Middle Market Mergers and Acquisitions by Colonnade Advisors

In this episode, we discuss strategic steps for Equipment Leasing and Finance companies as they grow and evolve. The leadership of some of these businesses may decide to remain a certain size and complexity and be “ lifestyle businesses”, providing healthy cash flow to the owner(s) while they continue to run the business. However, other options exist, and exiting the business for a favorable multiple to a bank or other buyer can be an excellent strategy, the dream plan for many entrepreneurs. In this interview, we interview Bob Rinaldi and discuss the potential to grow and leverage a business to realize a win-win exit strategy. This episode is a great follow-up to our previous show, Start Early & Exit Right, as we dive deep into many of the concepts of M&A rationale. What’s unique about this episode is that it is geared toward a specific target audience, our friends in the Equipment Leasing and Finance (ELF) industry. In this episode we cover: How partners such as Rinaldi Advisory Services (RAS) and Colonnade work with Equipment Leasing & Finance (ELF) companies to prepare for a successful sale (1:00) Bob: My practice has evolved around three target audiences in the equipment leasing space. About 60% of my clients are independent leasing (ELF) companies that I work with through the Confidential CEO Resource℠ model. This is multi-year exit strategy planning. Whether the company exits or not is not important. The idea is to get them from point A to point B so they’re prepared if that time comes. The second part of my practice is working with banks, predominantly community banks who are looking to get into the ELF space. Third, I work with a handful of service providers in the industry, as well. Rinaldi Advisory Services (RAS) offers the Confidential CEO Resource℠ (CCR) as a robust, full-scope advisory service that provides clients with a broad base of support for long-term strategic management. RAS works with CEOs and Principals to provide meaningful analysis and actionable insights. The aim is to help ELF senior management arrive at strategic and tactical decisions geared toward managing growth as well as operational and financial efficiencies. Colonnade has deep experience in the ELF industry. Colonnade is a leading investment banking firm that has completed over $9 billion in M&A transactions for clients in the business and financial services industries. Colonnade has advised many companies in the EFL sector on strategic transactions. Please see our Quarterly Updates on the ELF industry here. What are the biggest challenges for the independents as they look to be “bank ready” for an acquisition? (4:00) Bob: The biggest challenge is predominantly that these founders/owners are very much entrepreneurs. They started the business. They’re very much involved in the everyday transactional nature of their business. They don’t have the time to gain the perspective to look at their company objectively and determine what needs to happen to be a better company from a non-transactional standpoint or to be a better company for the purpose of acquisition. Jeff: Let’s drill down a little bit on some of the biggest challenges for the independents. There’s size and scale, where are you today and where are you going? Banks are the natural resting home for specialty finance companies, and ELF companies are such a great asset class for banks in particular. Obviously, they’re a number of large independents, but from the bank’s perspective, what are the other things you see where companies need to focus? Is it finance and accounting? Is it operations? Is it servicing? Bob: Yes. Yes. And yes. It’s really all those things. But even before you get to that, let’s look at the business and find components within the business that definitely will never, ever fit in a bank. I’m able to identify those things. You then have to decide what to do with those things. Do I jettison those things completely? Do I sell those off? Do I break it...

Before you sell your company, even the odds. This episode features guests Mark Achler and Mert Iseri, authors of the recent book, Exit Right: How to Sell Your Startup, Maximize Your Return and Build Your Legacy. Exit Right demystifies how to conclude the startup journey, a perfect complement to our podcast, which focuses more on the exits of larger middle-market companies. As Brad Feld states in the Foreword, “Mert and Mark set the roadmap for how entrepreneurs and business owners can proactively manage the process of getting to a successful exit along the way”. As Jeff says at the start of the interview: Mark and Mert cover so many great informative topics in the book. There is a wealth of tips to guide business owners through what can be a tumultuous process, getting through the exit. There are also so many topics we align with: relationships matter most, planning for wealth, time kills all deals, and the importance of following a best-practice process. In this podcast episode, we focus on three topics with a lot of meat to each: What is FAIR? Why does it lead to the best transactions? (3:00) Mert: What we realized as we started to gather stories and experiences from M&A bankers, lawyers, serial entrepreneurs, etc is that the real question isn’t, “Let’s find out who’s going to pay the most.” The real question is, “What’s the right home for this business? What’s the right home for my people? What’s the right home for the vision? Who is going to serve our customers the best?” Our view of an exit went from being a short-term transaction to a long-term partnership. The term “exit” is a poor word choice. You’re not really exiting anything. If anything, it’s the beginning of a brand new relationship. So when we ask ourselves, “What makes a great home for a startup?” we focus on these four elements that make exits great. FAIR. Fit, Alignment, Integration, and Rationale. If you have all four of those, it just so happens that you’ve also found the person who’s willing to pay the most for your business, because they will realize the long-term value and they’ll price the deal accordingly. Fit is the cultural fit between the two companies. Amazon and Zappos are a great fit. Time Warner and AOL, are probably not a great fit. It’s easily described. Can you sit next to this person for four hours and not want to kill them by the end of the meeting? Can you actually make decisions without written rules? Are cultural values aligned? Are the DNAs sort of similar, cousins to each other between those two companies? Alignment is about being aligned with your co-founders, board, and shareholders in terms of the direction of where you want to go. The acquiring company also must be aligned. We almost always dismiss the alignment that we need from all sides of the table. This isn’t two sides looking at each other. This is two sides looking in the same direction. Integration has to do with the plan for how these two companies will come together. We’ve seen so many examples of this plan of integration being done as an afterthought. It’s not just product and sales integration but people integration, finance integration; many, many layers. And all of these stakeholders have different agendas that need to be individually managed. Rationale. Can you explain to your grandmother why this acquisition makes sense? How are we going to deliver more value to our customers as a result of this partnership? How is two plus two equal to 100 in this context? Mark: There are profound financial implications to the FAIR framework. Let’s take Integration. Integration is the ugly stepchild. People always say, “Oh yeah, we’ll deal with integration afterward.” Turns out that in many transactions, it’s not always 100% cash. Sometimes there’s an earn-out for future performance. If you’re not integrated well (you don’t have the resources you need to execute your plan), there are some significant financial implications to the earn-out. Then there are the...

