Requirements of Purchase Accounting

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S-2 JANUARY 28 - FEBRUARY 3, 2013 CORPORATE GROWTH & M&A Advertisement LETTER FROM THE PRESIDENT table of ACG: What’s in a name? contents By SEAN MCCAULEY land include investment bankers, munity leaders. Twice a year, corporate M&A officers, private ACG Cleveland hosts workshop ften I am asked, “What equity, “C” level corporate offi- events that bring together a pan- does Association for cers, senior asset based/corporate el of industry experts to explore a Corporate Growth lenders, junior/mezzanine lenders, specific business trend, issue, in- actually mean?” Whose transaction attorneys, tax/assur- dustry or community project. Ogrowth? Is it the companies, the ance accounting professionals and The Great Lakes ACG Capital corporate officers or the other service providers. Connection is a two-day event financial professionals Earlier this year ACG for capital providers and deal who support businesses? Cleveland was recognized makers that attracts more than The short answer is yes, as 2012 ACG Large Chap- 700 M&A professionals. ACG yes and yes. ter of Year. We are proud Cleveland hosted the event in its To be successful you to be honored ahead of first two years and we supported must always be looking to chapters in New York, successful events in Indianapolis develop new relationships. Chicago, Los Angeles, and Detroit in 2011 and 2012. A strategy to consistently Boston and Dallas. This Over the years ACG Cleveland connect with deal makers SEAN MCCAULEY achievement would not has evolved its programming and and shapers will always ACG president have been possible with- expanded its mission to address result in new business op- out the significant efforts the needs of future leaders, con- portunities. The mission of ACG is of our current and past volunteer nect with Ohio’s graduate busi- FILE PHOTO to provide this critical network- board members, our chapter ness schools and engage in the ing platform among participants members, and the thousands of economic vibrancy of our region. in mergers and acquisitions and professionals who support our Our ACG Cup brings together corporate finance. ACG Cleve- events each year. MBA student teams from the top S4 Sky’s the limit land’s primary networking efforts On Jan. 31, ACG Cleveland graduate business schools in are the 25 to 30 diverse and award- will host its 17th Annual Deal Northeast Ohio for a deal-specific Cleveland’s diverse business base and wealth winning events hosted each year. Maker Awards. This signature case study competition. Over the Social media is important, but event to recognize significant last few years ACG Cleveland has of service firms enhance private equity position. building long-term relationships merger and acquisition accom- developed programming specific is done by getting out, rolling up plishments attracts more than to Women in Transactions (WIT) your sleeves and talking to people 800 financial professionals from and a Young ACG (YACG) initia- S3 Buyer due diligence S14 Prepare for selling family face to face. No matter how big Northeast Ohio and around the tive to develop the next genera- held business or small the company, business country. M&A financial profes- tion of deal makers. S6 Purchase agreements gets done between individuals sionals know that Cleveland is If you are serious about build- S7 80/20 rule S15 Tale of M&A markets and not solely through a web page a deal-making town and an ing or growing your own busi- S16 Combining ABL with S7 Primary care revolution or phone call. important destination for net- ness network, I encourage you to syndicated term loans ACG Cleveland has a 30-year working. The event is a unique learn more about our organiza- S8 Earn-out contingent tradition of connection and experience complete with non- tion. Attend an event, talk to and high-yield bonds consideration engagement in Northeast Ohio. stop introductions and reconnec- a chapter member, visit S17 Noncorrelated Our Cleveland chapter is one of tions, past and future deal discus- www.acgcleveland.org or contact S8 Acquisition advice investments 58 around the world, including sions, and market observations me at 216-222-2847. ■ Asia, South America and Europe, and frustrations. S9 Timing deals S18 Lending alternatives and part of a 14,500-member Our monthly breakfast meet- Sean McCauley is president of ACG S10 Tax considerations S19 Leverage buyout trends ACG global organization. ings showcase Northeast Ohio’s Cleveland and a vice president with for carve-out statements The 500 members of ACG Cleve- most senior corporate and com- PNC Business Credit. S20 Global M&A S10 Corporate divestitures S20 Conflict minerals rule S11 Managing M&A fees S20 Private equity survey “I work with Benesch because of their ability to S12 Valuations S21 Judging a private equity get to the core of an issue and then develop the S13 Purchase accounting rules firm strategies to resolve it, whether an everyday S13 Sell-side due diligence S22 Transactional insurance matter or something out of the ordinary.” S14 What is your corporate S23 Asset-based lending DAVID I. MANSBERY M.P.G.? S23 Deal Maker awards President, Duck Creek Energy, Inc.

David considers himself a “serial entrepreneur” COVER PHOTO: The Veterans Memorial Bridge with 200 Public and has relied on Benesch for a multitude of Square, Terminal Tower and Carl B. Stokes U.S. Courthouse in the background. Photo by Eureka Lott business needs. From handling real estate, leasing, litigation and general business matters for Duck Creek Energy to navigating the successful sale of a prior business and its DISCLAIMER intellectual property to incorporating a new The articles in this section were prepared by the respective contributors for general information purposes only and are not intended as legal, tax, accounting venture, Benesch has the breadth and depth or financial advice. Under no circumstances should any information contained in to help David go wherever his ideas take him. any of these articles be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon any such To learn more about our relationship with Duck information is solely and exclusively at your own risk. Please consult your own Creek Energy, visit beneschlaw.com/myteam counsel, accountant or other advisor regarding your specific situation. Any views expressed in the article are those of the respective contributor and are subject to change without notice due to market conditions and other factors.

YOUR MARKETS With expertise encompassing business FEATURED ATTORNEYS (left-right): ROBERT A. ZIMMERMAN, law, regulatory matters and advocacy, LORI H. WELKER, DAVID MANSBERY, JR., DAVID R. MAYO MAY BE GLOBAL Squire Sanders lawyers have the skills AND JOSEPH G. TEGREENE and in-depth industry knowledge to BUT YOUR LEGAL provide the full range of legal counsel needed to implement your strategy in ISSUES ARE LOCAL Cleveland, across the country and MY BENESCH MY TEAM around the world.

Crain’s Cleveland Business Custom Publishing 20130128-NEWS--19-NAT-CCI-CL_-- 1/23/2013 1:26 PM Page 1

Advertisement CORPORATE GROWTH & M&A JANUARY 28 - FEBRUARY 3, 2013 S-3 Best practices in financial due diligence

ment of revenues and margins by should be closely assessed to ■ Scalability of the business, diligence, it’s buyer beware. ■ Target firm’s customer, product line and chan- determine the appropriateness of depth of the management team, nel to assess the quality of such such valuation given its direct adequacy of information systems Mark Bober is a partner with Bober earnings quality revenue and the sustainability of impact on reported earnings. and related items Markey Federovich. Contact him at the revenue stream. ■ Debt and debt-like liabilities. 330-255-2425 or email mbober@ key to crafting ■ Pro forma cost adjust- Items are often not recorded on bobermarkey.com. solid transaction ■ Accounting adjustments ments: Pro forma costs might in- the balance sheet impacting earnings: The clude restructuring or financing ■ Working capital require- By MARK BOBER nature of activity within reserves costs. These need to be carefully ments and thresholds and accruals, such as allowance analyzed in order to determine established in the purchase horough due diligence is for doubtful accounts, inventory the appropriateness of such agreement or letter of reserves, warranty reserves, adjustments. This will require intent an important component ■ of a transaction that, if accrued liabilities, etc., should be assessment of both the qualita- Capital expenditures, done properly, provides analyzed to determine potential tive and quantitative aspects of both past and future Ta prospective buyer with an inflation of reported earnings. these adjustments. in-depth understanding of the Acquisitions provide ■ Inventory valuation: quality of earnings of the target Capi- Other due diligence areas to tremendous opportunities, company. Knowing a target’s talization of costs into inventory consider include the following: but without adequate due quality of earnings can further assist a buyer in establishing pricing, deal structure and post- acquisition planning. Generally, it would not be disclosed in their audited financial statements or a confidential information memo- randum, which is a description of the business and its financial performance. While every situation is different, following are typical focal points of a quality of earnings investigation:

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

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

■ Quality of revenues: This entails a comprehensive assess-

Crain’s Cleveland Business Custom Publishing 20130128-NEWS--20-NAT-CCI-CL_-- 1/22/2013 1:14 PM Page 1

S-4 JANUARY 28 - FEBRUARY 3, 2013 CORPORATE GROWTH & M&A Advertisement Dealmakers elevate position of private equity industry Professional service firms augment burgeoning sector

By CHERYL HIGLEY from each other and from the their thinking to continue to markets we’re in, and our perform well.” uilt on the shoulders of investors are refining how they visionaries such as Kirtland do business,” says Jim Marra, AN EVOLUTION Capital’s Jack Turben, director of business development Linsalata Capital Partners’ for Blue Point Capital Partners. The evolution of private equity BFrank Linsalata, Morgenthaler’s Despite the long legacy of in Cleveland includes focused yet David Morgenthaler and private equity in Cleveland, per- flexible approach to getting deals Primus Capital’s Loyal Wilson, formance is still key — and it is done: Cleveland has quietly and steadily those companies that embrace More firms are taking a cemented itself as a private equity their history and work to build a more targeted approach to deals, powerhouse over the past 30 different future that continue to focusing on specific types of years. thrive. deals, industries or ownership There are no signs of wear on Tim Healy, senior vice president styles — all important criteria to the industry, as both established of Linsalata Capital Partners, consider given the competitive and up-and-coming firms continue says: “It’s a different world than market. to evolve to meet the changing it was in 1984. To survive in any “With so many private equity needs of their investors and port- industry, you have to be open firms bidding for good businesses, folio companies with the same to change — or you will have a this has become a much more “roll up your sleeves and get to limited life span. We are lucky efficient market today. As a seller, work” mentality for which to have some really good, smart, it’s great — however, if you’re Northeast Ohio is famous. hard-working individuals who buying, it is much more chal- “Private equity in Cleveland is have been successful and have lenging,” Marra says. Seelbach says while many firms get away with it. But as company growing up. Firms are learning been able to evolve and adapt in Primus Capital Director Scott began (and some remain) as gen- valuations have gotten more eralists, a trend toward building robust, if you don’t understand expertise in certain sectors is the competitive landscape facing taking hold. the target company, you can “We find that make serious focusing on “By bringing financial and mistakes. Getting specific industry intellectual capital to the deeply familiar sectors where we table and looking at different with the indus- have had past tries in which success and can ways to help companies companies com- continue to grow, it opens a broad slate pete helps miti- leverage a of opportunities.” gate our risk segment specific and adds more knowledge base – Stewart Kohl, The Riverside Co. value to the is imperative deal.” to generate favorable returns. Stewart Kohl, co-CEO of The Within health care specifically, a Riverside Co., says multi-sector constantly evolving regulatory specialists can thrive — with and reimbursement landscape good due diligence: “We like the requires a significant amount of generalist approach; it’s in our focus to properly assess invest- DNA. But we succeed because We’re proud to be ment risks.” we’re big on comparison shop- Marra agrees: “When compa- ping and choosing only those nies were relatively cheap, you companies that offer the best could invest in companies you risk-reward opportunities for our right here! didn’t know much about and investors.”

