m&a apr12 roundtable herman

7/29/2019 M&a Apr12 RoundTable Herman

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Sponsored by

Roundtable

ponsored by

StandingOutin a

PrivateEquityCrowd


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Roundtable

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s the private equity industry has grown and entrepreneurs have

become more aware o their options when it comes time to sell,competition among PE rms has intensied. For many rms, di-

erentiating themselves has become the biggest challenge. o discuss the is-

sue,Mergers & Acquisitionshosted a special roundtable, sponsored by Aba-

cus Finance Group LLC and Goulston & Storrs P.C. o reect a range o

perspectives and views, we brought together a handul o prominent lower

middle-market dealmakers, including three private equity investors, an in-

vestment banker, a lender and a lawyer.

Mary Kathleen Flynn: Lets start by discussing thecompetitive landscape or private equity frms.

Jamie Elias: Everybody likes to talk about thecompanies in their portolio and the areas o expertisetheir rms possess. Tats all ne and good, but you

need to be able to look at enough balls coming overthe plate beore you swing at one, and so at rivest

we ocus on that ront end o the business, in termso trying to generate quality opportunities outside othe traditional investment banking auction process.Private equity is much more competitive than it used

to be, and there are more and more rms ev-ery day. You dont necessarily know who yourcompetition is on a particular deal, but youknow that there are other rms knocking on

the door, because word spreads airly quicklywhen a business owner is thinking about do-ing something. Tey have attorneys, accoun-tants, private wealth advisors, and everybodystarts talking. Te key to success in this busi-ness is to be in that rst grouping o peoplethat the business owner talks to when he or

Jamie Elias

Find thedeal beoreit fnds you.

Roundtable Participants

Matthew Carroll, WestView Capital Partne

Timothy Cliord, Abacus Finance Group L(sponsor)

Jamie Elias, Trivest Partners

Mary Kathleen Flynn, Mergers & Acquisit(moderator)

Philip Herman, Goulston & Storrs P.C. (sp

Devin Mathews, Chicago Growth Partners

Tom Wylly, Brentwood Capital Advisors

36 MERGERS&ACQUISITIONS April2012


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she is ready to move orward with a transac-

tion.

Timothy Clifford: As a lender, we oten seemultiple private equity rms which are goingater the same transaction that were lookingat, and its interesting to see how the privateequity rms are diferentiating themselves.One might bring in an operating partner, oranother might diferentiate itsel by structur-ing the equity in an innovative way.

We oten do that as a lender. For exam-ple, we can ofer a senior-stretch term loan,

whereby we provide more structural exibilityas an alternative to a senior-mezzanine execu-tion. We have a stable and signicant sourceo capital, secured by an FDIC-insured de-pository base, which allows us to ofer reliablecash ow and nancing exibility, providingcertainty o close. Tis was the case with the

WestView eSolutions deal helping West-View to diferentiate itsel.

Matthew Carroll: Tis business has ab-solutely gone rom a gatherer business to ahunter business. Tere used to be so ew pri-

vate equity rms that when I was an analystin investment banking in a private capital-raising group, I knew the names o every partner. Ididnt know these guys, but I knew the names o every

partner at every private equity und in the countrybecause I maintained a database, and oten times

we sent a book to every one o them and that was in

Lower middle-market dealmakers come together to talk about how private equity frms play the dierentiation game

Sponsored Roundtable

Youve got tolet everyoneknow you wantthe deal.

Matthew Carroll

April 2012 MERGERS&ACQUISITIONS3


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Roundtable

1995, 1996. Ten I shited into private equity, where

Ive been basically ever since, and now its more thanten times the rms, more than ten times the capital.I think years ago you could just wait or the phoneto ring and most investment opportunities wouldcome your way. Now youve increasingly got to getout and nd them, because no one Brentwood needsany one WestView. Tey just dont. We all hope wehave angles, industry experience or ocus on minorityrecaps in WestViews case, and that absolutely helps,but getting in ront o deal ow is something thatneeds consistent daily ocus. We have to rst makesure we see the opportunity and then make sure we

diferentiate ourselves. You do that by getting up andgetting out there.

Devin Mathews: It used to be, back in the day:a couple o guys would get a call rom a banker, and

theyd call a couple o other private equity guys, andall our o them would do the deal together, and theentrepreneur would have no choice. Whats happened

in the last 15 years in the private equity industry is

that entrepreneurs have gotten very savvy about theprocess o selling their businesses. Tey might have100 percent o their net worth tied up in this asset.

All their eggs are in one basket, and they should havechoices. Tey should be able to pick their partner.Tey should get good advice. And they should be ableto get top dollar, or the best relationship, or whateverit is they want out o the transaction.