This episode continues with our “industry spotlight series” where we focus on specific trends and opportunities in middle-market M&A transactions. Our previous episodes have covered four industries in which Colonnade has played a significant role as an M&A advisor to both buy-side and sell-side clients. We add F&I Agencies & Payment Plan Providers as industries where we deeply know the dynamics and players so as to provide exceptional service to clients who hire us to assist them in a transaction. Colonnade has studied the F&I Agencies and Payment Plan Provider markets for the last 20+ years. We have worked on nearly 30 M&A transactions on the buy-side and the sell-side. We have gotten to know the industry players and the buyers. We’ve identified some high-opportunity M&A plays that could help to drive even more value, scale, and customer satisfaction in the industry. Spotlight on F&I Agencies (1:00) In this first part of our episode, we answer the following questions: Where do F&I agencies sit in the F&I ecosystem and what value do they provide? (1:00) Gina: Between the F&I administrators and the F&I office and the dealership, there are F&I agencies. They are independent agencies with independent agents. They are like insurance agents. They bring together the product administrators and the dealers. Gina: The agents have deep knowledge about the products they represent. They can train the F&I office on those products and how to sell the products. They also act as the middle man or the interface with the administrator. They are one distribution arm for the administrators, which makes them critical in the ecosystem. They are a valuable component of the overall F&I ecosystem. Jeff: The F&I agency is a particular point in the value chain. It’s a differentiator. Some administrators sell to dealers through a direct sales force, others use F&I agents. Gina: There are administrators who go direct to dealers, but most administrators also use independent agents. They may have a direct sales force, but they have independent agents also. The only sector where that seems to not always be the case is selling into independent dealerships. You tend to see more direct agents that are employed by the administrators selling into the independent dealerships. Gina: An important component of what the agents do is help the dealership with reinsurance. Reinsurance is an important component of a dealership owner’s profits. For every contract, every F&I product that is sold, there is a reserve set aside for future claims. F&I agents are usually very fluid and educated in talking about reinsurance and making sure that the dealership has the right reinsurance programs. So they deal with reinsurance, they do training on products, they do training on how to sell products. They sometimes help with staffing in the F&I office, and they’ll help with some of the technology that is between the F&I office and the administrator. Gina: F&I represents a third of a dealership’s profits. Everybody within the organization and affiliated with the organization is going to make sure that F&I runs smoothly. What does a typical F&I agency look like? (7:00) Gina: There are well over 100 independent agencies, and approximately 75%-80% of F&I agencies are less than 10 employees. There are very few large agencies. There are a few that are scaling, but there really aren’t many. There is only one national agency that comes to mind and that’s Vanguard (owned by Spectrum Automotive). Vanguard has been very acquisitive in building out its agent network. We also see Brown & Brown, which is a P&C insurance brokerage. They’ve been acquiring F&I agencies over the last few years. I don’t know if they have a national footprint yet, but they’re probably getting pretty close. And then you have acquired a lot of small agencies. ​​Jeff: The Brown & Brown example is an interesting one that we’ve watched over the last five to six years as they’ve entered the industry. We’ve...

In this episode, Gina Cocking and Jeff Guylay pick up their discussion around the due diligence process related to the sale of a company. This episode is a great add-on to the previously released four-episode series exploring the due diligence process: EP003: Business aspects of due diligence EP004: Legal aspects of due diligence EP005: Accounting aspects of due diligence EP006: Technology aspects of due diligence As we explore the organizational aspects of a due diligence data room, you’ll hear the reminiscing of both Gina and Jeff as they remember their days on Wall Street physically managing the data rooms of decades past when there were literally rooms full of documents that buyers would make appointments to review while the analysts on the deal watched. You’ll hear how much data rooms have transformed in recent years with the birth of the electronic data room. Get ready for a call-to-action, which Gina describes as a “resolution” that you can make any time, to get your company’s documents located, organized, and filed in a neat system to be ready for a transaction. Thus our title for the episode: Get your Ducks in a Row. We answer the following questions in this podcast episode: What are data rooms, and why are they so important in the due diligence process? (2:00) What were data rooms like in decades past? (2:30) What are data rooms like today? (4:30) What is contained in an electronic data room? (6:20) Are data rooms static or do they change over time? (10:00) How is confidentiality protected in a data room? (16:00) What can a company do to prepare for a transaction? (20:00) What do you suggest companies do immediately after listening to this episode in regards to data rooms? (27:00) What are data rooms, and why are they so important in the due diligence process? (2:00) Jeff: Big picture, data rooms are the electronic location of all the materials that we help our clients collect and collate during our process of selling the company. They contain all the information that buyers and investors will need to complete a transaction. So it’s everything from articles of incorporations, to financial models, to contracts, etc. Gina: The data room is critical in any buyside or sellside process. The data room is where all the documents are kept that the buyers have access to when reviewing the business. We also give access to the buyers’ accountants, attorneys, HR consultants, marketing consultants, etc. Datarooms are all electronic (online) nowadays, but it has not always been that way. What were data rooms like in decades past? (2:30) Jeff: As an analyst in investment banking in the ’90s, I would sit in a physical data room on Wall Street. We would have buyers come through, and they would have to sign into the data room and show ID. It was a room full of documents where buyers could spend several days going through documents. They were not able to take any documents out of the data room. They could ask to selectively photocopy certain documents, and we analysts would photocopy them. The business folks, the attorneys, the accountants would come in in-person and spend days digging through the documents. Gina: I remember being stuck in Bethlehem, Pennsylvania in a basement of a chemicals manufacturing facility for about two weeks. One of the challenges in a physical data room is you couldn’t have multiple buyers come in at the same time. You also had to double-check all the files when everyone left to make sure nobody took a document. What are data rooms like today? (4:30) Jeff: The efficiency with electronic data rooms has been a game-changer. You can have 30 professionals across various functions looking at documents at the same time and really increase the cycle time of the transaction. Everybody has a unique password, they sign in (online). We can see what documents they’ve downloaded, which ones they’ve reviewed, and which ones they haven’t looked at. You can see who is really being active....

