a cutting-edge research platform for professionals in the PE and VC industries. He has 15 years of experience in building venture capital and private equity database products. Prior to founding PitchBook in March 2007, Gabbert was managing director of private markets for Dow Jones & Company, and vice president of worldwide research for VentureOne, VentureSource and The Private Equity Analyst. Throughout his career leading PE and VC research organizations, Gabbert has played a key role in six acquisitions/mergers by both strategic and private equity investors.

SELECT ABOVE TO SEE Q&A

WHERE DID THE IDEA FOR PITCHBOOK COME FROM AND WHAT DO YOU SEE AS YOUR ROLE IN THE PE INDUSTRY?

ike a lot of products in the technology space, PitchBook was the result of market demand. For nine years, I ran the team at VentureSource and the most common request I got from clients there was: “Where can we get more data on private equity deals?” I started PitchBook to meet that need. As far as PitchBook’s role in PE, I think we provide transparency in a rather opaque industry. People need reliable information in order to make the best possible decisions, and PitchBook offers that. We provide the highest quality data, which we ensure through a relentlessly managed research process that includes various levels of cross validation. Good data is one thing, but being able to use it is another. We want to make complicated information easy to understand—and more importantly, tools that make our data actionable.

Photo by Stewart Tilger

A QUALIFIED OPINION JOHN GABBERT // CEO and Founder of PitchBook

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HOW IS PITCHBOOK CHANGING THE WAY PEOPLE GET DEALS DONE? WHO IS THE TYPICAL PITCHBOOK SUBSCRIBER?

ur clients are some of the top professionals in the industry, and range from boutique firms to international giants. They’re smart, savvy and take their roles in this industry very seriously. PitchBook has changed the way people do business in a number of ways. One feature is up-to-date contact information for, at last count, nearly 348,000 industry professionals. In addition to providing data on deals, the PitchBook Platform serves as a networking tool, exclusive to this industry. You can see who’s doing what and get in touch with them directly or through the new LinkedIn feature. We’ve also made sharing and communicating information as easy as possible. You can save customized searches and share search links from user to user, or download search results into Excel, MS Word, PowerPoint or a PDF.

Photo by Stewart Tilger

A QUALIFIED OPINION JOHN GABBERT // CEO and Founder of PitchBook

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WHAT ROLE DO YOU BELIEVE THE MIDDLE MARKET PLAYS IN THE GLOBAL ECONOMY?

he middle market is where we see the most growth and opportunity for investment. We publish a biannual report on middle-market trends and activity, and our most recent showed middle-market companies have consistently attracted about two-thirds of all PE investments in the United States over the last decade. Investors seem eager to take advantage of the middle market, which has driven up valuations for companies. A lot of PE firms have responded by executing growth equity investments, which in turn provide companies with the capital expand without investors having to make a large transaction at a high price. These are the kinds of trends we’re able to see when we take a look at the data, and it’s important to keep an eye on what’s happening in the middle market, in particular.

Photo by Stewart Tilger

A QUALIFIED OPINION JOHN GABBERT // CEO and Founder of PitchBook

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YOU RECENTLY LAUNCHED A NEW PLATFORM. WHAT ARE SOME OF THE NEW BENEFITS AND WHAT, IN YOUR OPINION, IS MOST VALUABLE TO THE AVERAGE USER?

eveloping the new PitchBook Platform took a couple years because we wanted it to be our best ever. At a glance, the most obvious change to the platform is its appearance. It’s cleaner, sleeker and more modern. But once you dive in and explore, you’ll find that the breadth and depth of the data is greatly improved, as well as the platform’s functionality. The dashboard itself is fully customizable so users can prioritize whatever is most relevant to their interests, which creates an “at your fingertips” experience as soon as you log in. The searches have been improved with instant, predictive results, better filtering options, and better downloading and sharing options. There also are some powerful visualization tools that help users make sense of the data and present it to colleagues and clients in a way that is meaningful.

Photo by Stewart Tilger

A QUALIFIED OPINION JOHN GABBERT // CEO and Founder of PitchBook

SELECT ABOVE TO SEE Q&A

HOW IS PITCHBOOK VALUABLE PARTICULARLY FOR INTERGROWTH ATTENDEES? HOW DOES IT HELP THEM CONNECT THE DOTS?

“C

onnecting the dots” is a phrase we use a lot with PitchBook because we know that showing an isolated data point with zero context is useless. When it comes to contact information, we show how everything is connected. If you look up someone’s profile you’ll see a phone number and email address. You’ll see a history of their deals, companies and firms they’ve been involved with. Connecting is about understanding whom you’re talking to. PitchBook makes that possible. We’re also really excited about the launch of the PitchBook app which will be available for a limited time to InterGrowth attendees. We want to make sure our clients can access what they need when they need it, whether that’s at the airport, in a conference room, from home or even the InterGrowth Lounge.