And that’s why we’ve called Cleveland home for over 20 years. To learn more Why Cleveland? about Riverside’s strategies to grow What is it about Cleveland that that helped develop the private equity companies with $1 million - $30 million makes it a prime hub for private community. There are resources that equity deals? Cleveland private equity were invested here decades ago that in EBITDA, contact: insiders attribute it to three keys: continue to benefit the community today,” says Tim Healy, senior vice ■ Scott Gilbertson Diverse industries/ president of Linsalata Capital Partners. Fortune 500 history. While a Clusters of economic development and Principal, Origination smaller number remain, a number of manufacturing specialties in a variety [email protected] Fortune 500-size corporations were of company sizes (rubber, health founded and headquartered in the re- care, manufacturing, etc.) give Cleve- gion in the last century — giving root land a competitive advantage, he says. to smaller support businesses. “Both the large and small businesses have ■ Midwest moxie. “Cleveland developed a lot of management talent and the Midwest in general are

CREATIVE SOLUTIONS THAT GET DEALS DONE. 20 offices 50 Public Square, 29th floor 14 countries Terminal Tower, Cleveland, OH 44113 216.905.3350 4 continents riversidecompany.com | phone: +1 216 344 1040 transactionalrisk.com

STEVEN LEE, ESQ. JEFFERY PHILLIPS, CRM

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Advertisement CORPORATE GROWTH & M&A JANUARY 28 - FEBRUARY 3, 2013 S-5 COMPLEMENTARY PLAYERS Private equity While deal structures and targeted acquisitions continue to synergy at work evolve, a critical component of private equity’s success in a given The synergistic relation- geographic market — the presence ships that exist in Cleveland’s of complementary professional private equity world help set service companies — has also it apart. Working together taken hold. to get a deal done, and Attorneys, accountants, transac- trends such as add-on tional advisory consultants, transactions taking hold, investment bankers and commer- makes PE hum: cial banking specialists all play key roles in the deal-making Western Reserve process — and Cleveland is Partners introduces Morgenthaler fortunate to have a robust cadre Private Equity to Avtron, an of such specialists. Independence-based and family “The third-party private equity owned business in November 2007. resources within Northeast Ohio Avtron operated three business units, With Morgenthaler’s oversight, Avtron are amazing and have helped designing and manufacturing aerospace made two successful add-on acquisi- establish the region as a strong PE test equipment, power generation test tions. Avtron Loadbank, the power community,” says Karen Tuleta, equipment and high-end encoders and generation test equipment business unit, partner with Morgenthaler Private drive systems for industrial automation. was sold in March 2012 to Emerson Equity. After 53 years, the company’s family Electric and Avtron Industrial Automa- Kohl says the growth of those owners were seeking liquidity and tion, the encoders and drive systems sectors has helped to keep Cleve- assistance in management succession. business unit, was sold to Nidec in land’s private equity hub thriving, September 2012. Both companies providing an economic boost to Morgenthaler transitioned a family owned plan to grow their respective Avtron the region. business to a PE-owned business, which businesses in Independence. “For a city our size, we are provided Avtron’s management team FOTOLIA blessed to have a rich pool of with the framework to accelerate growth Jones Day’s Cleveland office repre- human capital across all the initiatives while reducing costs and im- sented Morgenthaler on the initial acqui- service firms. The private equity proving operational efficiency. At the time sition and both sale processes. network is a real economic engine of the recapitalization, creative transac- DIFFERENT DEALS Marra says. “We’re seeing a lot of … we have a lot of smart people tion structuring facilitated the potential fu- KeyBanc and JP Morgan Chase- older owners that are making a making good investments and ture divestiture of each business unit in- Cleveland provided financing to Avtron Another key factor in the evo- decent living, love their company creating wealth for our city.” ■ dividually on a tax-efficient basis. during the course of ownership. lution of private equity in North- but have their money wrapped up east Ohio is that firms are taking in one asset. Recapitalizing the more interest in the operations of business gives the founder deeper the companies they are buying. pockets to invest back into the “Twenty years ago, we were company.” talking about how much to bor- Primus Capital’s Seelbach is Reason says: row from the bank to get a deal also seeing more minority deals done. Today, there is relatively being consummated — taking M&A is the right little talk on the financing side. complete control and changing You have to do it well, obviously, management isn’t always the growth strategy. but now the question is ‘How are order of the day. we going to help the companies “Some firms only want a we’ve invested in become more majority interest, but we’re seeing profitable?’” Kohl says. success with tailored investment Tied to the operational focus is structures where there is minority that more owners are looking for control and the private equity private equity partners not firm is adding more value at the because they want to sell and exit Board of Directors level with the business but because they growth strategies, leveraging con- want to grow. tacts and evaluating acquisition “Recapitalization transactions opportunities.” wouldn’t have been considered Kohl says Riverside is seeing 10 to 15 years ago, but they can more add-on acquisitions and be very profitable for both parties,” expects that trend to continue.

hotbeds of lower middle market, Pittsburgh, for example, those cities founder- and family-owned businesses,” are highly dependent on a narrow says Karen Tuleta, partner with slice of a particular industry. As those Morgenthaler Private Equity. “There companies became huge, they are a lot of high-value manufacturing dwarfed the abilities of local service companies in Northeast Ohio, which providers and went to New York City helps fuel the private equity deal flow. to get capital,” says Stewart Kohl, co- They are deeply rooted in product CEO of The Riverside Company. “In innovation and engineering talent.” Cleveland, the diverse middle market Instinct says: and smaller Fortune 500 companies ■ Organic growth. The are well-served by local providers. The buying smart is the diverse, middle market company base whole private equity ecosystem has right path to growth. found in Cleveland keeps the deals grown here and now people come to churning. “If you look at Detroit and Cleveland to pursue private equity.”

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

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

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S-6 JANUARY 28 - FEBRUARY 3, 2013 CORPORATE GROWTH & M&A Advertisement Will your purchase agreement GETS THE DEAL DONE. stop you from recovering losses? By MICHAEL J. MEANEY EBITDA had been over- Then you read in the back of stated by $1 million. the purchase agreement that the ou have just pur- You think you must “losses” that you are able to recover chased XYZ Com- have a good claim do not include “consequential pany for a pur- against the seller to re- damages, lost profits or diminu- chase price equal cover your losses, since tion in value.” Such disclaimers Yto five times EBITDA the purchase agreement are not unusual. According to a Contact Mark Kiskorna at 216-222-8506 or (Earnings Before Interest, contains representations recent study, 55% of private com- [email protected] to ﬁnd out how PNC Taxes, Depreciation and MICHAEL J. that: pany deals contained a disclaimer can get you the capital you need. Amortization). You MEANEY ■ XYZ is in compli- of the right to recover “conse- discover that XYZ is not ance with all laws, and quential damages” and 17% of deals PNC and ACHIEVEMENT are registered marks of The PNC Financial Services Group, Inc. (“PNC”). PNC McDonald Business Credit is the asset-based lending division of PNC Bank, National Association, a wholly owned handicap compliant, and ■ The financial state- contained a disclaimer of the right subsidiary of PNC. In Canada, PNC provides asset-based lending through PNC Bank Canada Branch. Hopkins LLC In the U.K., loans are provided by PNC Financial Services UK Ltd., which is an indirectly wholly owned the required remedial ments were accurately to recover “diminution in value.” subsidiary of PNC Bank, National Association. Lending products and services require credit approval. work will shut down XYZ prepared in accordance The term “consequential dam- *A portion of the ﬁnancing provided by Steel Cit y Capital Funding, a division of PNC Bank N.A. ©2012 The PNC Financial Services Group, Inc. All rights reserved. CIB PDF 1212-046-125205 for a week, resulting in lost profits. with generally accepted account- ages” does not have a precise legal You also discover that XYZ’s ing principles. definition but is commonly understood to mean those damages that do not ordinarily result from a breach of the contract and thus were not reasonably foreseeable. A court might conclude that the profits lost during the week XYZ is shut down for construction were reasonably foreseeable and therefore, would not be considered “consequential damages.” However, I Am Private Capital depending upon how the term is interpreted, the profits lost as a result of the plant shutdown may or may not be considered “consequential damages,” and therefore, might not be recoverable. Moreover, if the contract contained an exclusion from recovery of “lost profits,” the buyer would be out of luck. A buyer would likely be very surprised that a purchase agreement would prevent recovery of such clearly provable losses that directly resulted from the seller’s breach.

I was nervous when my company was acquired by private investors. But they

are putting their money to Turning to the $1 million over- work with new equipment statement of EBITDA, the buyer may assume that he can recover to add jobs and serve $5 million in damages – an more customers. amount equal to the product of the EBITDA overstatement ($1 million) times the EBITDA multi- My job is the story of the ple (5) used to value the deal. Al- middle-market growth. though this may seem to be the best way of measuring buyer’s loss, such recovery may be pre- vented by an exclusion for “diminution in value” damages. Thus, the buyer may be deprived of any effective remedy for breach of the most important representation in the entire purchase agreement – the accuracy of the financial statements. The definition of “losses” is typically found deep in the fine print of the purchase agreement. These terms should be carefully reviewed to make sure they do not defeat the reasonable expectations of the ■ Learn more at buyer. Private Capital drives middle market growth, WWW.MIDDLEMARKETGROWTH.ORG Michael J. Meaney is co-chair, fuels job growth and builds communities. Private Capital, Public Good.SM Mergers and Acquisitions Practice, at McDonald Hopkins LLC. Contact him at 216-348-5411 or mmeaney@ mcdonaldhopkins.com. Crain’s Cleveland Business Custom Publishing 20130128-NEWS--23-NAT-CCI-CL_-- 1/22/2013 1:16 PM Page 1