This episode is an excellent continuation of our discussion in E023 about the pros and cons of partnering with a financial sponsor. When a company is considering an M&A transaction, there’s a range of alternatives. On one side of the spectrum, there’s selling 100% of the company and exiting. On the other side of the spectrum is no transaction at all (“stay the course”). In the middle are the options to sell various amounts of a company’s equity. When considering raising capital, more often, we see our clients sell a majority stake, in which an investor buys more than 50% of the equity in the company. In some cases, we see a minority stake investment, which is less than 50% of the economics. Today’s episode dives in deep on minority investments, and Colonnade Advisor’s Managing Directors Gina Cocking and Jeff Guylay explore: Reasons companies take on minority investments (1:56) Gina: The most common reason we see is to buy out a minority partner. Another reason is to increase the equity capital in the business so it can raise debt and finance growth. Often, there’s a thin layer of equity in founder-owned companies because they’ve been distributing their own capital. They now want to make an acquisition, for instance. To make that acquisition, they will need more capital in the business. They need equity to then raise debt. We hear business owners say, “I want to diversify my investments. Or, I would like to fund my kids’ education, weddings, etc.” Minority investments can be raised to give owners of businesses some liquidity. Jeff: In our last podcast (E023), we talked about the value that financial sponsors bring to a founder-owned or an entrepreneurial-run company in terms of strategic benefits to the growth of the business. Sometimes we hear our clients say: “I don’t need a lot of growth capital” or “I don’t need a lot of liquidity” or “I don’t need to buy anybody out. But this might be the right time, given what’s going on in my industry, at this particular point in time, to bring on somebody who can help me out. I might need help in the capital markets. I might need help with a growth plan. I might need help with acquisitions.” These strategic issues are important and sometimes supersede the economics of the transaction. Different types of minority investors and what they are seeking (4:58) Gina: I tend to put the investors into three buckets: venture capital firms, strategic investors, and private equity firms and family offices. Venture capital funds frequently make minority investments in companies. VCs are more focused on companies that are pre-profit and in the early stages with a lot of growth ahead. When you take an investment from a venture capital firm, you’re not getting liquidity. Dollars are not going into your pocket. Jeff: Venture capitalists are focused on putting capital into the business to help you grow. A strategic investor is interested in investing in a company to lock in a long-term relationship. If one of your vendors has an investment in you, you’re probably not going to move away from that vendor. So that’s where you can get strategic money. Strategic investors will also invest in companies to watch new technologies as they grow. They are then at the forefront and in a position to make an acquisition later of that company. Jeff: Strategic partners bring not just capital but relationships. They’re investing in you because there’s a good business case, and they’re going to help you grow. Gina: The third bucket is private equity firms and family offices. Some PE firms will make minority investments. We often see private equity firms making minority investments because they really like the company and they want to get their foot in the door. The company’s not ready to sell yet, and the investor wants to be the first capital there. They partner with the company, sit at the board level, and help with strategic decisions. When the company’s ready to sell, they’re a trusted partner and...

This episode continues our series of "industry spotlights," in which we focus on specific trends and opportunities in middle market M&A transactions.