Philip Herman: I have a question or om. Whenyoure sending out books or seeking rms who mightbe interested in a deal, to what extent do you seg-

ment them and do much match making? As attor-neys, when we represent our clients who are lookingto partner with a private equity rm, were very muchtrying to gure out the objectives that the client hasand then we look or the match.

Tom Wylly: We do segment and match upour clients with the appropriate private equityrms. Tere are so many rms, and most aregood actors although there are a ew bad ac-tors -- but even within the good actors, youvegot diferent industry expertise and behaviorpatterns. You have track records o how ag-

gressive theyve been. You also have trackrecords o how good theyve been with theircompanies in terms o what have they beenlike to live with. So not only are price and up-ront terms critically important, but what therm and the partner leading the investment isgoing to be like to live with on the back end isalso an important element.

Te other thing is that we urge our clientsnot to all in love with any one rm. We haveexamples where the CEO ell in love with aPE rm early in the process, and that PE rmthought they had an edge. But they were lighton their bid and too heavy on the structure,and we told them, Youre not there. Youreout. Tey didnt believe us and they lost thedeal. I learned this lesson a very hard way as abanker many years ago rom a client who said,om, the relationship begins when the priceis right. I said, Say that again? He said,

Te relationship begins when the price is right. Iwas too high on my ee or a particular M&A assign-ment. And so what that means or the private equity

Entrepreneurshave gottenvery savvyabout the

process ofselling theirbusinesses.

Devin Mathews



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rms is i these guys are all together and around the

same price and the same terms, then were into a loto other important value-add and relationship actors,but i one PE rm is 15 percent higher thanthe other, as much as our client might love theother rm, the clients going to say 15 percentis a lot o love.

Elias: We have a model that says, Findthe deal beore it nds you. Tere is a per-ception out there that the only way to buya company is through an investment bank,and that is just at out not correct. Tere are

over 200,000 businesses in the U.S. alonewith revenues between $10 million and $250million, 90 percent o which are owned byounders. Many o these ounders are babyboomers who are set to retire in droves in thenext ve to 10 years. So we try to outpace oroutank the investment bankers. About 10years ago at rivest, we put in an outboundcalling program that says everybody -- romour entry-level associates to partners -- make25 to 30 connected calls to deal generators permonth. Te vast majority o deal generatorsare business brokers. Tey might not have the

ancy Park Avenue addresses, but these indi-viduals are spread all around the country andotentimes generate telephonic relationships

with business owners. In addition to busi-ness brokers, we call on lawyers, accountants,insurance brokers, and anybody that we think has arelationship with a ounder owned business. We doan outreach program to constantly remind them that

we want an introduction to a business owner. All theintermediary has said to me is, Call this businessowner at this phone number, hes expecting your call.I that introduction leads to rivest investing or pur-chasing that business, we pay buy-side ees equating toone percent o the purchase price, plus $100,000. Inmore traditional auction oriented situations, the busi-ness owner pays a ee to the investment bank. Oneprogram we started doing about ve years back thathas denitely caught peoples attention is that we givean S class Mercedes Benz, in addition to that buy-sideee, as an additional thank you and incentive.

Clifford: Its a terric analogy between an invest-ment bank selling a company or a seller, and a private

equity rm buying it rom that seller. Te diference

can be seen in how valuation is afected: What is thePE rms entry multiple? How much did the PE rm

pay or it? Ten the ofset to that is, How does whatthe PE rm paid impact the lender? Because the lend-er looks at that. Te PE rm is hopeully not paying asmuch as it perhaps may pay with a ull auction, which

would lessen the leverage requirement. Tereore, we,as the lender, can probably take more comort in put-ting less leverage into that transaction. So you can see,depending upon how the transaction was originated,how valuation and leverage levels can be afected.

On the investment bankers side, in an auction sit-uation, certainty o close can be a diferentiator. As alender, this is where Abacus helps private equity rmsto diferentiate themselves with the seller and the in-vestment banker. When a PE rm is putting in a bid,it has got to know that it has the nancing to back upthe bid. A lot o it is: How solid is the nancing? Howstrong a commitment is it? Tats why speed to closeis so important.

Certainty ofclose can be a

differentiator.

Timothy Clifford




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Roundtable

Working with rivest on its Group III Interna-

tional deal theyre a designer and manuacturer othe highly recognized Wenger Swiss Army brand weput our partnership strategy to work. By this we meanspeed, certainty o close, experience in the brandedconsumer products industry and fexibility in transac-tion structuring. We also oered to introduce rivestand Group III to another branded name in the sports-equipment arena, which could help with revenuegrowth. Industry knowledge and relationships aretwo other dierentiators or us.