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ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

LONDON MUSKEGON NEW ORLEANS

PHILADELPHIA RICHMOND ATLANTA

TAP CITIES TO NAVIGATE TO ARTICLE

A NEW ADDITION TO EUROPE’S M&A SCENE The ACG Eurogrowth® 2013 conference delivered something new and promising for Europe’s middle-market M&A practitioners. For Charlie Johnstone, partner at ECI Partners and Eurogrowth co-chair, the event represented a vital stage in the evolution for ACG. “For ourselves and for the businesses that we back, the world is getting smaller,” he says. “In order to grow, we need to build and leverage our global contacts.” Attendees could participate in two of 17 round-table discussions focused on a specific topic. It was an excellent structure for getting quality networking going from the start. “I particularly liked these discussions,” says Maarten de Jongh, director of Norgestion. “It was an interesting format that allowed everyone to participate.” Next, two sets of panel sessions ran concurrently, each one focusing on the dynamics of key sectors: TMT and healthcare, and consumer/retail and industrials. I had the priviContinued on next page

TELL US // Middle Market Growth wants to highlight ACG chapters around the world. Send your recent events or member news in 250 words or less, along with a color photo if available, to Editor-in-Chief Kristin Gomez.

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

lege of chairing the consumer panel, featuring Harry Dolman, chief operating officer of HPE Growth Capital; Claire Kent, co-founder of Iffley Road and luxury goods industry analyst; and Steve Petrow, partner at Change Capital Partners. After lunch, we listened to a fascinating keynote discussion with Marc Brown, global head of M&A and strategic investments at Microsoft; Deep Shah, a partner at Francisco Partners; and Graham Cooke, founder and CEO of Qubit. Then it was time for ACG Capital Connection.®The showcase firms included 3P Equity Partners, Bank of America Business Capital, Deerpath Capital Management, ECI Partners, HPE Growth Capital, JZ International, Levant Capital, Levine Leichtman Capital Partners, Lloyds Bank Commercial Banking, Oakley Capital, Omada Capital, PNC Business Credit, The Riverside Company and Scottish Equity Partners. This is a relatively untried concept in Europe so it was unclear how delegates would respond to the format. But any doubts were shed as people started to talk. One of the prime aims for any conference delegate is to get leads. On that basis, EuroGrowth delivered. “In terms of contacts, I hit two home runs,” said Beaumont Capital’s Andrew Johnson, “and that is a good strike rate.” //

—Stuart Rock Co-founder, Caspian Media, and editorial adviser to the UK Department of Business Innovation & Skills and the UK Business Angels Association. Twitter: @stuart_rock

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE ACG WESTERN MICHIGAN

ACG Western Michigan Meets with Rep. Bill Huizenga Members of ACG Western Michigan met in November with U.S. Rep. Bill Huizenga, RMich., to showcase the importance of middle-market companies in Michigan’s 2nd congressional district. The meeting took place at ADAC Automotive, a corporate member of ACG Western Michigan and a full-service automotive manufacturer and supplier. ADAC Automotive employs 800 full-time workers in Muskegon, Mich., and produces products such as body-color exterior door handle assemblies and mirrors for Ford, General Motors and Chrysler. The company was recently awarded a $650,000 Michigan Business Development Program performance-based grant due to ADAC’s plans to expand their facilities in Muskegon and grow full-time jobs by 97 employees – a 12 percent increase—by 2016. The meeting was led by Nick Adamy, managing director of Adamy Valuations and president of ACG Western Michigan, who shared with Huizenga the value of ACG membership in growing social capital in local business markets, then leveraging that social capital at ACG events. ACG Global President and CEO Gary LaBranche spoke about the significance of private capital in Michigan’s 2nd district and how the companies ACG members invest in, own or sell are companies similar to ADAC Automotive—the growth engines of local economies and sustained providers of well-paying full-time jobs. In addition to discussion around the middle market, members of ACG Western Michigan highlighted policy issues that were top of mind, including the concept of limiting interest deductibility on corporate debt in tax reform conversations. Jim Teets, President and CEO of ADAD Automotive, highlighted with Rep. Huizenga the significance this would have on middle market companies. Teets explained that the new jobs at ADAC were a result of an expansion to their Muskegon facility which added new state of the

If you are interested in learning more about planning an ACG indistrict meeting, please contact ACG Public Policy Communication Manager Amber Landis.

art painting lines to meet new and increased demand. “I wish I had the millions in cash that it took to expand our facilities, we simply don’t. We financed this new expansion with debt and deducting the interest will help keep our operations growing.” Limiting interest deductibility is a top policy priority for ACG and its members. A new tax targeting interest would harm the economy by raising costs on all businesses, which would reduce investment and growth in direct opposition of the goals of tax reform. Additionally, the group discussed H.R. 2274, the Small Business Mergers, Acquisitions, Sales and Brokerage Simplification Act and Rep. Huizenga is the lead sponsor of this bill. The legislation would provide a registration exemption to M&A advisers who serve as business brokers to arrange the sale of privately held middle- market family businesses to other family businesses. For more information, see the MLive article.