This episode continues our series of "industry spotlights," in which we focus on specific trends and opportunities in middle market M&A transactions. This episode focuses on the automotive reconditioning industry, a $5.4 billion industry that is highly fragmented and ripe for consolidation. Colonnade has extensive transaction experience in the automotive services industry and has been the sell side or buy side M&A advisor on many of the automotive services industry transactions that have taken place over the last decade. Colonnade has insider-level mastery of the drivers of valuation, competitive positioning, business trends, relevant metrics, and the right buyer universe, enabling us to provide superior deal execution to our clients. Colonnade recently published a white paper on the automotive reconditioning industry. The white paper is available here. In this episode, we answer the following questions: What is automotive reconditioning? (02:10) Gina: Automotive reconditioning is the process of making a newly acquired vehicle retail-ready. Dealerships get cars in a couple of ways. On the new side, they get it directly from the OEMs, and on the used side, they may be buying it from auctions or taking vehicles as a trade-in. Used vehicles need to be reconditioned to be car lot ready. Do dealerships have an in-house reconditioning department? (04:17) Gina: The majority of dealerships outsource reconditioning. What is the size of the automotive reconditioning industry, and who are the industry participants? (05:01) Gina: We estimate that the automotive reconditioning industry is a $5.4 billion market. It is comprised of mainly single technician entrepreneurs, a technician who is skilled in a specific trade. When a dealership outsources reconditioning, they are probably outsourcing it to three to five reconditioning technicians that are independent contractors. What types of dealerships typically outsource automotive reconditioning versus having it in-house? (06:25) Gina: The largest dealerships are the most likely to outsource because they realize how inefficient it is to have highly paid employees reconditioning cars. They could use that time doing much more valuable service lane work. Independent dealerships and smaller dealerships tend to have automotive reconditioning done in-house. How many companies are in the automotive reconditioning industry? (07:50) Gina: We don't really see many companies of scale. Based on the number of dealerships out there, we estimated as many as 40,000 independent technicians nationwide doing this type of work. Why do dealerships outsource automotive reconditioning? (09:57) Gina: Skilled technicians are expensive and in high demand at dealerships. Outsourcing automotive reconditioning helps to keep up the profitability of the dealership. Why do dealerships need to make vehicles retail ready as quickly as possible? (10:30) Gina: New and used vehicle supplies are low, and demand is high. Low supply and high demand are driving prices of cars to an all-time high, so dealerships need to get vehicles retail ready as quickly as possible. How do dealerships manage relationships with multiple outsourced automotive reconditioning vendors? (13:02) Gina: It is a lot of process management, and there is some software to manage the process, but still, managing five different vendors is inefficient, especially if the dealers do not control their daily activity because they are independent. Who are the largest participants in the automotive reconditioning industry? (14:05) Gina: The largest in the industry is Dent Wizard. Some companies, such as Streamline Recon, are located in large metropolitan markets, and they may have some scale. But, aside from these companies, there are not many companies of scale. This industry is very fragmented. What systems or processes do automotive reconditioning companies need to scale up? (16:16) Gina: There are a couple of...

In previous episodes, Colonnade Advisors has outlined our unique 16-week sales process timeline in four phases: pre-marketing, go to market, management presentations/buyer due diligence, and exclusivity/documentation. In this episode, we will be doing a deep dive on indications of interest ("IOI"), which take place at the end of the go to market phase, and letters of intent ("LOI"), which take place at the end of the management presentations/buyer due diligence phase.

This episode continues our series of "industry spotlights," in which we focus on specific trends and opportunities in middle market M&A transactions. This episode kicks off several episodes around the finance and insurance ("F&I") products industry, estimated at $80+ billion in size at the retail level. Specifically, this episode is all about vehicle service contract ("VSC") administrators. Colonnade has extensive transaction experience in the automotive F&I products industry and has been on the sell side or buy side M&A advisor on many of the significant F&I products transactions that have taken place over the last decade. These transactions are complex and require an investment banking team with deep industry knowledge. Colonnade has insider-level mastery of the drivers of valuation, competitive positioning, business trends, relevant metrics, and the right buyer universe, enabling us to provide superior deal execution to our clients. In this episode, we answer the following questions: What is a VSC? (02:30) Gina Cocking: A VSC is like a warranty but cannot be legally called a warranty. OEMs can only offer warranties. Essentially, a VSC is covering any mechanical failures on a vehicle, which can range from problems with the engine, electronics, windows, and others. What types of car problems are covered by VSCs? (02:38) Gina Cocking: Different VSCs cover different car problems. Some have full coverage, and others are more limited. Car buyers may also buy a tire and wheel contract, a key fob contract, or an appearance protection contract. There is a whole slew of products that can cover mechanical failures, which are noninsurance-related problems. What is covered by car insurance versus a VSC? (03:00) Gina Cocking: Collusion damages, such as if a driver gets hit by another car or runs into a stop sign, are covered by insurance. VSC covers all mechanical failures. How often are VSCs purchased with cars? (3:40) Gina Cocking: About 51% of cars sold in the United States through franchise dealerships are sold with a VSC attached to that car. What is the F&I products ecosystem? (03:46) Gina Cocking: Dealerships are the primary distribution channel as they are selling the F&I product to consumers. Third party marketers also sell VSCs. The VSC administrators adjudicate the claims. For example, when a consumer has a mechanical failure, they will contact the VSC administrator, who will work with the repair facility to ensure that the repair facility is paid for any claims. If it is an administrator obligor, they are responsible for the payments for the claims. F&I agents are the intermediary between the administrator and the dealership. What are the economics of a VSC? (05:16) Gina Cocking: VSCs are profitable products for dealerships and other sellers. For example, if a dealership sold a VSC to a consumer for $3,000 (VSC usually costs $2,800 to $3,500), the administrator probably sold it to the dealer for $1,000, and $500 was paid to an F&I agent. Therefore, the dealership is going to make a $1,000 profit on the sale of the VSC. Part of the $1,000 paid to the administrator covers administration costs, and part of it goes into the trust to pay for future claims. VSCs are typically a five-year contract. The funds held at the trust will earn out over five years and will be used to pay future claims. Any excess funds in the trust are remitted back as profits to the dealership or whoever owns the trust. What is the typical F&I product penetration rate on vehicles sold? (08:04) Gina Cocking: Public dealerships have shown F&I product penetration rate greater than 100% on average per vehicle sold last year, which means they are selling more than one product. Penetration rate continues to increase primarily driven by returning customers who have had good experiences with these products and dealerships' increased marketing efforts around these products. What is the value of VSCs to...