Advertisement CORPORATE GROWTH & M&A JANUARY 28 - FEBRUARY 3, 2013 S-7

chase price was agreed upon? How are accounts receivable and inventory to be Primary care revolution leads 80/20 rule valued? What happens to obsolete or dam- aged inventory or past due or uncollectible receivables? to market consolidation applies in Detail on payment terms other than 3 cash. If a seller note is “subordinated,” By SEAN DORSEY Physician groups what does that mean? When can buyer’s he passing of the Patient Protection and hospitals are deals, too lender stop seller from receiving note pay- seeking the ments? Is the buyer credit worthy? Is there and Affordable Care Act of 2010 any security for payment? (PPACA), commonly known as expertise of ... Focus on provisions Rights of offset. Can the buyer stop “Obamacare,” is accelerating health- health care invest- Tcare provider consolidation, particularly 4 seller note payments if it “believes” with financial impact with respect to primary care physicians. ment bankers seller has breached the agreement, or should to help navigate the buyer be required to get the ap- The reasons for this acceleration are com- SEAN DORSEY By STEVE ELLIS and JENNY BERLIN plex, yet vital in understanding the expect- proval of a third party? If a party can League Park the acquisition ed wave of M&A activity. simply withhold payment to make Advisors process. he “80/20” rule appears in itself whole there is the potential An outcome of the PPACA has been the business all the time. for unfair leverage in a dispute. formation of new delivery models, including Twenty percent of your In that endless indemnity Accountable Care Organizations (ACOs). aligned primary care network will provide customers produce 80% of 5 provision, go right to the These new models of care, in conjunction significant cost advantages across the con- Tyour profit, 80% of your com- with the shift from inpatient settings to- tinuum of care, as reimbursement models “basket.” The dollar threshold for plaints, etc. You get the idea. making a claim and whether the ward outpatient care, are underscoring the evolve from historical fee-for-service schemes We believe something close to STEVE ELLIS basket is a true “deductible” typi- role of primary care physicians as the clini- to bundled payment models. Hospitals the same ratio applies to most Tucker Ellis LLP cally have financial consequence cal center of care. The economic value of lacking a strong primary care foundation acquisition agreements, at least in far more often than how long primary care physicians, therefore, is in- will be challenged to compete in the cur- terms of where clients might best representations survive or the creasing. A typical primary care physician rent environment of evolving risk sharing. focus their attention. Your busi- “cap” on total claims. provides approximately $1 million of Increasingly, physician groups and hos- ness lawyer needs to be an expert downstream referral revenue for hospitals pitals are seeking the expertise of dedicated on 100% of the deal documents, Focus on the real money issues and and controls just over $12 million of health care investment bankers to help and every provision has to be ana- let your lawyer advise you on the healthcare expenditures for every 2,000 navigate the acquisition process. These lyzed; but under the 80/20 rule, a rest. Every deal has unique facts and patients. transactions require a unique understanding client should initially focus on the risk allocation issues, all of which At the same time, primary care practices of the complexities associated with key provisions that, in most in- are important, but they also typi- are experiencing dramatic cost pressures, Medicare and Medicaid reimbursement, fair stances, are likely to have the most JENNY BERLIN cally have a fairly standard set of because smaller independently owned market valuation requirements and a rapidly meaningful financial consequence. Tucker Ellis LLP alternative solutions that any good practices are often unable to keep pace with evolving regulatory environment. deal lawyer is well equipped to increased regulation and challenging reim- With the re-election of President Obama, Liabilities assumed. Paying the sell- handle. We suggest that you focus on the 20% bursement trends. According to Accenture, 12 health care reform is here to stay. The new 1 er’s bills (e.g., accounts payable and that is likely to make the most difference. ■ years ago 57% of all physicians owned their economic realities of the health care mar- accrued expenses) is the same as paying own practices. Today, independent physi- ketplace will drive a sustained period of cash. It all counts as purchase price. Steve Ellis is a partner with Tucker Ellis LLP. Jenny cians account for less than 39% of the total. ongoing provider consolidation. ■ Adjustment for changes in working Berlin is counsel with Tucker Ellis LLP. Contact Ellis As a result, acquiring primary care prac- 2 capital. What happens if the amount at 216-696-2435 or [email protected]. tices has become a critical strategic objec- Sean Dorsey is founder and CEO of League Park of working capital at closing is less than Contact Berlin at 216-696-5482 or tive for hospitals and health systems. Po- Advisors. Contact him at 216-455-9990 or email the amount that existed when the pur- [email protected]. tential buyers recognize that a well- [email protected].

Announcing a merger between FRQğGHQFHDQGYDOXH

M & A is one of the quickest paths to growth. But it’s not always the surest. That’s why at PwC, we help you understand the risks in your transactions, so \RXFDQEHFRQğGHQWWKDW\RXDUHPDNLQJLQIRUPHGVWUDWHJLFGHFLVLRQV)URP your deal negotiations, to capturing synergies during integration, we help FOLHQWVJDLQYDOXH$QGXOWLPDWHO\GHOLYHUWKLVYDOXHWRVWDNHKROGHUV/LNH ZHłYHGRQHIRUWKHPDMRULW\RIWKHWRSJOREDOSULYDWHHTXLW\DQG)RUWXQH FRPSDQLHV/HYHUDJHWKHH[SHULHQFHRIRXUJOREDOQHWZRUNRIğUPV Learn how at pwc.com/us/deals

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

Crain’s Cleveland Business Custom Publishing 20130128-NEWS--24-NAT-CCI-CL_-- 1/23/2013 9:45 AM Page 1

S-8 JANUARY 28 - FEBRUARY 3, 2013 CORPORATE GROWTH & M&A Advertisement Advice for first-time buyers Understand the complexities of completing a deal By LLOYD BELL their family and what they hope Finally, while legal and to enjoy in retirement. accounting advisers of buyers enry Ford famously said, Successful transactions, there- will be quick to respond, advisers “Whether you think fore, must meet the personal for sellers, who will likely be you can or can’t, you’re goals of sellers while protecting losing a client as a result of the right.” When it the financial goals of transaction, may find compelling Hcomes to buying a busi- buyers. reasons why a deal just isn’t ness, the ability to effec- Buyers also tend to right. tively run a business is a underestimate how long While the closing of acquisi- different skill set than it will take to successfully tions will likely veer from origi- what is required to com- close a transaction. Not nal plans, buyers must remember plete an acquisition. As only does it take a signifi- to stick to the program as closely a result, many successful cant amount of time to as possible. If specific steps drag companies and/or execu- find the appropriate on, it’s better to close later than tives underestimate LLOYD BELL target company, but the to take short-cuts on due dili- the complexities Meaden & amount of time required gence. involved in closing a Moore LTD to woo and then wed will If the economics change either transaction. probably take longer than because of performance issues By far the largest hurdle that buyers anticipate, for a number by sellers or the capital being buyers need to understand is that of reasons. made available, buyers must stop sellers don’t have to be rational. If outside financing will be and make sure that they are Buyers can develop all sorts of required, buyers may find that working to close a deal that still financial models projecting cer- banks are a little more measured makes sense, not just working tain rates of return on various in their approach then they had to close a deal. ■ capital structures, but sellers been a few years ago. If real estate Addressing conflicts rarely care. Their internal rate of is involved in the deal, the cast of Lloyd Bell is the director of the corporate return is not calculated on a characters now includes engi- finance practice at Meaden & Moore. spreadsheet, but rather by what neers and appraisers who may Contact him at 216-241-3272 or email through an earn-out they’ve been able to provide for not share in the sense of urgency. [email protected]. contingent consideration

By MICHAEL TUCCI multiple of the target company’s historical EBITDA (earnings before WE ARE ROETZEL. hen acquirers and interest, taxes, depreciation and sellers don’t agree on amortization) of $10 million. The the value of the tar- seller, however, believes that the get company, the gap acquirer’s price significantly un- Wis almost always based on dervalues the company, the parties’ differing ex- because the seller is cer- pectations with respect to tain it will land a major the future earnings — customer that will in- sellers being more opti- crease its EBITDA by mistic than acquirers. $3 million. The acquirer is One way to bridge the not willing to pay for an gap is through a contin- uncertain future revenue gent consideration mech- stream that it may have anism, the most popular MICHAEL TUCCI little control over. The being the “earn-out.” Mansour, Gavin seller, on the other hand, With an earn-out, the Gerlack & wants to enjoy the upside amount of some portion Manos Co. LPA on the resources it ex- of the purchase price is pended in securing the contingent on the future earnings customer. This disparity can be of the company or the achieve- aligned through an earn-out, ment of certain milestones and which would allow for the pur- 0VS$PSQPSBUFBOE#VTJOFTT4FSWJDFTBUUPSOFZTQSPWJEFFYQFSJFODFEDPVOTFMUPDMJFOUTUISPVHIPVU becomes payable at a specified fu- chase price to be increased to re- ture date. flect the new revenue if and BMMTUBHFTPGCVTJOFTTEFWFMPQNFOU8FBSFUSVTUFEBEWJTPSTXIPXPSLXJUIPVSDMJFOUTBOEJOIPVTF For example, say the acquirer when it happens. This eliminates DPVOTFMUPBEESFTTUIFDIBMMFOHFTBOEPQQPSUVOJUJFTBTTPDJBUFEXJUIUIFGPSNBUJPO PQFSBUJPO BOE has priced the target by using a the acquirer’s risk if the target TUSBUFHJFTGPSHSPXUIPGBMMUZQFTPGPSHBOJ[BUJPOT8FEFWFMPQTUSPOHQBSUOFSTIJQTXJUIPVSDMJFOUT UPVOEFSTUBOEUIFJSCVTJOFTTFT WJTJPOTBOEHPBMT8FBSF3PFU[FM BOEPVSFYQFSUTBSFKVTUBQIPOF DBMMPSBDMJDLBXBZ Wherever your journey may

'PSNPSFJOGPSNBUJPO DBMMVTBU216.623.0150 lead, take along someone 0SWJTJUVTBUralaw.com/business_services who can provide a true sense of direction. /&8:03,t$)*$"(0tCLEVELANDt50-&%0t",30/t$0-6.#64t$*/$*//"5* 8"4)*/(50/ %$t5"--")"44&&t03-"/%0t'035.:&34t/"1-&4t'035-"6%&3%"-& In transactions, the goal is to maximize value and minimize risk. Choosing the right professionals to perform quality of earnings/ due diligence is crucial to the success of your acquisition. Led by Mark B. Bober, CPA/ABV, CFF, CVA, BMF’s Transaction Services Group is a dedicated team of professionals that supports private equity groups nationwide.