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE “LOUISIANA IS AN ATTRACTIVE INVESTMENT MARKET, PARTIC ULARLY IN THE AREAS OF OIL AND GAS, ENERGY SERVICES, MARINE TRANSPOR TATION AND MANUFA CTURING” Les Alexander ACG Louisiana and Jefferson Capital Partners

ACG NEW ORLEANS

ACG Louisiana Hosts Third Annual ‘Taste of New Orleans’ ACG Louisiana hosted its third annual “Taste of New Orleans” this fall at the Roosevelt Hotel in New Orleans. The well-attended event covered the latest business trends and successes in Louisiana, including what types of deals are happening in the region, job growth, access to capital and the state of entrepreneurship. “Louisiana is an attractive investment market, particularly in the areas of oil and gas, energy services, marine transportation and manufacturing, but is often overlooked by private equity firms marketing for new transactions,” says Les Alexander of ACG Louisiana and Jefferson Capital Partners. “So we developed the ACG Louisiana Taste of New Orleans conference as a way to attract capital providers to the state to network with local dealmakers.” This two-day conference of networking featured a keynote by Pam Hendrickson, COO of the Riverside Company and chair of the ACG Board of Directors, followed by a packed day of presentations from Gary LaBranche, FASAE, CAE, president and CEO of ACG Global; Tim Williamson, co-founder and CEO of Idea Village; Matt Lane, senior vice presContinued on next page

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE DID YOU KNOW?// InterGrowth® 2016 will be held in New Orleans.

ident of Gen Cap America; John Gabbert, CEO of PitchBook; Duncan Bourne, managing director of Wynnchurch Capital; Matt Gullen, principal of H.I.G. Capital; Greg Zoglio, CEO of Cornerstone Chemical Company; David Russell, chairman of Loadmaster Derrick & Equipment; Joe Lovette, managing partner of Louisiana Fund 1; Sandra Coufal, co-founder and president of Sibling Capital; Jimmy Roussel, entrepreneur in residence of New Orleans Start Up Fund; Aaron Miscenich, president of the New Orleans BioInnovation Center, John Clarke; associate dean of the A.B. Freeman School of Business, Tulane University; Jen Medbery, CEO of Kickboard; and others. All these leaders spoke about the growth opportunities in New Orleans and the state overall. The highlight of the conference, however, was the evening networking event where private equity firms, commercial banks, investment banks, venture capital firms and other providers of capital hosted tables to meet with more than 200 corporate executives, lawyers, accountants, investment bankers and other business professionals while serving attendees a taste of New Orleans-inspired food and drinks. “With tables full of shrimp remoulade, oysters Rockefeller, and sazeracs, it’s an excellent opportunity to find new deals while enjoying traditional New Orleans cocktails and cuisine,” Alexander says. Eight years after the devastation of Hurricane Katrina, there is no doubt about it…. New Orleans is back. Learn more about ACG Louisiana. //

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

ACG PHILADELPHIA

ACG Philadelphia Hosts 11th Annual M&A East Conference This fall, ACG Philadelphia brought together 1,400 top strategic and financial dealmakers, investment bankers, lenders and leading middle-market advisers from across the country and around the globe for the 11th Annual M&A East Conference, one of the most efficient dealsourcing conferences in the region. Some M&A East conference highlights were modified to improve the conference experience for networking and sourcing deals. ACG DealSource® offered private equity firms meetings with both investment bankers as well as limited partners. ACG Philadelphia also expanded ACG DealSource to span two half-days, helping reduce meeting fatigue while giving participants more time for meetings and to source deals on the spot. Also new this year was the combination of two great events: the Grand Welcome Reception and the Private Equity Marketplace, which featured 90 private equity firms. Throughout the two-day conference, attendees were able to attend industry-focused breakout sessions led by leading dealmakers and enjoy keynotes on topics impacting our world from Fareed Zakaria, host of CNN’s “GPS,” Erik Peterson of A.T. Kearney and Rob O’Neill of SEAL Team Six, who received a standing ovation at the end of the twoday conference.

SHARE YOUR GROWTH STORY // MMG seeks story ideas. If you are part of a company or know of one that created growth through private-backed capital, please share a 250-word synopsis with Editor-inChief Kristin Gomez.