Wylly: Te selsh argument or hiring the invest-

ment banker is, we spend six months to six years

cultivating relationships with sellers. We spend a loto time getting to know the company beore we gethired, and we usually have to compete to get hired. Akey element o this process is setting expectations ovalue and terms. So what hopeully a banker bringsis, while we may make the buyer pay more than he

would pay on a proprietary basis, no question, but we

bring him something that will close.

Flynn: What are some other strategies PE frms useto stand out?

Carroll: I think youve really got to declare yourselto a company and its advisers. In ootball, theres a de-ensive term when you really commit, which is youvegot to sell out, and you do, you have to sell out. Itsnot the bad use o that term, its the good one. Youvegot to let everyone know you want the deal. I wantthis investment. Our entire rm is behind it. Youstill absolutely need to do thorough due diligence but

every little thing you do along the way needs to showyour level o ocus and commitment. Tingslike knowing the industry super well, makingpotential customer and strategic intros beoreyou are even selected, right down to who youchoose as a lender. You bring a lender whocares about the deal, someone who knowsthe sector, asks good questions, and someoneyouve already vetted yoursel. For example, inmy most recent investment, in eSolutions, Ibrought in im, because I trusted him. I knewhed close, he had nanced other healthcareI/outsourcing investments or me, and I

knew he had hospital relationships that com-plemented mine. You have to paint the pictureor the management team o what he/she canexpect rom the entire team you are bringingto the table.

Clifford: Te theme here is: How do pri-vate equity rms dierentiate themselves? It issimilar to how lenders dierentiate themselves.

At Abacus, were generalists by background,but there are a couple o areas where we havea lot o experience, including healthcare. Inthe example o eSolutions, and knowing howmuch our private equity sponsor wanted to

win a really nice investment opportunity in asought-ater sector, I considered, in addition

to capital, what else can we do or WestView CapitalPartners and eSolutions? Where Abacus added valuehere was in our deep knowledge o the healthcare in-dustry and in our long-standing relationships in thatindustry. We were able to leverage those relationships,introducing WestView to hospitals across the country,

which enhanced WestViews positioning in the eyes o

We urge ourclients not to

all in love withany one frm.

Tom Wylly



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management.

Carroll: oo ew people in our business have ahealthy respect or whos really making it hap-pen, and its the entrepreneurs, not us. Tereare a lot o people in our business who thinktheyre smarter than the entrepreneurs. Privateequity can get a bad name in the minds o en-trepreneurs, and oten, we have to overcomethat when we rst meet a management team.Unortunately, proving that out to a CEOcan be dicult, its a very sot and uzzy topicand can sound too salesy. So, or example, I

push existing portolio company CEO reer-ences early and oten. And Im not saying justcall mine. Im saying, please call reerences on

whoever you get down to the short strokeswith. Im very comortable with how I treatmy CEOs so i I can get a prospective man-agement team to make these reerence calls,Ill take that bet any day.

Mathews: Unortunately or entrepre-neurs, a lot o people in our business still takethe approach that theyve got the checkbook,so theyve got the power. Sometimes the big-

gest dierentiator is, Dont be a jerk. Howabout this? Dont pull out your BlackBerryand start checking messages ve minutes intoa management meeting. Do your homework,have good questions, show that you actually careabout the business. Dont show up in a Hermes tieand dont have the limo waiting outside. Even better,dont be that guy who even takes a limo.

Elias: Without a doubt private equity has de-nitely, in the last ve to 10 years, developed a reputa-tion or having very sharp elbows. For the opportuni-ties rivest deems highly attractive, the rm marketsa fexible deal structure coined, Just Say No. Tishighly eective campaign counters the industrystypically rigid structure and has been increasingly em-braced by many ounders and deal sources. We JustSay No to what all these other private equity rmshave told the owner is just the way things have to bedone in a transaction. Its part o our secret sauce soIm not going to go through what the elements o thecampaign are, but the program relates to the level oounder reinvestment, the type o capital structure,

escrow indemnications, working capital adjustment

and re-trading. Were comortable doing it becauseweve done it or so long that we know what works

and what doesnt work. We have a lot o fexibility.

Flynn: Lets hear rom the lawyer in the room abouthow exibility gets translated into deal terms.

Herman: As lawyers, were bound by the deal thathas been agreed to. I mean, it gets tweaked. It getsfeshed out, so there might be some changes at themargins, but when a PE rm comes to us and says,Find the creative, fexible way to do this, we do.

And it involves a bunch o diligence up ront.

Wylly: Tere are two things the owner is thinking.Is this going to close, and is this going be a partner-ship, or is this guy going to be a pain in the neck? Itsabout that simple at one level. Te owners who wantto stay in are looking or a partnership. Teyre notlooking or a dictator. Tey built this company. Teybuilt the value.

We fgure outthe clients

objectivesand look or amatch.

Philip Herman



m&a apr12 roundtable herman

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