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Crain’s Cleveland Business Custom Publishing 20130128-NEWS--25-NAT-CCI-CL_-- 1/23/2013 1:25 PM Page 1

Advertisement CORPORATE GROWTH & M&A JANUARY 28 - FEBRUARY 3, 2013 S-9 Controlling the uncontrollable

By TOM BECHTEL ■ Seller Preparation: isn’t really what they are the key owner does not have a Private companies can be looking for to achieve solid succession plan. aking an acquisition caught off guard by due specific strategic objec- ■ Be flexible: Not every buyer or selling a company diligence. Without out- tives. From the seller’s or seller is going to fit with all is as much a game of side pressure, statements perspective, there is too the desired criteria. If the ideal isn’t timing as it is any- may be prepared on an- much anticipated growth there when wanted, don’t ignore Mthing else, and having the right other accounting method to sell now. strategic priorities and take what- fit at the wrong time is particular- not in accordance with What to do when ever is available. ly frustrating. Generally, poor tim- GAAP, interim reports can TOM BECHTEL faced with the right deal The more prepared you are as ing boils down to one or more of be irregular and certain Cohen & Co. at the wrong time? a seller and the more qualified the following constraints: activities may be driven ■ Be patient: Utilize opportunities you have in your ■ Funding Advanced Notice: primarily by tax benefits. Such quality advisers and give the oth- pipeline as a buyer, the better posi- While the credit freeze has start- practices are fine for a private er side time to prepare for due tioned you are to hedge against the ed to thaw, it is difficult to rush a company but can lead to deals diligence. timing issue that may hinder a transaction through. Proper due being delayed or halted due to ■ Find solutions: If a seller great potential opportunity. ■ diligence by the buyer and the the lack of understanding of re- wants to keep milking the “cash bank or equity source is critical, sults from the buyer’s perspective. cow” for a few more years, offer Tom Bechtel is a CPA and director of especially when maximizing the ■ Strategic Priorities: From the insight as to the potential down- transaction services at Cohen & Co. use of leverage in an acquisition. buyer’s perspective, the deal just side implications, particularly if Contact him at [email protected].

customer isn’t landed and allows the seller to realize the upside if it is. Earn-outs, however, have risks. A business litigator I know once told me, “I’ve never met an earn- out I didn’t like.” They are often contested and end up in court for resolution, which greatly helped his revenue. To avoid problems at payout time, the parties should carefully craft an earn-out provision up front in the purchase agreement keeping the following in mind:

Earn-outs work best when the 1seller stays involved with the target company after the sale.

Keep the financial structure 2simple. For example, a flat percentage of earnings or revenue is easier to calculate and less likely to lead to disputes than complicated formulas.

Make milestones and metrics as 3objective as possible. For example, gross earnings are a more objective metric than net earnings, because net earnings provide the opportunity to fight over how expenses and write-offs are calculated and applied.

For a seller, it is important that 4it has control over the contin- gencies that affect the goals, such as making sure the acquirer has and is willing to commit sufficient resources. On the other hand, the acquirer needs to protect its flexibility to change its overall business objectives.

Keep the earn-out period as 5short as possible. Longer periods provide more time for disputes as well as diluting the value of the target company as it becomes more integrated into the acquirer’s business, making payout calculations more difficult.

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

Michael R. Tucci is an attorney with Mansour, Gavin Gerlack & Manos Co., LPA and counsels his clients on business and intellectual property matters. Contact him at 216-523-1500. More information is available at www.mggmlpa.com. Crain’s Cleveland Business Custom Publishing 20130128-NEWS--26-NAT-CCI-CL_-- 1/22/2013 1:18 PM Page 1

S-10 JANUARY 28 - FEBRUARY 3, 2013 CORPORATE GROWTH & M&A Advertisement Tax considerations for Four principles carve-out financial statements By GIOVANNI F. DI CENSO the carved-out business. Identify- may be needed to can help guide ing these assets upfront facilitates show how the s companies focus on core allocating the deferred tax-related company would strategies to sustain future items associated with the assets to look if operating on growth, many are finding a successful be bifurcated. Further, careful exam- a stand-alone basis. If the tax at- the divestiture ination of the legal entity tributes recorded in the carve-out Acomponent of transac- structure helps identify financial statements are materially tions has grown in size the particular jurisdic- different from those actually as- divestiture and complexity. Synthe- tions where the carve-out signed to legal entities that comprise sizing information relat- business will operate, pro- the carve-out group, it may be nec- ed to tax provisions is of- viding guidance as to the essary to add comments in the tax uying or selling a tion, weakening the seller’s ten one of the most appropriate statutory tax footnote to explain the discrepan- company is a complex hand at the negotiating table complex aspects of rates and compliance cies. process, fraught with risk and destroying value while preparing carve-out fi- with applicable tax laws. Finally, the company should and uncertainty. That’s employees, customers and stake- Bwhy buyers have historically used holders jump ship and head for nancial statements in GIOVANNI F. Calculating and report- determine the likelihood that the safer ground. conjunction with a di- DI CENSO ing deferred tax assets carved-out operations will realize due diligence to help reveal hid- A robust divestiture prepara- vestiture. Among the spe- Deloitte Tax LLP associated with the com- deferred tax assets in the future den risks or opportunities that cific tax areas to consider pany’s attributes, such as and assess the need for an appro- will help them negotiate a better tion process can help sellers suc- are the legal entity structure and de- net operating losses and various priate valuation allowance. price. cessfully exit their businesses in a termination of tax attributes. credits, poses distinct challenges For divestitures requiring carve- The frenzied markets of the shorter time frame, avoid sale Accounting data used in tax re- when preparing carve-out state- out financial statements, compa- past put the seller at an advan- price erosion at the negotiating turns are prepared on a legal-enti- ments. A company should start by nies should seek the upfront in- tage, because heavy competition table, minimize distractions to ty basis. Consequently, determin- tracking the attributes and related volvement of tax professionals to for businesses hampered the the core business, and ultimately ing which legal entities comprise deferred items associated with the address the key tax matters that buyer’s due diligence process. derive the desired value from the the business segments or divisions legal entities that comprise the may ultimately increase the likeli- Now, in a tougher, post-Great sale. to be carved out will help deter- carve-out statements. These attrib- hood of a successful transaction. ■ Recession deal market, the smaller In a divestiture setting, one mine whether relevant tax infor- utes may be adjusted for any ac- pool of likely buyers and increased way to avoid value erosion is mation exists for these entities counting push-down adjustments Giovanni F. Di Censo is a principal in demands from banks heighten to design and implement a and how to extract needed data. that are recorded as part of the M&A Transaction Services at Deloitte Tax the need for extensive buyer due process that supports rapid deal Sometimes only a part of a legal carve-out process. LLP. Contact him at 216-589-5150 or diligence and lengthen closing completion. To accomplish this, entity’s net assets are included in Further carve-out adjustments email [email protected]. time frames. Now more than most successful sellers in today’s ever, the seller shoulders the bur- market use a thorough process den of being prepared. You must that follows the four guiding know what the buyer will need to principles of successful divesti- know or risk deal failure, missed tures: value targets or stumbling along a protracted timeline. Plan for all aspects of the While sellers may think they 1 divestiture process know their divestiture target’s ■ Establish scope, goals and operations inside and out, they objectives of the transaction are usually too close to the busi- ■ Develop a divestiture project plan ness to look at it from a buyer’s ■ Determine what’s left behind perspective, making it difficult to clearly under- Present WEATHERING stand its value 2 financial and viability information on a stand-alone tailored for basis. the deal This is particu- ■ Evaluate A STORM? larly true when information the target is part requirements and of a division or articulate a “bridge” a product line, ■ Describe WE’LL GET YOU BACK TO BUSINESS. especially if the the business in a business has clear and cohesive manner been ignored or is underperforming. ■ Address the potential need for Failure to see the target through carve-out audited financial statements the buyer’s lens increases the odds that the buyer’s diligence findings will derail the transac- See DIVESTITURE Page S11

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Advertisement CORPORATE GROWTH & M&A JANUARY 28 - FEBRUARY 3, 2013 S-11 M&A fees: How much will this trophy cost me? HALFTIME: driven toward the ultimate goal. VICTORY Proper game Withholding information and With any luck, the teams have due diligence re-trading on issues is costly and avoided overtime for post-closing management An essential part of a transac- erodes trust between the parties. issues. While both sides emerge tion for a buyer, due diligence also Stay focused and keep attitudes in successful, the real winner will be can keep costs presents the seller with an oppor- check. tunity to keep legal fees in check. the team that followed the game under control The level of the client’s prepara- plan that was put in place early in the process. Celebrate with a trip tion for, and participation in, the CHRISTOPHER SARAH BAKER TWO-MINUTE WARNING: diligence process has a direct cor- to Disneyland, and get ready for REUSCHER Roetzel & agreement to closing ■ By CHRISTOPHER REUSCHER relation to the amount of time next season. Roetzel & Andress and SARAH BAKER and fees saved during, for exam- The agreement is signed, but Andress ple, the preparation of the sched- what conditions must be fulfilled Christopher Reuscher is a partner “Individual commitment to a group effort ules to the purchase agreement. prior to closing? Again, prepara- at Roetzel & Andress. Contact – that is what makes a team work, a controlled; however, understanding tion is key to keeping costs at or him at 330-762-7994 or email company work, a society work, a civi- SECOND HALF: your opponent’s tendencies and below budget. Have a closing [email protected]. Sarah Baker is lization work.” — Vince Lombardi motivations avoids “reactive” and agenda prepared and a two- an associate at the firm. Contact her at the definitive agreement inefficient negotiating. Further- minute drill in place for any 330-762-7985 or email f closing a transaction is akin The other side cannot be fully more, fair play keeps the players last-minute obstacles. [email protected]. to winning the Super Bowl, then all of the players need to work as a team to keep legal Ifees under the proverbial salary cap. PRESEASON: engaging counsel The first step in managing legal fees is to engage experienced counsel prior to drafting the letter of intent. The likelihood of a successful transaction is exponential- ly higher and a seller’s leverage typically strongest if counsel is involved at this juncture. FIRST HALF: communication and fee structures Candid communication is crucial to developing a game plan focused on client objectives, resources and expectations. All players should consider alternative fee structures such as fixed fees per deliverable, capped fees, flat fees per period (i.e. monthly or quar- terly), and/or discounted hourly rates with a performance-based holdback. Legal fees generally es- calate later in the game unless the team has previously implemented a strategy to manage such costs.