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE ACG ATLANTA ACG Atlanta Hosts Wine Tasting Event and Golf Tournament This fall, ACG Atlanta hosted its annual Wine Tasting event at the Summerour Studio, with more than 400 wine-drinkers in attendance. With a “passport” in hand, ACG members mixed and mingled while sampling wines from France, Italy, Oregon and other regions. The event was coupled with a golf

ACG RICHMOND ACG Richmond Hosts Successful ACG Capital Connection®

tournament at the St. Ives Country

More than 325 people attended the fall Richmond ACG Capital Connec-

kicked-off ACG Atlanta’s 2013-14

tion®. Scott Storey, ACG Richmond conference chair, says, “Based on

calendar of events.

feedback from attendees I spoke with, the 2013 Virginia Capital Conference was an overwhelming success. As one attendee wrote to me ‘I

Club the day before, and officially

Learn more about the ACG Atlanta Chapter.

have been coming to the Virginia Capital Conference for a long time and I have to tell you this was one of the best. Each year it gets better and better and everyone at our firm was blown away.’” Conference participants return year after year to the Jefferson Hotel because they appreciate the intimate setting of the event and its manageable size. This backdrop—coupled with numerous networking opportunities and an impressive list of companies, service providers, sponsors and mezzanine investors—made for a productive two days. Chapter President Laura B. Bacon adds, “I would like to thank all of our sponsors, exhibitors and attendees for supporting the 13th annual ACG Richmond Capital Conference and making it a memorable and valuable event. I was impressed with the high level of energy and engagement during the networking sessions Wednesday evening which carried over to Thursday’s keynote presentation by Scott Wayne of the Frontier Project.” Wayne spoke on the topic of negotiation, which is relevant to many of the attendees. Support of this conference allows ACG Richmond to fund numerous community outreach programs, including college scholarships and undergraduate and graduate business school case competitions.

Share Recent Chapter News Middle Market Growth wants to highlight ACG chapter events, dealmaking and other news coming from the local chapter level. Please send news in 250 words or less, along with a color photo (300 dpi or above) if available, to Editorin-Chief Kristin Gomez.

NEW YEAR. NEW CITY. AN ALL-NEW INTERGROWTH.

APRIL 28 â&#x20AC;&#x201C; MAY 1, 2014

ARIA

CONNECTIONS

LAS VEGAS, NEVADA

DEALS

CAPITAL

THE PORTFOLIO INSIGHT FROM THE EXPERTS

SOUND DECISIONS

BANKING SENSE

LP CORNER

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IN THIS ISSUE SOUND DECISIONS Selling a technology company can be complex because these companies are vastly different from other industries. The good news is that interest is quality IT companies is still high.

BANKING SENSE While the temptation may be strong for founders or owners to manage the sales process themselves, experienced M&A professionals advise strongly against this.

LP CORNER Read an excerpt from the Duane Morris publication, Inside the Mind of the Limited Partner, based on the firm’s 2013 trans-Atlantic simulcast of the same name.

COMING SOON Check out the Portfolio section of the February issue for more on the latest middle-market trends, written exclusively by our team of expert ACG Partners. To learn more about contributing to this section, please contact Meredith Rollins, (312) 957-4260 or Ellen Moore, (312) 957-4274. These articles are brought to you by ACG’s Global Partners.

THE PORTFOLIO SOUND DECISIONS // Marc Chiang, Partner, Grant Thornton LLP

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Selling a Technology Business Requires Important Extra Steps

The seller needs to demonstrate the company is growing in a growing market.

elling a company is one of the most important—and complicated— things an owner will do. Make it a technology company and things get even more complicated because technology companies are different by nature. They are usually built from the ground up and after a period of development can experience very extraordinary growth and margins. The good news for owners who want to exit is that deal interest in quality technology companies is very high, with both private equity and strategic buyers bidding up the price of technology assets. PE firms are active and looking for attrac-

the hardware and engineers to company

tive assets to buy—and it’s not just the

employs—these are all very important for

sector-specific firms that have interest.

a tech company,” says John Kim, a manag-

Technology companies often fit the bill with

ing director with H.I.G. Ventures. “Market

high-growth, low-capital intensity and high

timing is also very important with technol-

margins that private equity firms like to

ogy companies. You don’t want to be light

buy. “With SaaS (Software as a Service) and

years ahead of the market or be at risk of

cloud platforms, which lend themselves to

becoming obsolete. All of these things are

much more predictable subscription-based

very important.”

revenue sources, non-technology-focused

The seller needs to demonstrate the

private equity firms are also looking at

company is growing in a growing market.

technology investments these days,” says

The company should also show it has a

Marc Chiang, M&A technology leader of

competitive advantage in its market and

Grant Thornton’s Transaction Advisory

having a top class management team is

Services group in San Francisco.

also critical. “Strong management is im-

However, it’s important to note that

portant with any company, but even more

tech companies are commonly valued dif-

important for tech companies because

ferently than other types of companies.

the market is changing every six months

“There is a more detailed emphasis on

to a year. Management needs to be able to

kicking the tires on technology companies.

understand the changes and make course

IP in the form patents, how many tech-

corrections when necessary. It requires a

nology coders support the company, and

high standard of operator,” Kim says.