This episode kicks off a series of “industry spotlights” in which we focus on specific trends and opportunities in middle market M&A transactions. Our first episode in this series is all about an exciting niche industry ($35 billion) that Colonnade has dominated in the role of advisor to both buy-side and sell-side clients. This industry focus has allowed us to deeply know the industry players and provide exceptional service to clients who hire us to assist them in a transaction.

We are excited to focus today’s episode on the final phase of our unique 16-week sales process. Today we are focused on phase four: exclusivity/documentation. We invite you to listen to episode 001 for more information about phase one (pre-marketing), episode 002 for more information about phase two (go to market), and episode 0016 for more information about management meetings: https://www.coladv.com/podcasts/002/ Other episodes dive deep into technical aspects and tactics used in middle market and mergers and acquisitions. We also invite you to download our 16-week sales process timeline for more information on how Colonnade Advisors typically approaches the process of selling a company: https://coladv.com/wp-content/uploads/Four-Phases-with-graphic.pdf In our deep-dive discussion on exclusivity/documentation, the word “scary” comes up quite a few times. Rather than being scary from a horror film or haunted house, this scary is more like cold feet before a wedding. That’s because exclusivity/documentation is when you pick your partner and take a leap of faith with a single buyer. You’ll learn that in this phase of the sales process, we are not yet on the homestretch. In fact, our discussion unveils the many challenges of this phase of the sales process that must be simultaneously and actively managed. You’ll hear that this phase of the sales process almost feels like a crescendo. Our job at Colonnade is to manage this increasing set of workstreams and pull off a successfully closed deal. Then, as you’ll hear in the podcast episode, it’s time to celebrate. Key topics covered in this episode: • Preparing for the shift of power from seller to buyer • The importance of the letter of intent ("LOI") negotiations • How to select the winner (while keeping others warm in the background) • Who’s involved during the exclusivity/documentation phase • How long the process takes, and how much it costs • Pitfalls that we have encountered during this phase and how Colonnade mitigates these risks with our clients What is the exclusivity and documentation phase, and how do you get up to this point? (01:07) Gina: "This phase occurs when a seller is exclusive with a single buyer—we have received several bids and determined the winner. Both parties sign an LOI at this phase, and the seller agrees not to provide information or engage with any other potential buyers. The seller is essentially going off the market, which can be a bit scary because if the deal does not move forward with the exclusive buyer for some reason, then we will have to go back to the other bidders." What tasks need to be completed during the exclusivity and documentation phase? (02:11) Gina: "During exclusivity and documentation phase, we work through the confirmatory due diligence, which often involves a buy-side quality of earnings report. Also, during this period, we negotiate, finalize and execute the definitive purchase agreements and work through any related regulatory tasks to close." Is it possible for sellers to go through the exclusivity and documentation phase with multiple potential buyers? (03:18) Jeff: "In large transactions, it is possible to run multiple parties through this phase, but it typically does not happen in middle market deals.” What is the importance of the letter of intent (LOI) negotiations? (04:13) Jeff: "LOI negotiation is critical because we want to nail down all the topics that we think are going to be critical in negotiation and final documentation before we commit to one party. Hammering out these key topics ahead of time also expedites the process." Is the highest price generally selected as the winner? (05:05) Jeff: "Business owners do not always pick the highest price. It is also about picking the best terms." Listen to Colonnade’s podcast episode 007: Striking a Deal: Price & Terms: https://www.coladv.com/podcasts/007/ Once a seller is exclusive with a buyer, is there a backup plan if the deal falls apart?...

In previous episodes, Colonnade Advisors has outlined our unique 16-week sales process timeline in four phases: pre-marketing, go to market, management presentations/buyer due diligence, and exclusivity/documentation. Today’s episode focuses on phase three: management presentations/ buyer due diligence. We invite you to listen to episode 001 for more information about phase one (pre-marketing) and episode 002 for more information about phase two (go to market). Other episodes dive deep into technical aspects and tactics used in middle market and mergers and acquisitions. We also invite you to download our 16-week sales process timeline for more information on how Colonnade Advisors typically approaches the process of selling a company. In this episode, we focus on the management meetings, where we introduce our seller clients to a limited set of qualified buyers that have put forth strong offers to buy the company. Management meetings fall on the heels of all the work Colonnade Advisors does with our clients to prepare for this stage of the sales process. At this point in the game, we’ve worked through the list of potential buyers and have narrowed the field to the most qualified. Management meetings are the first time the seller's management team will interact with this limited set of buyers. Thus the title for our episode: Seller and Buyer’s First Date. Key questions explored in this episode are: What purpose does a management meeting serve? (02:15) Gina: "Management meetings are a continuation of the storytelling of the company. It is the opportunity for the management team to tell their story in their own words. Management meetings are different from diligence meetings—it is not a meeting for potential buyers to ask detailed questions. Management meetings are the showcase for the management to tell the origin story, to explain in their own words what the business does. And then, very importantly, talk about the growth opportunities.” What topics are covered during management meetings? (04:35) Gina: "Management presentations involve much of the confidential information memorandum but told from management's voice. Additionally, financial numbers are updated from when the confidential information memorandum was released. Sometimes, pages are added to the management presentation specific to the buyers we're meeting with. Jeff: "When we go to market and have one-on-one conversations with buyers and investors, different themes emerge. Some of them are new and intriguing and bring us down different paths and highlight new growth opportunities. We benefit from the collective insights and questions of up to 100 or more different investors that are looking at the acquisition from their perspective. Once we collect all these thoughts, questions, and comments that buyers ask of us, we weave those themes into the management presentation. It is a collection of ideas that we've been able to cultivate from the market." Who is invited to the management meetings? (08:12) Gina: "From the seller's side, you'll have the CEO, President, the Chief Marketing Officer, the Chief Sales Officer, and the CFO. Management team members that are leaving post-transaction should not attend the management meeting. (From the buyers’ side) if the buyer is a private equity firm, it will typically include Principals, VPs, and maybe some analysts. If the private equity firm has an investment banking advisor, their banking team will typically attend. If it is a strategic acquirer, the group may be larger. There may be an internal M& team and/or an investment banking advisory team. If the buyer is a private equity-backed company, it will usually be the investment banking advisory team, the strategic core team, M&A team, and some of the private equity firm representatives." What’s the format for a successful management meeting? (12:15) Gina: "Meetings typically take place at the seller's location, either their office or...