Divestiture continued from Page S10

3Prepare, prepare, prepare ■ Identify operational issues/opportunities and anticipate questions/requests ■ Plan for key terms in the purchase agreement ■ Validate forecast assumptions and bridge to historical results ■ Provide stand-alone cost estimates

Position for the exit 4 and execute ■ Managing the process ■ Drafting of transition service agreements ■ Tax structuring ■ Maintaining a competitive process

A thorough preparation process is crucial to a successful divestiture in today’s market. Such process arms a seller with the critical information needed to present the business most effectively, address deal issues early on, answer challenging questions and boost value for the assets in play. ■

Brian Kelly is the PwC Cleveland Deals partner. Contact him at 216-875-3121 or email [email protected]. Crain’s Cleveland Business Custom Publishing 20130128-NEWS--28-NAT-CCI-CL_-- 1/23/2013 11:25 AM Page 1

S-12 JANUARY 28 - FEBRUARY 3, 2013 CORPORATE GROWTH & M&A Advertisement

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Advertisement CORPORATE GROWTH & M&A JANUARY 28 - FEBRUARY 3, 2013 S-13 Sell-side due diligence Requirements of becoming more common purchase accounting By BRIAN LEONARD fore going to market. Every company has its strengths, weaknesses, By PAUL WOZNICKI property, plant, and equipment are identi- hether it’s the single risks and opportunities. When a fied as part of a business combination, owner of a family busi- seller identifies and confronts the n the U.S., whenever a company expe- they are measured as of the transaction ness preparing for re- issues ahead of time, it can better riences a business combination or date at fair value in accordance with the tirement or a large cor- manage the discussion around event whereby the acquirer obtains principles of ASC 820 — in essence, the Wporation pursuing strategic these topics, present them to the effective control of another business, value that would be received in an arms- alternatives through the divesti- buyers in a light that is most favor- Ithe acquirer is subject to generally accepted length transaction. ture of a business unit, the sale of a BRIAN LEONARD able to the company and focus the accounting principles (GAAP) that require business is a complex transaction Grant Thornton negotiations on the entity’s the allocation of the purchase price under Intangible asset valuations: The filled with uncertainty. While ac- LLP strengths and opportunities. the requirements of purchase accounting - identification and subsequent valuation of quirers have traditionally engaged The sell-side due diligence ASC 805 (formerly SFAS 141r). intangible assets can be significant- an army of professional service providers process can also help assemble In simplest terms, ASC 805 rely more complex and require the to perform due diligence, identify risks and financial information that is complete and quires all consideration transferred use of a wide range of valuation strengthen their negotiating position, so- accurate. Financial information that is (i.e. “purchase price”) to be mea- methods. When valuing intangible phisticated sellers are increasingly engag- transparent and reconciles to the underlying sured at the acquisition date at fair assets, the acquirer must consider ing these advisers to perform sell-side due financial records lends credibility to man- value. This includes any and all assets asset characteristics such as separa- diligence prior to opening up the business agement, minimizes surprises during buy- transferred, liabilities assumed (in- bility and/or contractual or legal for sale. side diligence and provides the seller cluding contingent liability consid- right considerations. Typical intan- Sell-side due diligence involves the seller with a dress rehearsal prior to its interac- erations), and if applicable, any equity gible assets with finite lives might PAUL WOZNICKI taking an objective look at the quality and tions with the advisers of the potential interests issued by the acquirer. include trademarks, brand names, SS&G sustainability of its earnings, determining buyer. This effort can expedite the sales non-compete agreements, cus- the reasonableness of its forecasts, under- process by streamlining the buyer’s due Purchase price allocation: tomer lists, and patents. standing its historical working capital re- diligence, thereby protecting shareholder Although a fairly complex process in prac- The application of purchase accounting quirements and identifying potential tax value. tice, the allocation of purchase price in its with all its nuisance and ultimate determi- exposures by standing in the shoes of Sell-side due diligence is just one facet of most basic form generally involves three steps: nation of value of purchased assets is a potential suitors. While nobody knows the a transaction readiness strategy that many Identifying and assigning a fair value highly sophisticated process that requires a business better than the business owner, sophisticated sellers effectively employ. By 1to all tangible assets acquired sound understanding of accounting princi- many sellers may be too close to the busi- identifying and getting ahead of the issues Identifying and assigning a fair value ples. Companies often need the assistance ness to identify risk areas that may com- early in the process, sellers can proactively 2to all identifiable intangible assets of professional accountants experienced in promise valuation or certainty to close. Sell- manage the discussions and drive efficiency, with finite lives valuation services to properly identify and ers are increasingly looking outside in certainty and value throughout the trans- Determining the residual positive or determine acquired-asset values. ■ performing this critical assessment. action. ■ 3negative “goodwill” associated with Sell-side due diligence procedures assist the transaction Paul Woznicki, CPA, is a director in the a seller in understanding financial and tax Brian Leonard is director, Transaction Advisory Transaction Advisory Services department exposures and opportunities, and proac- Services, with Grant Thornton LLP. Contact him at Tangible asset valuations: Once tan- of SS&G. Contact him at 330-668-9696 or tively addressing these identified issues be- 216-858-3539 or [email protected]. gible assets such as working capital or email [email protected].

is proud to join ACG in recognizing our longstanding client

and the other 2013 Deal Maker Award Winners.

We are honored to have been legal counsel to RPM for more than 40 years, including the 2011-2012 acquisitions of Synta, Inc., Kirker Enterprises, Inc., and Multicolor Specialties, Inc.

Calfee’s Corporate/M&A Group: Helping deal makers get deals done for 110 years.

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

Crain’s Cleveland Business Custom Publishing 20130128-NEWS--30-NAT-CCI-CL_-- 1/23/2013 11:52 AM Page 1

S-14 JANUARY 28 - FEBRUARY 3, 2013 CORPORATE GROWTH & M&A Advertisement What is your corporate M.P.G.? sents growth Most investors and Indicators show potential. Most investors and lenders look to (the M.P.G.) which firms get lenders look to attributes when assessing these attributes quality companies. better mileage when assessing quality compa- By MICHAEL F. PAPARELLA nies. can be assessed in the quality of P MICHAEL F. Quality of the and G, and it is rare that P and G orporate M.P.G., as will be high without a strong PAPARELLA management defined here, is different team is most management team. Candlewood from what might first important. In Past performance is the most Partners LLC come to mind. It is not a the ideal situa- often cited attribute when assessing Creference to the average miles per tion, each member of the manage- an investment. It is natural to gallon of your corporate fleet. ment team is a strong performer infer that past performance indi- Instead it is a high level indication and each highly important posi- cates future results. However, we of the quality of your company as tion among the management roster all know that is not true. Nonethe- perceived by the marketplace. is occupied. The highly important less, understanding the company’s In Corporate M.P.G., M denotes slots include the CEO, CFO, COO past business plans and goals and management team, P indicates and head of sales and marketing. assessing the management team’s past performance, and G repre- The quality of these performers See M.P.G. Page S16

the input of this team, it is impor- Carefully prepare for selling family held businesses tant to determine whether your valuation goals and objectives can By ALBERT D. MELCHIORRE starts first with the busi- ensuring the right man- that you manage your business be met given the current state of ness. There are areas to agement personnel are through this process in order to the M&A market. he sale of a business is a focus on that will result in in the right positions, avoid negative surprises. You You will also need to make sure once-in-a-lifetime endeavor a smoother process and and if retiring after the want to make sure the business is you have thoroughly thought out for most family held busi- help maximize the value sale, identifying your performing at optimal capacity what you would like your role to ness owners. I would like of the business. These successor. throughout the process. be post-closing. The following are Tto offer some advice to the own- include improving opera- The M&A process will Once you have your house in important questions to think ers of family held businesses about tional efficiencies, com- be a distraction to your order, and before you begin the through carefully: Are you looking having a successful merger and plying with environmen- business as the process process, assemble a strong M&A to retire immediately after closing? acquisition (M&A) sales process. tal laws and regulations, ALBERT D. can take between 6 to 12 deal team. This will include an Do you have your successor in To begin, it is important that having accurately pre- MELCHIORRE months from the time experienced M&A attorney, place? Would you like to roll over you are prepared and have your pared monthly and yearly MelCap your investment banker accountant, investment banker a small portion of your proceeds house in order. This preparation financials (review or audit), Partners LLC is hired. It is important and investment adviser. Based on to participate in the future growth

Crain’s Cleveland Business Custom Publishing 20130128-NEWS--31-NAT-CCI-CL_-- 1/23/2013 1:23 PM Page 1

Advertisement CORPORATE GROWTH & M&A JANUARY 28 - FEBRUARY 3, 2013 S-15 M&A outcome depends on company quality

By KEVIN WHITE Buyers remain concerned Strategic and financial buyers balances. mentally a secondary driver. Other about the strength and have both been very Financial sponsors have also drivers, such as owner retirement hroughout 2012 and into durability of the current active. For the best com- become more active sellers of and the need to realize returns 2013, Western Reserve recovery. Without confi- panies, financial buyers businesses over the past year, for private equity investors, con- Partners has seen “A Tale dence in a rising eco- have shown a willingness with the healthy M&A environ- tinue to bring new supply to the of Two M&A Markets.” For nomic tide to lift all to pay prices normally ment, relatively strong portfolio market regardless of the tax envi- Tcompanies with good market posi- ships, buyers are engag- seen only from strategics. company financial performance ronment. Western Reserve expects tions, solid margins, strong man- ing in rigorous due dili- In instances where strate- and impending tax changes 2013 to be no different in this agement teams and steady perfor- gence. Target companies’ gic buyers are confident making this a good time to sell. regard. Based on current pitch mance through the recent results are being moni- KEVIN WHITE that they have found the Nonetheless, a significant por- activity and new deal generation, downturn, it has been the best of tored very carefully dur- right fit, they are willing tion of those sell-sides have been we are optimistic that 2013 will Western Reserve times, with strong buyer interest ing the course of the deal to outbid the financial to other financial sponsors, be another solid — if not strong — Partners and high multiples paid. process to maintain as- buyers by paying the implying ongoing caution on year in the M&A market. ■ For companies with elements of surance that the business is seller for a portion of the expected the part of corporate acquirers. weakness, such as succession issues, performing to plan. Those that synergies. But when the fit isn’t While expected changes in the Kevin White is a director with Western high capital intensity, customer don’t are being hit hard, with quite right, they are quite conser- tax environment helped spur a Reserve Partners. Contact him at concentration or exposure to re- deals being re-cut or called off vative, choosing instead to significant portion of 2012’s 216-589-9536 or email kwhite@ cession-sensitive end markets, the due to relatively modest misses. maintain their current large cash M&A activity, tax remains funda- wesrespartners.com. M&A market has been dramatically different, with far less buyer interest and relatively low prices paid.

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

Albert D. Melchiorre is president and founder of MelCap Partners, LLC, a middle market investment banking firm. Contact him at 330-239-1990 or [email protected].