THE PORTFOLIO SOUND DECISIONS // Marc Chiang, Partner, Grant Thornton LLP

SOUND DECISIONS

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Marc Chiang

That said, different revenue models will

“Many technology company owners ex-

change a company’s valuation. Buyers are

plore partial sale opportunities to bring in

likely to pay more for companies with a

an experienced partner who can bring their

predictable revenue stream. Reoccurring

business to the next level of success,” says

revenue models are king. “The higher re-

Chris Schenkenberg, a partner in Grant

occurring revenue a company can demon-

Thornton’s M&A Tax Services group.

strate the more valuable the company is at

Indeed, for technology-focused busi-

sale time. In the software space most com-

nesses, growth equity can often be a good

panies are headed toward this model and

solution for owners who want to remain

position themselves this way,” says Stefan

involved, and in many cases, in control.

Jansen, co-head of technology investment

Additionally, companies ripe for growth

banking at Raymond James.

equity investments have typically reached

Having records in order, proper systems

the breakeven point. Growth equity has

in place, employee incentives established

emerged as a strong alternative to the

and succession plans documented are

leveraged buyout.

meaningful ways owners can enhance

As business owners contemplate a sale,

the value of their company. Utilizing ef-

they need to focus and prepare themselves

fective tax strategies at the corporate and

for the M&A process. Investors and stra-

individual levels can increase tax savings

tegic acquirers are prepared to pay high

and, ultimately, lead to more money in the

valuations for attractive businesses with

seller’s pocket. These best practices help

good growth potential. However, in the

maximize value at a future sale time, and

technology industry, there are many pit-

they are effective in making businesses

falls. If issues arise during due diligence,

run more efficiently today. Business own-

this can result in significant price reduc-

ers would do well to annually evaluate

tions and even derail the sale. The key is

their companies, engaging a trusted

to present buyers with complete, credible

adviser as they do so.

and accurate information. Comprehensive

Given the nature of technology companies, it’s also not uncommon for owners to take growth equity rather than completely exit their investment. Many owners realize their companies have a lot more upside, but they need help realizing the companies’ full potential. This is where growth equity comes in.

information goes a long way. // Marc Chiang is a Partner for Grant Thornton in its Transactions Advisory Services group.

THE PORTFOLIO BANKING SENSE // Bill Polese, Senior Director, Merrill Datasite

SOUND DECISIONS

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Choosing the Right Investment Banker for a Sales Transaction

Sellers should engage the services of sell-side investment bankers.

ith a false sense of security in their own dealmaking capabilities, company executives are often blindsided by the nuances and specialization required in an M&A or capital-raising transaction. While the temptation may be strong for founders or owners to manage the sales process themselves, experienced M&A professionals advise strongly against this. It’s too risky. However, for executives of small-to-medium-sized businesses, it can be challenging to determine what advice is necessary to prepare the company for sale. At a minimum, sellers should engage the

their interest in your company,” Durity

services of sell-side investment bankers.

says, “so choose advisers who can demon-

We asked Harry Durity, an expert dealmak-

strably reach those senior-level decision

er whose M&A career includes more than

makers who can make a deal happen.”

300 M&A transactions for firms such as RJR Nabisco Automatic Data Processing,

If you’re in the market for investment bankers, keep the following in mind:

to share some practical tips. “First and foremost, you need to find an investment

1. Seek advice within

bank that specializes in your industry,”

your professional network.

Durity says, “The right firm can be in-

Your peers may know of transaction pro-

strumental in helping you identify a much

fessionals who were involved with the

wider list of possible buyers than you may

sale of other companies in your industry.

have anticipated, and will also help you

Another potential source for ideas may

achieve the best possible valuation for

be professional organizations such as the

your company.”

Association for Corporate Growth or The

In addition to industry experience, it’s

M&A Advisor.

important to choose a banker that has the right level of access to decision makers.

2. Compare banks.

“At the end of the day, a large part of mak-

Large global investment banks often in-

ing the right choice is finding an agent or

clude a range of industries and a broad

adviser with the ability to reach the right

portfolio of services. In contrast, mid-mar-

people at the right level, who can act on

ket investment banks tend to focus on one

THE PORTFOLIO BANKING SENSE // Bill Polese, Senior Director, Merrill Datasite

SOUND DECISIONS

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Bill Polese

or limited industries. The best approach

5. Discuss fees structures.

is to identify several potential banks and

Some banks may have a published sched-

interview each firm thoroughly to deter-

ule of fees, others will not. Some will

mine their depth of experience, the size

require a retainer, others will waive it. It’s

and depth of their team, and the full value

important to talk through the fee structure

of ideas and services that they will bring

as it applies to the entire process, and get

to the table.

detailed enough information so that you can compare your options.