In this episode, Jeff Guylay focuses on the best practices to maximize after-tax proceeds from a transaction. Jeff is joined by featured guest Raj Rathi, co-founder of Rathi Singh Private Wealth Management, to share his insights from helping his clients understand the nuances of how best to manage their wealth. Jeff and Raj discuss the importance of diligently working to articulate one's long-term personal and financial goals and utilize the wealth created in a transaction to achieve those goals. Key takeaways from this episode are: • Planning matters; and the sooner business owners start thinking about these important topics, the better • Assembling a complete team, spearheaded by a trusted private wealth advisor, can materially improve the odds of achieving business owners’ lifelong goals post-transaction through wealth preservation In this episode, Colonnade Advisors addresses the following questions as related to maximizing wealth created in a transaction: Why and how did Raj make the transition from working with corporate clients to wealth management? (02:24) Raj: "My corporate life tended to be transactional, where I would have wonderful client relationships, but sometimes those relationships tend to fade after the transaction has transpired. I realized that I liked to keep those relationships, and I liked to have those flourish a little longer. Also, there is an incredible opportunity for my personal clients to get the value-added services from somebody that can look at their situation from a much broader perspective." "Corporate clients have the benefit of an M&A advisor giving them expert advice on how to navigate every nuance of a transaction. Private clients don't get that same type of benefit. They tend to do things by themselves. There is a tremendous amount of inefficiency that exists in the way private clients manage their assets." "Part of the reason for my transition was the opportunity to work with corporate clients on an individual basis and help them, as a trusted advisor, on the private side. To help them figure out the most efficient structure regarding what happens with their wealth after they sell their business." When should business owners start thinking about post-transaction wealth management structures? (08:35) Raj: The best structures tend to be implemented before a transaction takes place. Colonnade, as a sell-side advisor, is incredibly value-added. You focus on maximizing your clients' pretax return on a sale and also try to highlight that there is a maximization that happens after the sale with the estate taxes and structure." "No client has a crystal ball on exactly when they may sell a business. The best advice is pre-planning never hurts because you don't know when exactly the sale is going to occur." Can business owners work in parallel with an M&A advisor on a sale transaction and a private wealth advisor on post-transaction wealth management? (10:50) Raj: Yes, it can run on a parallel path, but it takes a little bit of work. Business owners will need a good banking team to assist on the actual M&A execution and have a good private banking team that can work with the estate attorney or other key advisors. The critical component here is the more time you have, the better, and if you don't have a lot of time, there are still things that can be done that are quite valuable." Why is it important to consider post-transaction wealth management before a transaction takes place? (12:18) Raj: "Knowing how much of the transaction proceeds you will need for your lifespan, how much of the proceeds you want to give to your children, and to charity, in advance, will allow private wealth advisors more time to research the best approach." "Protecting your kids from creditors or predators can be done pre-transaction, harder to do post-transaction, not impossible but a little bit harder." "With the right structure, the estate tax bill can be alleviated into perpetuity. These are the...

In this episode, Gina Cocking and Jeff Guylay discuss the different types of auction processes we use in a sale transaction, including a negotiated deal, a small process, a targeted auction, and a broad auction. Gina and Jeff talk about each approach's pros and cons and why Colonnade advises clients on selecting one versus the other, recognizing that each situation is unique and calls for a customized approach to the market. This episode concludes with a case study of a negotiated process, a broad auction, and a hybrid between a small and targeted auction. In this episode, Colonnade Advisors addresses the following questions as related to the different types of auction processes: What are the four primary types of auction processes that Colonnade ues when helping clients sell their business? (01:52) Gina: "There are four general categories, ranging from the smallest audience to the largest. A negotiated deal involves one bidder. A small auction process generally involves two to five bidders. A targeted auction involves the most likely universe of buyers, ranging from six to 20. Lastly, a broad auction involves contacting a large universe of potential buyers, over 20 parties. There are pros and cons to each of these types of auctions." What are the advantages of a broad auction? (03:42) Jeff: "Broad auction is all about market discovery. All four types of auctions involve competition and market discovery, but a broad auction involves unturning every stone, looking under every nook and cranny, and finding that needle in a haystack that you wouldn't have thought about otherwise." How do we get to the highest value and best outcome with a negotiated auction? (05:14) Gina: "With a negotiated auction, there is one buyer, so there is the risk of no competition. The buyer could decide to change the price or walk away at any time. One tactic that we use is creating a credible threat. As the seller's advisor, we work in the background on creating materials to go to broader auction, if necessary. That is the credible threat: if the deal has a misstep at any point, the buyer knows that we can immediately go to market and get full market discovery." Jeff: "Some sellers do not want to go through a broad auction, so they are willing to get a slightly lower price for the benefit of only dealing with one buyer. In addition to pricing, deal momentum and getting a deal done are also critical. " What are the benefits of running a small process? (08:01) Gina: "A small process has a lot of the same dynamics as a negotiated auction. One additional advantage with a small process is actual competition, so you can compare bids and push bids up to the highest possible bid of that group. A second advantage is that the seller will have a fallback buyer if the first choice drops out for some reason. Another advantage to a small process is confidentiality. Selling a company is a very revealing exercise because the seller has to tell buyers everything about the company. A negotiated deal and small process limit the risk of who is getting the seller's confidential information." What types of buyers are generally in a small process and targeted auction? (10:46) Gina: "In a small process, it tends to be strategics. When there is a smaller universe of potential buyers, it tends to be the ones who really understand the business and are already interested, which are likely to be strategics. Jeff: "A small process is almost always largely comprised of strategics. There is probably a mix of strategics in a targeted auction, maybe have half a dozen strategics and ten private equity firms. That sort of universe can generate meaningful competition." What are the trade-offs between a small process and a targeted auction? (11:27) Jeff: "The workload for a small process and a targeted auction is probably the same, but the seller does lose a little bit of a grip on confidentiality because they are talking to 20 parties instead of two." What is one of the...