Crain’s Cleveland Business Custom Publishing 20130128-NEWS--32-NAT-CCI-CL_-- 1/22/2013 1:23 PM Page 1

S-16 JANUARY 28 - FEBRUARY 3, 2013 CORPORATE GROWTH & M&A Advertisement Benefits of combining M.P.G. continued from Page S14 asset-based lending ability to perform over a 3- to 10- year period can give some comfort that the performance was not a and syndicated random occurrence and should, with reasonable expectation, continue into the future. financing for M&A The growth prospects provide the “sizzle.” It seems that most By LAURIE MULLER-GIRARD middle market companies lack a and AMY CARLSON well articulated, implementable and measurable 3-year growth he combination of histori- plan. Investors and lenders take cally low interest rates and comfort in, and will generally waning enthusiasm for attach value to, a sound, well waiting out the sluggish thought out plan that can serve Teconomy could mean increased as the roadmap to get from current revenue and profitability merger and acquisition activity LAURIE MULLER- AMY K. CARLSON in 2013. Prospective buyers, with to projected revenue and prof- GIRARD KeyBanc asset-rich balance sheets, may itability. KeyBank Capital Markets wish to consider financing strate- Ideally, this plan should allow Business Capital gies that combine an asset-based lien on working capital assets and This article is designed to provide for revenue and profits to grow working capital revolver with a first lien on property and equip- general information only. Before at 10% per year or more. longer term debt via the syndicated debt capital market offerings and ment could also bridge the gap. entering into any financing arrange- Whatever the projected growth term loan or high-yield bond sector expertise. This financing has variable rates ment, please consult your own rate, it must be supportable to be market. In some cases, a borrower could and can be pre-paid, sometimes competent professional financial, believable. Asset-based loans (ABL) are rely on ABL only. Larger transac- with minimal cost. If the business tax and legal advisors. In the best case, the M will have offered on a revolving basis and tions may require a different generates strong excess cash flow, KeyBanc Capital Markets Inc., the P to support the G. When this are collateralized by a company’s approach. For example, a well- this option enables the business Member NYSE/FINRA/SIPC, and comes together, investors and assets, including accounts receiv- known retail company consider- owner to reduce debt quickly. KeyBank National Association lenders get excited about the able and inventory. A syndicated ing expansion may benefit by A high-yield bond offering may (KeyBank N.A.) are separate but affili- opportunities that lie ahead of loan is typically structured and using an ABL collateralized by its be the best option for a borrower ated companies. Securities products such a well-managed business. priced by a lead arranger or agent receivables and inventory as well that needs more than $150 mil- and services are offered by KeyBanc Sellers and borrowers get excited who then sells portions of the as the brand name’s appraised lion in additional financing. The Capital Markets Inc. and its licensed because the “market” is eager to credit to other lenders or investors value. The ABL facility offers low offering could be unsecured or securities representatives. Banking invest alongside the team and under terms negotiated by the pricing and flexibility. have the previously described sec- products and services are offered their vision. agent. Today’s more diverse If the business requires more ond lien structure. High-yield bonds by KeyBank N.A. Member FDIC Ultimately, companies with investor base often requires that a debt financing than is available are fixed rate, offer long tenors and Equal Housing Lender. Credit good past performance, offering a loan be structured to meet the through a standard ABL, it may and no amoritization; however, products are subject to credit good “plug-and-play” growth needs of the market. need to layer in another form they require public debt ratings approval. strategy, and managed by a high Syndicating asset-based deals of debt such as subordinated or and can be expensive to prepay. performing team (i.e. high M.P.G.) requires a particular set of skills — mezzanine debt, institutional term Regardless of the final financing Laurie Muller-Girard is national director are in high demand in good eco- a combination of expertise in both loans or high-yield bonds. solution, combining ABL and of KeyBank Business Capital. Contact nomic times and bad. ■ asset valuation and syndication. Financing through subordinated syndicated term loans or high her at 216-689-7941 or laurie.muller- Borrowers should look for lenders or mezzanine debt could fill a hole yield bonds gives borrowers addi- [email protected]. Amy K. Carlson is Michael F. Paparella is managing who understand their industry in the capital structure and is less tional flexibility to make deals in head of Debt Capital Markets, KeyBanc director for Candlewood Partners, LLC. and business strategy and offer expensive than equity. An institu- both the highs and lows of the Capital Markets, Inc. Contact her at Contact him at 216-472-6640 or email integrated asset-based lending, tional term loan with a second economic cycle. ■ 216-689-4227 or [email protected]. [email protected].

Innovative solutions Throughout the M&A lifecycle

Deloitte’s step-by-step services are designed to provide assistance to you through every phase of the deal. From strategy to post-merger integration and divestitures, we can help you in your efforts to get through each critical juncture of the transaction process. We are the only professional services organization with world-class capabilities across the entire M&A deal cycle and on either side of a transaction. Congratulations to ACG Deal Maker Award winners and our clients: We provide global resources and capabilities, yet our presence is local — with a deep understanding of the way that our Northeast — US Endoscopy Ohio clients do business. — STERIS Corporation — Blue Point Capital Partners Contact us today for local connections to a world of service. Our attorneys work with deal makers to design and implement Kevin M. Murphy Giovanni F. Di Censo John Stipkovich WUDQVDFWLRQVWUXFWXUHVWD[HI¿FLHQFLHVULVNPDQDJHPHQW Director | M&A Transaction Services Principal | M&A Transaction Services Director | M&A Transaction Services measures and negotiating strategies. We bring together tax, Deloitte & Touche LLP Deloitte Tax LLP Deloitte & Touche LLP antitrust, environmental, international, real estate, employee +1 216 589 1471 +1 216 589 5150 +1 216 589 1408 EHQH¿WVHPSOR\PHQWH[HFXWLYHFRPSHQVDWLRQLQWHOOHFWXDO [email protected] [email protected] [email protected] property, technology and litigation lawyers to provide the necessary breadth and depth of representation. For more information, visit deloitte.com/us/malibrary.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member ﬁrms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about Chicago Cincinnati Cleveland Columbus Costa Mesa Denver for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member ﬁrms. Houston Los Angeles New York Orlando Washington, DC Copyright © 2012 Deloitte Development LLC. All rights reserved. www.bakerlaw.com Member of Deloitte Touche Tohmatsu Limited

Advertisement CORPORATE GROWTH & M&A JANUARY 28 - FEBRUARY 3, 2013 S-17 Noncorrelated investments: narwhal or unicorn? By LINDA OLEJKO drive financial markets. With noncorrelated investments, the oth the narwhal and the risks for which investors are unicorn are fantastical compensated are dissimilar to else- creatures — one real and where in their portfolios. Exam- one mythical. In the case ples of noncorrelated investments Bof noncorrelated investments, include reinsurance, water rights, one must ask the question, “Is it film rights, pharmaceutical co- possible to find that rare invest- development and intellectual ment with returns independent property. There are other options, of the factors that move but the markets for many publicly traded debt, of them are too immature equity and real estate or the risks too difficult to markets?” The answer is quantify. yes … and no. There are numerous Most publicly traded reasons to seek noncorre- investments are in some lated investments, even way dependent on eco- if, like fantastical crea- nomic conditions. Equity tures, they are hard to returns are contingent on LINDA M. find. These investments a business’s prospects OLEJKO can be highly beneficial and profitability, and real Glenmede to portfolios since they estate values depend on provide a great deal of such factors as employment levels diversification for the dollar. An and the buildup of available in- academic using the risk/return ventory. From time to time, some profile of these investments in investments are negatively corre- a portfolio optimization program lated with economic conditions. may wish to take an extra In a recessionary environment, helping. for instance, an investment with Noncorrelated investments a fixed payment, such as Treasury have earned a place in sophisti- bonds, may increase in value as cated investment portfolios, but the values of equity securities as in the cases of the fantastical decline. This inverse correlation, narwhal and unicorn, careful however, may not persist as mar- study is required to separate the ket conditions change – for exam- real from the mythological. ■ ple, if the economy improves. When flipping a coin and calling Linda M. Olejko is a managing director at heads or tails, the result is obvi- Glenmede. Contact her at 216-514-7876 ously unrelated to the factors that or email [email protected].

OUR ROSTER OF STAR TALENT CONTINUES TO GROW. from left to right: Jeffrey Fickes, Bob Loesch, Jen Roth, Peter Igel, Brian O’Neill, Jenny Berlin, Steve Bittence, Chris Hewitt

Adding talent and depth to serve your business transaction needs.

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Crain’s Cleveland Business Custom Publishing 20130128-NEWS--34-NAT-CCI-CL_-- 1/23/2013 2:05 PM Page 1

S-18 JANUARY 28 - FEBRUARY 3, 2013 CORPORATE GROWTH & M&A Advertisement

Obtaining credit through conventional cash flow methods Expertise Pays Off For more than 80 years, we have helped middle THYRL[JVTWHUPLZHJOPL]LÄUHUJPHSZ\JJLZZ Seek an alternative -PUHUJPHS[H_0;HUKVYNHUPaH[PVUHSK\LKPSPNLUJL through 7\YJOHZLHJJV\U[PUNJVUZ\S[H[PVU ;H_Z[Y\J[\YPUN asset-based + Risk assessment/risk mitigation lending (\KP[[H_HUKHK]PZVY`ZLY]PJLZ 3L[V\YRUV^SLKNLL_WLYPLUJLHUKL_WLY[PZLILHU HZZL[[V`V\YJVTWHU`»ZVWLYH[PVUZTHUHNLTLU[ HUKZOHYLOVSKLYZ Lending alternative: How companies can use assets to finance Cleveland | 216.363.0100 Canton | 330.966.9400 Elyria | 440.323.3200 strategic growth Business Advisors and Certified Public Accountants maloneynovotny.com By DOUG WINGET which offers advance rates that are higher against accounts or many companies, receivable and inventory, providing obtaining credit through more availability than a traditional conventional cash flow middle market cash flow struc- lending arrangements can ture. Companies that have a Fbe difficult. They may be having strong EBITDA and earnings operational problems, undergo- profile relative to working capital EDITORIAL FOCUSED ON THE TOPICS ing rapid growth, dealing with an will likely have more availability THAT MATTER MOST TO NORTHEAST OHIO. acquisition or their borrowing from a cash flow product, but CrainsCleveland.com/editorialCalendar needs might reflect their cyclical companies that are more asset- or seasonal industries. intensive will benefit from an For those companies, asset- asset-based structure. based lending, also known as There are several differences ABL, provides an alternative to between a cash flow structure and the traditional lending model. an asset-based structure. For Asset-based lenders specialize in example, ABL structures generally providing secured financing to require cash dominion. This You’re not just customers with limited access to means a controlled account OUR PRINCIPLES capital. agreement is in place that Asset-based requires the cash Value-Added lending is Asset-based receipts of a senior secured company to flow Proposition lending that lending into a lockbox. allows borrowers provides an The funds then Expectation to leverage alternative are swept from their receiv- to the the lockbox Management ables, inventory, and are used to equipment traditional pay down the Honesty & Integrity and real estate. DOUG WINGET lending revolving debt. FirstMerit Bank Advances are model. This is the most based upon eli- Business Credit efficient treasury Innovation & Quality gible collateral, management a number. with formulas against receivables, structure to reduce leverage. Experience inventory, equipment and real ABL covenant structures are estate. The working capital line of generally not as leverage focused credit is financed against eligible compared with cash flow struc- receivables and inventory. Typi- tures. Typically, a cash flow struc- cally, ABL has fewer covenants ture may have three or four fi- than a cash flow structure and nancial covenants and an ABL At MelCap Partners, LLC, our goal is to show you, and you can rest assured that our interests will more availability from the assets. structure will have only one our valued client, that you are not just a number always be aligned with your goals and objectives. It also may not need a personal financial covenant. ABL groups to us. We strive to provide high quality and We are creating the most significant liquidity guarantee from the owner. are typically collateral focused, innovative investment-banking services to middle event in the history of our clients’ lives…and we Companies that have sufficient not leverage focused. market companies. We are here to fight for you take that responsibility very seriously. receivables and inventory can In summary, for companies leverage their working capital and with exposure to cyclical receive higher advance rates. industries and markets, ABL can They can use this for working be a more patient financing capital financing, seasonal solution since ABL groups will working capital borrowing needs, typically work with a borrower leveraged recaps, mergers and given sufficient availability and 1684 Medina Road, Suite 102 / Medina, Ohio 44256 acquisition financing and turn- liquidity. ■ p 330-239-1990 / f 330-239-1991 / www.melcap.co around financing. If the company is looking for Doug Winget is president of FirstMerit Bank Securities offered through Burch & Company, Inc. Member FINRA/SIPC. MelCap and BurchCo are not affiliated entities. more availability from its working Business Credit. Contact him at 330-384- capital, that profile fits ABL, 7448 or email [email protected]. Crain’s Cleveland Business Custom Publishing 20130128-NEWS--35-NAT-CCI-CL_-- 1/22/2013 1:27 PM Page 1