3. Explore conflicts of interest.

The bottom line? Thorough due dili-

Find out if there are any potential conflicts

gence counts when you’re looking for an

of interest that may exist on the bank’s

investment bank to represent your compa-

team or across the entire firm. Do they

ny in what is likely one of the most impor-

have other teams working in parallel on po-

tant milestones in its growth.

tential deals that may be in conflict? How do they propose to protect your interests?

On this important decision, Durity has some final words of advice: “Don’t make the decision solely on price,” he says. “I

4. Meet the teams.

have seen a number of companies choose

Take the time to meet with everyone who

an investment bank primarily based on

will be working on your team from the

fees and frankly, it was a mistake.”

senior advisers to junior associates. Ask

As you’re comparing your options, keep

probing questions that will give you a

in mind you want the absolute best ally on

sense of how this team will interact and

your side. The team that can demonstrate

enhance your team and also promote your

that it’s going to do whatever it takes to

company’s interests.

help you achieve the best possible price and ensure a certainty of close is well worth the fees. // Bill Polese is a Senior Director at Merrill DataSite.

THE PORTFOLIO LP CORNER // Duane Morris Private Equity Group, Duane Morris LLP

SOUND DECISIONS

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Myths, Points of Contention and Red Flags: The Co-Investment Conundrum

As LPs become more sophisticated, it’s clear they don’t always see eye to eye.

This is an excerpt from the Duane Morris publication, Inside the Mind of the Limited Partner, which is based on a 2013 event simulcast in London and New York, and captures the trans-Atlantic panelists’ insights into factors driving LP decision-making in a rapidly globalizing environment for middle-market investments. It featured such LP industry leaders as Erik Hirsch and Jim Strang of Hamilton Lane, Howard Searing of DuPont Capital Management, Kathleen Bacon of HarbourVest Partners, Alan MacKay of Hermes GPE and Mike Elio of the Institutional Limited Partners Association, and was moderated by Jennifer Rossa and David Powell of Bloomberg.

s the industry matures and LPs become more sophisticated and focused on their particular needs, it is becoming clearer that they don’t always see eye to eye. They are indeed a heterogeneous bunch. Certainly, not all investors are equal

when it comes to negotiating terms and conditions such as management fee offsets, waterfalls or co-investment rights. One flashpoint where investor opinion

a useful GP marketing tool, but for inves-

diverges is co-investment rights. “It is

tors “co-investment is an elusive thing.”

cyclical—when it’s all the rage, everybody

He thinks the instances where a co-invest-

wants to do it,” says Erik Hirsch, chief

ment makes sense for everybody are rare.

investment officer at Hamilton Lane.

“Where a GP actually has a good deal, and

Better returns and lower fees are the top

it’s too big for them to do, and they gen-

objectives investors hope to achieve with

erally want to distribute to an LP—you

co-investment, according to a 2012 Preqin

know, one or two of these—that’s kind of

survey (see chart below). More recently, it

rare,” says Searing. “For the vast major-

found that over 40 percent of institutional

ity of LPs,” observes Searing, “it’s really

investors expected to increase their co-

hard to get it done and you’re going to end

investments in 2013 while some 52 percent

up being the victim of adverse selection.”

would like to increase their direct private

Finally, he points out that “where most of

equity investment in companies.

the deals we’re looking at are middle and

In the view of Howard Searing at DuPont Capital, co-investment rights may be

lower middle market, it’s even harder.” On the other side of the aisle is Alan

THE PORTFOLIO LP CORNER // Duane Morris Private Equity Group, Duane Morris LLP

SOUND DECISIONS

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LP CORNER

TAP BUTTONS TO NAVIGATE COLUMNS MacKay of Hermes GPE, which manages

What does the evidence say about co-

about $10 billion, with about half of that

investing? According to a recent paper by

devoted to co-investment. As he indicates,

professors at Harvard and INSEAD, co-in-

“my whole business is built around co-

vestment programs have consistently un-

invest, I don’t have a co-investee—every-

derperformed ordinary fund investments.1

one’s a co-investor.” In MacKay’s view,

The study looked at seven large institu-

co-investment is “a critical and essential

tional investors and found that their direct

component of the PE portfolio—as are sec-

investments outperformed co-investments

ondaries, actually, but co-invest is a criti-

and a wide range of benchmarks for private

cal, vibrant component of smart private

equity investments. The authors put the

equity, smart use of the asset class and

poor performance of co-investments down

smart portfolio construction.” For MacKay,

to fund managers’ selective offering of what

co-investment shouldn’t be a problem if an

are generally large deals—nearly five times

LP is “sophisticated and well-resourced.”