This is a special episode discussing how to build successful business relationships. In this episode, Gina Cocking, is joined by featured guest Willard Bunn, a managing director at Colonnade Advisors. Willard has previously served as chairman, chief executive, and director of several commercial banks. He has held numerous board positions and has extensive experience as an investment banker. Willard has the ability to build deep relationships with potential clients and industry professionals, resulting in seemingly effortless marketing. One of the key takeaways from this episode is that trust is a critical factor in building a successful business relationship. In this episode, Willard addresses the following questions as related to building business relationships: Before you meet somebody for the first time, do you do any special preparation beforehand? (02:02) Willard: "Yes, there is so much information available on LinkedIn and other sources. When I meet people for the first time, I will search for them and extract what I can. It's helpful when you show up at a luncheon table to know who exactly you're talking to." How do you prepare when you don't know you're going to meet a person? For example, when attending conferences with hundreds of people in a room. (03:11) Willard: "I have found the best icebreaker has always been to ask. ‘What is your business? What do you do?’ Because there is nobody on the planet who doesn't want to talk about his or her business. Once you get that laid out, then you know where to go with the next question." Once you have met a person and chatted for a few minutes, how do you continue with that relationship? What type of follow-ups do you do? (03:57) Willard: "Normally, the follow-up would be an email of some sort. In the email, try to grab onto something in the conversation because that person has met a lot of people that evening, too." How soon do you generally follow-up with someone that you have met? (04:53) Willard: "I try to follow up quickly with an email, so the image is still in their mind. I also think it's helpful to attach something to the email. For example, for Colonnade's marketing, attaching a podcast episode or white paper would be helpful because it gives them an idea of who you are and the company." Do you have any strategies for cold calling or emailing people? (04:53) Willard: "If you are reaching out to someone for the first time, it is a good idea to attach a piece of work that you have done. For people that you're in touch with regularly, it is a good idea to attach a current update to the piece of work. This kind of process can stretch over the years. Building these relationships take time." When you do outreach and do not get a response, how long do you wait before you reach out to somebody again? What strategy is there without making the person feel guilty but reminding them that you're there? (08:19) Willard: "These are situational. I think once a quarter is probably sufficient time to give some downtime, but not to let it lapse either." What are other successful maintaining relationship strategies have you encountered? (09:21) Willard: "When I was running a bank, I was the target for investment bankers, and one of the bankers would send a non-business book every Christmas. I always thought that was a good way to keep in touch via a non-aggressive Christmas present." How do you prioritize maintaining relationships with people? (11:35) Willard: "One of the things that I noticed in the investment banking business was the bifurcation of time. When you get busy with current active deals, how do you simultaneously keep in touch with prospects? It's like everything else in life, you have the work you have to do right now in front of you, but you also have a list on the side of prospects. Communication now is much easier than ten years ago, which makes reaching out to prospects to keep in touch much easier." How do you reach out to people that you have not...