Advertisement CORPORATE GROWTH & M&A JANUARY 28 - FEBRUARY 3, 2013 S-19 2013 looks promising for leveraged buyouts

companies. limited partners ready to invest in Equity overhang, Limited partners have become their next fund. far more scrutinizing of the cohe- ■ Few private equity funds still deal creativity sion of the private equity fund call themselves “agnostic” as to team, the operational abilities of industry choices with funds spe- should widen at least some of that team versus cializing in certain industries and deal pipeline financial capabilities, and have having advisers who are heavily ACCESS dissected the reasons for success networked in those industries. behind large cash-on-cash returns The most popular sectors today BEGINS WITH A CAPITAL “G”. By JIM HILL in certain sale transactions. are energy services (albeit, it is At Glenmede, we believe the best way to serve our clients is to With the re-election of Presi- somewhat slipping), business give them direct access to our experts and best thinking — with ooking ahead to what 2013 dent Obama, the dialogue of taxing services (asset light), niche manu- will bring, there are a the carried interest as ordinary facturing requiring little capital no barriers or bureaucracy. Our low client-to-staff ratio means number of trends that will income versus capital gains has expenditures annually, health care you’ll always have our full attention. impact the private equity once again become a hot topic. services and devices, consumer Lindustry and leveraged buyouts Despite these challenges, there products, business-to-business (LBO) in particular. First, the is a good deal of encouraging distribution and logistics. challenges: news: ■ Leverage remains quite avail- There is a $200 billion equity ■ LBO funds in 2012 able for buyouts with equity overhang in private equity raised 24% more funds as residing on deals over $10 million worldwide that must new funds than in 2011, of EBITDA between 33% and 43%, get spent in next 12 despite a downturn in and rates remain very low. This months or be returned deal activity. tends to drive up multiples for to investors. General part- ■ Many pension plans pricing purposes but also allows ners of funds will not and endowments have private equity firms to be in the receive their 2% asset largely abandoned ven- hunt against strategic acquirers. management fee on ture capital investing due Given the low rates of returns capital that is returned JIM HILL to the dismal returns of on both public securities invest- since it is not committed. Benesch the top 100 venture ment in the past several years In 2007, private equity funds over the last and in many alternative private consisted of 35% of total dollar decade. This has allowed private asset investments, many pension volume of transactions in the U.S. equity funds to gain a larger allo- plans and endowments are now In 2012, it consisted of approxi- cation of asset employment. allocating a greater percentage of mately 15% of total dollar volume ■ Private equity has become their assets to the private equity of transactions. more creative in generating deal world. ■ www.glenmede.com Worldwide, the level of transac- flow through proprietary relation- Glenmede’s services are best suited for those with $3 million or more to invest. To learn more, please call Linda Olejko for a personal conversation at 216-514-7876. tional activity in 2012 was 50% ships, regional investment bankers Jim Hill is executive chairman of what it was in 2007. (almost brokers) and utilizing buy Benesch, chair of the firm’s Private 2 2 2 2 2 There was a dearth of transac- side investment bankers. Many Equity Group and an active and tions in the U.S. in 2012 — down funds now have dedicated “busi- practicing member of its Corporate & 15% in transactional dollar vol- ness development partners” who Securities Practice Group. Contact him ume from 2011. The rush to the participate in the carried interest at 216-363-4444 or email jhill@ exits to avoid higher capital gains and are key to deal flow. beneschlaw.com. rates did not really happen. The ■ Despite the current lack of primary reason was uncertainty classic auction deal flow, private of earnings and potential sellers’ equity firms are anticipating 2013 performance during the sales will become a more seller-friendly process. environment as the fiscal cliff, There was also hope on the part while somewhat resolved, will not of some sellers that earnings create huge automatic cutbacks in would be higher in 2013, which government spending. Approxi- caused them to hold off. With mately 67% of private equity sparse inventory, cash on strate- firms’ U.S. portfolio companies gics’ balance sheets and private have been owned for more than equity overhang, multiples for 6½ years, with the average fund high performing sellers were having a 10-year life. Obviously, staggering — even higher than in delayed exits mean there have 2007 for comparably performing to be more exits in 2013 to get

Proudly Congratulates WE SHARE YOUR Deal Maker Award Recipient OBJECTIVES OF GROWTH Blue Point AND BUSINESS SUCCESS.

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Crain’s Cleveland Business Custom Publishing 20130128-NEWS--36-NAT-CCI-CL_-- 1/22/2013 1:30 PM Page 1

S-20 JANUARY 28 - FEBRUARY 3, 2013 CORPORATE GROWTH & M&A Advertisement Shrinking world expands global opportunities for private equity

By STEWART KOHL beneficial to both the private Conflict minerals rule impacts M&A equity industry and economies or years now, we’ve heard around the world. As private Consider implications during acquisition due diligence about the globalization of equity matures, firms have world economies become savvier about By DYNDA A. THOMAS determine whether and changes in policies and procure- and certainly felt capturing opportunities to the extent it is cov- ment activities. Consider any con- Fplenty of effects from it. It wherever they may be, n Aug. 22, 2012, ered by the rule. And re- sequences of these changes in your may come as a surprise to then growing them the SEC issued member, you will need financial planning and modeling. hear that the private equity using global resources its long-awaited to consider all activities The good news is that if a com- industry has largely lagged and connections. Conflict Minerals and revenue sources of the pany that was not previously re- on that trend, but that has For Riverside, global- ORule. The rule does not target, not just those required to file any conflict minerals been changing rapidly in ization means more prohibit the use of con- lating to U.S. operations. disclosure reports is acquired by a recent years. than investing and run- ■ flict minerals in products, DYNDA A. What is the target’s reporting company, the acquiring When the Riverside Co. STEWART KOHL ning offices on four con- but it does require public THOMAS product? Consider any company is given a short grace launched a European fund Riverside Co. tinents. It means using disclosure of how conflict Squire Sanders business activity that in- period before it is required to in the 1990s, we were one teams staffed with locals minerals are used by the LLP troduces a product into undertake and complete conflict of only a handful of firms working to source deals and operate com- reporting company. More the stream of commerce. minerals diligence and disclosure in Europe. Regulations and the panies in various regions while specifically, the rule requires any For example, do not simply con- about the acquired company. immaturity of the industry in applying talent and know-how to reporting company to determine clude that the target is generally Visit the conflict minerals page Europe meant that few firms did open new markets and maximize if it has conflict minerals that are in a service industry but consider on the Squire Sanders website: private equity deals there, but value for each company in our necessary to the functionality or any commercial activity, no mat- www.squiresanders.com/ that changed quickly. portfolio. production of a product it manu- ter how small, and determine conflict_minerals/ and the We’ve seen the same shift in The effects of these efforts on factures or contracts to be manu- whether a “product” is involved. firm’s conflict minerals blog at the Asia-Pacific region, where pri- the small companies in which ■ factured. If it does, it must file a What is the financial model www.conflictmineralslaw.com vate equity was virtually nonexis- Riverside typically invests can specialized report with the SEC. impact of the rule? Consider the to learn more about due diligence tent in many countries just a be profound. Riverside owns a A company would be wise to impact of your own conflict and to view sample representations handful of years ago. Now, we’re small company in Georgia that take the conflict minerals rule minerals policy on the target’s and warranties. We also invite seeing dramatically increased ac- manufactures products that make into account when considering materials costs, procurement and you to experience our interactive tivity overall and some of our animal feed safer. Riverside an acquisition. The following are sourcing and include those con- flowchart tool to help you in your best opportunities as a firm. has used its Hong Kong-based ■ several key questions a company clusions in your financial model. conflict minerals analysis. These trends are healthy and Asian Strategy office to help that should ask about any target: ■ How might the acquiring company’s ■ Is the target covered by the rule? conflict minerals policy change? Dynda A. Thomas is a partner with Undertake a detailed review of the Customer requirements and share- Squire Sanders (US) LLP. Contact her business activities of the target, holders’ reactions to conflict at 216-479-8583 or email its affiliates and its subsidiaries to minerals disclosures could lead to [email protected]. Private equity survey reveals best investment practices

By MARK BRANDT the 109 private equity Value. firms surveyed reported Creating ecently, McGladrey that the management teamed with Pitch- team was a primary Book to conduct a driver of both successful survey of senior- and unsuccessful portfo- Rlevel executives who lead lio investments. private equity firms One of the reasons focused on the middle MARK BRANDT management is so market. More than 95% McGladrey important is the intimate

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Advertisement CORPORATE GROWTH & M&A JANUARY 28 - FEBRUARY 3, 2013 S-21