larger than an average sponsor’s deal. //

Hirsch mentions that another big driver is that “GPs today really do not want to do deals with each other—that is like a big nono. They hate it, they’ve all had bad experiences.” And, he notes, “LPs don’t like club deals.” Particularly in the big pre-crisis deals, investors could become overexposed to a single deal and experience sub-par returns. But, according to Hirsch, “coinvestment is almost a necessity for some number of people, it’s just that who can

SOURCES 1 Lily Fang,

Victoria Ivashina and Josh Lerner, The Disintermediation of Financial Markets: Direct Investing in Private Equity (INSEAD and Harvard Business School October 2012).

you do it with, and who can actually do it, are much deeper questions.”

Read the full text of Inside the Mind of the Limited Partner and Duane Morris’ other timely publications.

DEALS HAPPEN HERE. Deals happen in Utah. So it’s no surprise that sourcing deals will be the focus of the 2014 ACG Utah Intermountain Growth Conference in Salt Lake City on Thursday, March 13. Participants will hear from industry experts and find the tools they need to make deals happen. New at the Conference is “Deal Link” Thursday afternoon. This is not deal speed dating. Private Equity Groups and Intermediaries active in the intermountain region can schedule meetings in private executive suites for 30 minute blocks to discuss real deals—a great opportunity to see the best in the west in one afternoon. Corporate executives, Private Equity Groups, and all of our other conference attendees will be able to meet and mingle at the ACG Utah Capital Connection® social and buffet after the afternoon programs and Deal Link. And don’t forget the ACG Western Ski and Bobsled Conference starts Friday March 14. To register, go to acg.org/utah.

2014 ACG UTAH INTERMOUNTAIN GROW TH CONFERENCE | MARCH 13

www.acgutah.org

THE LADDER ACG MEMBERS ON THE MOVE Margaret Shanley of ACG Los

Gregory Dempsey of ACG

Angeles joined CohnReznick’s

Connecticut was named partner

Transactional Advisory Practice

at McGladrey in its Transaction

as a principal, responsible for

Advisory Services Group.

developing the Private Equity/ Margaret Shanley

Venture Capital Practice in the firm’s West region.

Gregory Dempsey

Dana Williams of ACG Los Natalie Tronkina of ACG Los

Angeles and Transaction

Angeles joined CohnReznick’s

Advisory Services partner at

Transactional Advisory Practice

McGladrey has been named to

as a director working to build

Los Angeles Business Journal’s

the firm’s West Coast practice.

Dana Williams

“Most Influential M&A Advisors.”

Natalie Tronkina

Kartik Sundar Raj was Jenny Wheater of Duane Morris

recently promoted to partner

LLP was made lead editor

at McGladrey in its Transaction

of Tax-Efficient Private Fund

Advisory Services Group.

Structuring: A practitioner’s guide for the UK and Europe. Jenny Wheater

Kartik Sundar Raj

Marcie Taylor was named

Castanea Partners

Castanea Partners was given

executive director of the

Private Equity International’s

ACG Cincinnati Chapter.

Operational Excellence Award in the lower middle market category for its work with Urban

Marcie Taylor

Decay cosmetics brands. Augentius (US) recently Augentius (US)

expanded its New York City offices to Lexington Avenue due to continuing growth.

To submit promotions, job changes and other accomplishments to the Ladder section of Middle Market Growth, please send information and a color headshot (hi-res 300 dpi or above) to Editor-in-Chief Kristin Gomez.

IT’S THE SMALL THINGS NEW YEAR’S RESOLUTIONS // Stick To It

WORKING OUT PAYS

Fitness trainer and instructor jobs are expected to grow 24 percent from 2010-2020, far outpacing the average 14 percent growth for all occupations.

THE MARKET FOR A BETTER YOU

In 2012, the market for motivational programs and products that seek to improve people physically, mentally, financially or spiritually surpassed $10 billion.

KICKING THE HABIT

The nicotine replacement products industry grew to $528 million in 2012, with e-cigarettes surpassing $1 billion per year in 2013.

RESOLUTION? WHAT RESOLUTION?

While 45 percent of Americans make New Year’s resolutions, only about 8 percent actually achieve them. About 25 percent don’t even make it past the first week.

BATTLE OF THE BULGE

With obesity on the rise, so is the number of weight-loss surgeries. About 220,000 people a year undergo the procedure—seven times the number from a decade ago—totaling more than $6 billion a year.

I’LL HAVE WHAT SHE’S HAVING An estimated 108 million people in the United States are on diets, driving the annual revenue of the weight loss industry to $20 billion and counting. An overwhelming number—85 percent—of these consumers are women.

18th Annual

DEAL MAKER

AWARDS

The premier networking event of the year. Honoring Northeast Ohio’s top deal makers.

January 30, 2014 5:30 p.m. Cleveland Convention Center 300 Lakeside Avenue Cleveland, Ohio 44113

2014 Award Winners American Greetings Corporation PolyOne Corporation Evolution Capital Partners The Riverside Company

www.acgcleveland.org/dealmaker (216)-696-8484

Association for Corporate Growth Driving Middle-Market Growth

www.ACGcleveland.com

THE LEADERSHIP ACG DIRECTORS ACG BOARD OF DIRECTORS //

CHAPTER REPRESENTATIVE DIRECTORS //

DIRECTORS AT LARGE //

Chairman Pamela Hendrickson* The Riverside Company ACG New York Term expires 8/31/2014

Bradford Adams* TM Capital ACG Boston Term expires 8/31/2015

Jason Brown GE Capital Corp. ACG Los Angeles Term expires 8/31/2016

Robert Burns Lazard Middle Market, LLC ACG Minnesota Term expires 8/31/2014

Greg Cinnamon Kilpatrick Townsend & Stockton LLP ACG Atlanta Term expires 8/31/2016

J.B. Dollison* Crutchfield Capital Corporation ACG Houston Term expires 8/31/2014

Mike Ehlert Capital One Leverage Finance Corp. ACG Houston Term expires 8/31/2015

Roy Graham Corporate Finance Associates ACG Central Texas Term expires 8/31/2015

Brian Gilbreath Merrill Corporation ACG Nebraska Term expires 8/31/2015

W. Braun Jones III Outcome Capital, LLC ACG National Capital Term expires 8/31/2014

Ramsey Goodrich Carter Morse & Mathias ACG Connecticut Term expires 8/31/2016

Patricia King Bank of America ACG Tennessee Term expires 8/31/2015

Angie MacPhee RGL Forensics ACG Denver Term expires 8/31/2016

Brian Moll Polsinelli Shughart PC ACG Arizona Term expires 8/31/2014

Frank Mack Merk Capital Corp. ACG Chicago Term expires 8/31/2014

Robert Napoli* First West Capital ACG British Columbia Term expires 8/31/2015

Gretchen Perkins Huron Capital Partners ACG Detroit Term expires 8/31/2016

Steven Peterson Brass Ring Capital, Inc. ACG Wisconsin Term expires 8/31/2015

Durant (Randy) Schwimmer The Carlyle Group ACG New York Term expires 8/31/2014

Joel Rosenthal Schneider Downs & Co., Inc. ACG Pittsburgh Term expires 8/31/2014

Tom Washbush ACG Columbus Term expires 8/31/2015

Vice Chairman Doug Tatum Newport Board Group ACG Atlanta Term expires 8/31/2014 Chairman of Finance Stephen V. Prostor Citi Private Bank ACG New York Term expires 8/31/2014 Secretary Richard P. Jaffe Duane Morris LLP ACG Philadelphia Term expires 8/31/2014 Immediate Past Chairman Charles J. Morton, Jr.* Venable LLP ACG Maryland Term expires 8/31/2014 Chairman of InterGrowth 2014 Ken Berryman CapitalSouth Partners ACG Kentucky Term expires 8/31/2014 President & Chief Executive Officer Gary A. LaBranche, FASAE, CAE* ACG Global

Hans-Josef Vogel Beiten Burkhardt ACG Germany Term expires 8/31/2015

ACG HONORARY DIRECTORS // Robert G. Coffey Alan B. Gelband

*denotes member of Executive Committee

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Want to tap into the middle market? LEARN ABOUT ADVERTISING OPPORTUNITIES IN MIDDLE MARKET GROWTH AND REACH 30,000+ MIDDLE-MARKET PROFESSIONALS. CONTACT US OR DOWNLOAD THE MEDIA KIT TO GET STARTED TODAY.

DOWNLOAD MEDIA KIT Contact Meredith Rollins at mrollins@acg.org // 312-957-4260

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THANK YOU ACG GLOBAL PARTNERS ACG Global thanks the following Partners who play a critical role in supporting ACG’s mission of Driving Middle-Market Growth.SM OFFICIAL SPONSOR OF GROWTHSM PARTNER

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For information on becoming an ACG Partner, download the ACG Global Partnership Program Prospectus or contact Meredith Rollins, mrollins@acg.org/312-957-4260 or Ellen Moore, emoore@acg.org/312-957-4274. ©2013 Association for Corporate Growth. All Rights Reserved.