GET DAILY NEWS ALERTS How to judge a PE firm FROM CRAIN’S! We expect the challenge of working with One of Cleveland’s Register for free e-mail alerts and globalization to be Making firms receive: good managers to help their com- jewels is the size and a valuable tool in panies grow. The professionals in better a common professionalism of its ■ The Morning Roundup: The opening markets. our firm are gratified that we day’s business news from Ohio’s could help the managers of QSR, a private equity industry, daily papers industry goal Twinsburg-based manufacturer of which is recognized ■ silicon products, grow their busi- Breaking news alerts By CHIP CHAIKIN ness both in the medical industry nationally. ■ Daily headlines: Crain’s- and in China by more than four produced news and blog items hanks to the recent elec- times. If we are, we help create stronger from the day company navigate the complex tion, for the first time in We are proud that we could companies that serve customers ■ regulations and relationships of my professional career Small Business Report help the managers of PSSI, a better, provide attractive platforms China, allowing the company to when asked, ■ Dealmaker Alert Twinsburg-based cleaning for employees, and, yes, create sell its products in the fastest- T“What do you do for a services provider, grow strong returns for investors. If we ■ Real Estate Report growing livestock feed market in living?” I can answer revenues by 150%. are not, then someone else will. ■ the world. Meanwhile, Riverside’s “private equity,” using Ohio Energy We are energized by Capital is highly liquid and teams in Europe have helped the same number of sylla- ■ Work Force Report the fact that we have relentless in its search for a navigate regulatory hurdles there, bles as a dermatologist, helped the managers of productive home. SIGN UP NOW AT: helping maintain access to another trial attorney or offensive AWP, a Kent-based traffic Fortunately, the most produc- huge market. line coach. No longer CrainsCleveland.com/register safety company, double tive home is often a fast-growing This is just one example among do private equity their business. We are far business, with all of the benefits thousands of small and large steps professionals require a ■ CHIP CHAIKIN from alone — one of that brings to employees, cus- Crain’s on Twitter: that private equity firms are 30-minute treatise on Blue Point Cleveland’s jewels is the tomers and cities. So the next time @CrainsCleveland taking as the industry becomes Adam Smith and Barbar- Capital Partners size and professionalism you see a private equity profes- ■ Crain’s on Facebook: truly global. Ultimately, it’s about ians at the Gate to of its private equity sional at a party, ask if he or she Facebook.com/CrainsCleveland finding the best opportunities for explain what we do. industry, which is recognized helps build better businesses. It is growth and using every tool possi- The flip side of that notoriety is nationally. a far more enjoyable topic than ble — everywhere possible — to that now the conversation often At its best, private equity can our tax rates. ■ accelerate that growth in a sus- goes directly to questions about provide company managers with tainable manner. The financial job creation or tax rates. growth capital and a knowledge- Chip Chaikin is a partner at Blue Point world has been “shrinking” for While these are certainly impor- able, active partner. Whether or Capital Partners. Contact him at decades. As private equity catches tant questions, they have over- not we are truly playing the latter 216-535-4706 or email up, we expect globalization to be a whelmed the most salient ques- role is how we should be judged. [email protected]. valuable tool in opening markets tion about our industry, the and helping companies thrive for one that gets at the heart of years to come. ■ whether we succeed at our most basic undertaking: Do we help Stewart Kohl is co-CEO of The Riverside make better companies? Co., a global private equity firm focused The days of relying on leverage on acquiring growing enterprises valued or buying undervalued assets for at up to $200 million. Contact him success in private equity are in the at 216-344-1040 or skohl@ past. For most in the industry, riversidecompany.com. that is fine. We come to work for

role these executives play in Management determines formulating the performance the success or failure of improvement plan and developing the overall strategy at portfolio portfolio investments. companies. Understanding external influ- team takes on the primary respon- ences, implementing perfor- sibility for designing the performance improvement strategies mance improvement plan in and establishing detailed progress roughly three out of every five tracking for each portfolio invest- cases. When the management ment will be essential to generating team does not take the reins, a strong investment returns and fund-level executive or member maximizing profitability: of the deal-making team typically takes control, underscoring the External factors high premium placed on these Influencing deal making plans and the intimate company and industry knowledge they While private equity firms require. There is an array of chal- would prefer to have control lenges during the implement of over all aspects of their businesses, improvement plans, primarily taxes provide a high level of centered on the establishment of uncertainty. Firms are now internal systems and operating concentrating their attention metrics. on tax-efficient structures that provide future benefits through Implementing performance the use of a step-up in tax basis, improvement plans the deductibility of interest expense and similar strategies. Most firms place a high priority Only 17% of firms say the looming on establishing robust financial threat of a hike in the tax rate for reporting systems and requiring carried interest will affect how much more detailed data, with they invest and operate their daily, weekly and monthly oper- portfolio. ating statistics. IT systems were regularly found to be insufficient Creating performance as well. improvement To download the complete survey Performance improvement report, go to www.mcgladrey. plans have long been a standard com/peg. If you are interested in for most private equity firms participating in the 2013 private equity when making new portfolio survey, please contact Mark Brandt investments. More than half at [email protected] or of the firms surveyed reported 216-522-1124. the utilization of plans laying out clear short- and long-term game plans. Interestingly, the management Crain’s Cleveland Business Custom Publishing 20130128-NEWS--38-NAT-CCI-CL_-- 1/23/2013 2:02 PM Page 1

S-22 JANUARY 28 - FEBRUARY 3, 2013 CORPORATE GROWTH & M&A Advertisement

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By STEVEN C. LEE insuring off the remaining tail liabilities for all of the portfolio eal makers are increas- companies in a particular fund, © 2012 McGladrey LLP. All Rights Reserved. ingly turning to transac- enabling an earlier distribution or tional insurance prod- redeployment of fund proceeds. ucts as risk mitigation Several other factors are con- Dtools in mergers and acquisitions. tributing to the growth in de- In the first six months of 2012, mand for transaction insurance. the total policy limits for transac- In general, deal makers are more GET MORE BOOK OF LISTS – print issue: $44.95 tional insurance policies pur- risk averse today than they were chased increased by 35% over the prior to the global financial crisis. Excel ﬁle - $249 – more data, Including contact info. CrainsCleveland.com/BookofLists same period in 2011, as In addition, the terms of reported by Marsh. the insurance products While successful pri- themselves have im- vate equity buyers have proved significantly since been using representa- they were first introduced tions and warranties to the market. The cover- insurance to distinguish age has improved, there their bids in auctions for are fewer standard exclu- many years, a growing sions, the pricing has percentage of policies STEVEN C. LEE come down, and the placed worldwide in 2012 Transactional underwriting process has were for corporate buyers. Risk Advisors been expedited. Corporate acquirers are Technology and a typically more cautious than their higher level of sophistication are private equity counterparts on enabling the insurers to complete the amount of warranty protec- their underwriting and be in a tion they require in a transaction position to issue a policy within and often lose out on a deal be- the time frame of the overall deal cause of this aversion to risk. negotiations. This process is com- Through the use of transaction monly completed in two to three insurance, corporate buyers are weeks. Finally, a history of suc- having more success in winning cessful claims under these policies sought-after assets, especially has eliminated the early skepti- overseas targets, while at the cism expressed by some parties. same time satisfying their board’s While representations and requirements for risk mitigation warranties insurance is most com- in the deal. monly used, contingent liability The surge in popularity is also insurance, tax liability insurance being fueled by sellers who are and litigation buyout insurance increasingly building representa- are increasingly being used to tions and warranties insurance overcome specific deal obstacles into the M&A process from the the parties are unable to resolve beginning in order to minimize through traditional contractual their post-closing exposure, while indemnification. ■ maximizing purchase price. Strategic private equity spon- Steven C. Lee, Esq., is a principal with sors are using transaction insur- Transactional Risk Advisors. Contact ance policies to maximize the ef- him at 216-905-3350 or email Northern Ohio TMA President John Lane presenting the 2012 Lifetime ficiency of capital structures, and [email protected]. Achievement Award winner Larry Goddard, Managing Director, of SS&G Parkland Consulting, LLC. Reading this section? Let us know and be entered in a drawing to win one of two $100 gift cards. We thank Larry for his leadership and the many contributions that he has Simply email your contact information to [email protected] with the made both in the turnaround industry and in our community. header “M&A Section.”

Crain’s Cleveland Business Custom Publishing 20130128-NEWS--39-NAT-CCI-CL_-- 1/23/2013 1:27 PM Page 1

Advertisement CORPORATE GROWTH & M&A JANUARY 28 - FEBRUARY 3, 2013 S-23 Asset-based lending option can work in private equity By MARK KISKORNA Creative credit structures offer financing flexibility Corporate deal makers also recognize the versatility sset Based Lending (ABL), often referred to as Com- ble credit structures, monitoring and reporting structures support more aggres- of ABL in addressing gaps mercial Credit or Business with fewer financial requirements, it is less sive purchase price multiples. in a transaction’s capital Credit, has been a financing covenants, and in some sensitive to the ebbs and Almost half of the PNC Business Aoption for decades. Over the structure or in combining instances the ability to flows of a company’s Credit deals sourced in 2012 were last 10 years, however, ABL has have springing financial income statement. ABL from private equity groups. with junior capital. become an increasingly important covenants based on avail- structures can be em- Corporate deal makers also financing strategy for middle ability. In some situa- ployed in both stable and recognize the versatility of ABL in If your current capital structure market and large companies across tions, ABL lenders can volatile markets (and ABL addressing gaps in a transaction’s isn’t providing the flexibility you a wide range of industries. lend beyond the asset units often do not trans- capital structure or in combining need to manage and grow your ABL structures can accommodate formulas and have higher MARK KISKORNA fer troubled deals to a with junior capital. For example, business, it may be time to look major cyclical or seasonal swings, credit holds, which can PNC Business workout group). PNC Business Credit, through its into ABL. ■ commodity dependent industries, eliminate or reduce the Credit Over the last few years, access to junior lender Steel City growth capital and companies need for syndication. M&A-focused strategic Capital Funding, both divisions Mark Kiskorna is senior vice president in the midst of a turnaround or Finally, because ABL lending and financial buyers have be- of PNC Bank, National Associa- & regional manager-Midwest Region, restructuring. focuses heavily on collateral and come comfortable choosing an tion, can provide a seamless one PNC Business Credit. Contact him at ABL provides creative and flexi- has more stringent and detailed ABL structure knowing that these stop, cash flow solution. 216-222-8506 or visit pnc.com/abl.

TOP DEAL MAKERS

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

RPM INTERNATIONAL INC. RPM closed nine acquisitions during the last 18 months, including five outside the U.S., adding more than $400 million to annual revenues. BLUE POINT CAPITAL PARTNERS Blue Point Capital Partners recently completed four platform acquisitions, three add-ons, and a significant plant expansion. It also made three divestitures that returned more than $300 million with an average in excess of four times cost.

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

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

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