In this episode, Gina Cocking and Jeff Guylay focus on valuation - determining what your company is worth. Key takeaways from this episode are: In this episode, Colonnade Advisors addresses the following questions as related to valuation: What are the different valuation methodologies used? (00:48) Gina: "There are comparable company trading, comparable transaction, and the more complex discounted cash flow valuations. There are also other types of valuation methods that are not relevant to what we do on a day-to-day, so we will focus on the three main ones." At what point in the process is valuation analysis generally performed? (01:12) Jeff: "It is often performed ahead of going to market. Many times, it is ahead of us doing due diligence. We might update these valuation analyses for our clients at various points throughout the process, and we do a gut check on whether we are ready to go to market." What is the value of hiring a sell-side financial advisor in determining the transaction price? (01:12) Jeff: "Ultimately, it is the market that sets the transaction price. The real value of hiring a financial advisor to help sell a business is to get the best price and terms, which is generally achieved through an auction process." What is a comparable transaction valuation? (02:43) Jeff: "It is what the market has offered up to companies that are comparable to the company being evaluated. For example, if a company sold at eight times EBITDA, it's logical to assume that another company that is very similar, or comparable, would trade at eight times EBITDA." What attributes of a target company will impact the comparable transaction multiple? (03:37) Jeff: "The multiple will depend on all sorts of attributes of the specific target company, whether it is growing faster or slower, whether the management team is better or worse, client concentration, or geographic concentration. All sorts of things influence the multiple that a buyer is willing to pay." What is comparable trading valuation, and how does it apply to middle market transactions? (04:17) Jeff: "This involves looking at where the comparable public companies are trading in the public markets. The comparable trading valuation metrics are a little more theoretical for the middle market transactions. It is a helpful metric and something used in negotiations with buyers, but there are all sorts of factors that drive the multiple relative to what you might expect to achieve in the private market." Gina: "Volatility in the public market will impact the valuation of public companies. You do not see the same day to day volatility in a private transaction. For a middle market company, comparable trading valuation is less relevant because of the size differential." What is discounted cash flow valuation? (06:35) Jeff: "The discounted cash flow valuation is an analysis of the businesses' free cash flows. Then discount the cash flows at a certain discount rate to arrive at the net present value of all those cash flows. The biggest drivers of this analysis include the discount rate, which could be derived using the CAPM model, and a variety of other factors." What industries use revenue multiples? (09:37) Gina: "Pre-profitability companies use revenue multiples. It is often used in high growth type businesses such as software and biotech companies and recurring revenue companies. The revenue multiples can range depending on the industry." What is the rationale for using EBITDA multiples? (10:29) Gina: "EBITDA is a proxy for cash flow and normalizes income between various companies." How do you determine which multiple metrics to use? (11:58) Jeff: "There are many different metrics that buyers and sellers can focus on, and it is generally industry-specific. It is important for the seller and their advisor to focus on what are the right metrics for the seller's business." What are the multiple metrics applied to? (12:34) Gina: "There are a lot of different ways...

In this episode, Gina Cocking and Jeff Guylay continue their discussion on deal structuring. Today, the focus is on roll-ups. Key takeaways from this episode are: • Highly fragmented industries are ripe for roll-ups • A roll-up is an attractive exit alternative for companies that are subscale or have an incomplete management organization • Transparency from both the buyer and the seller leads to the most successful outcomes Other episodes in our series about deal structuring include price and terms, earn outs, rollover equity, and reps and warranty insurance. Later in this episode, Gina is joined by our guest Rob Humble, Chief Revenue Officer at Innovative Aftermarket Systems ("IAS"), to share his insights from executing a roll-up strategy for IAS as the Senior Vice President of Strategy and Corporate Development. In this episode, Colonnade Advisors addresses the following questions as related to roll-ups: What is a roll-up? (01:02) Gina: "A roll-up is when an owner, which could be a private equity owner or a strategic, starts with a platform company. The roll-up adds other companies in the same industry, and they're typically smaller companies than the platform. The add-on companies are rolled into the platform." What is the purpose of implementing a roll-up strategy? (01:34) Gina: "It's a way for a company to increase in size inorganically, quickly, and while doing so, they are recognizing both expense synergies and perhaps revenue synergies." Jeff: "It plays on the themes that we've talked about in other episodes, which is bigger is better, in many respects. Generally, bigger companies are more attractive to a wider audience of investors or buyers." What industries typically do roll-ups? (02:42) Gina: "One industry that comes to mind is the insurance agency industry. We have seen this time and time again, where a private equity firm buys an insurance agency, a large insurance agency, and then they start making smaller acquisitions." Jeff: "The insurance distribution sector is perfect for the roll-up strategy. It's low capital intensity, recurring revenue, and highly fragmented market." What type of companies implement roll-up strategies? (04:29) Jeff: "This strategy works for large public companies, private equity firms, and independent companies." What is the rationale for roll-ups? (05:34) Gina: "One is geographic. Number two, it might be because of specific product knowledge. Number three, it can be to get a specific customer. What is the financial benefit of roll-ups? (06:49) Jeff: "A large platform company is going to trade at a higher multiple than a smaller company. There's arbitrage if a large platform company acquires smaller add-on acquisitions and integrates successfully." Why is integration important? (07:56) Gina: "Sometimes, acquisitions fail because they fail to integrate properly. That is not just making sure everybody is on the same technology system, but integrating cultures, integrating client relationships, and integrating product sets. That is the real challenge in an acquisition." Jeff: "The integration is key to a lot of things, certainly to value maximization over time." How do add-on companies benefit from roll-ups? (10:23) Jeff: "The add-on companies benefit from the resources of the parent company, the larger enterprise. Add-on companies can grow their business, which probably will have some contingent consideration involved in the transaction, and be a part of the success." Gina: "The smaller company, ideally, will have some rollover equity or earn outs that are structured on growth in the company, so you get to participate in the upside." When Colonnade represents a seller into a roll-up, what diligence is done on the buyer? (12:10) Jeff: "We do diligence on the parent company and the financial sponsor. We talk about their track record and history in doing roll-ups. We do diligence on the acquisitions they have done already and the outlook of the combined entity....

In this episode, Gina Cocking and Jeff Guylay continue their discussion on deal structuring. Today, we explore reps and warranties ("R&W") insurance. In this episode, we cover: · What is R&W insurance? · What is the pricing of R&W insurance? · What is the process to obtain R&W insurance? Key takeaways from this episode: · R&W insurance is a tried and true product, and securing it will not slow down the pace of a deal · Smaller deals, down to $10 million in size, can still get R&W insurance · R&W insurance is a great way for a seller to get more cash at close, rather than having 10%+ of the purchase price tied up in a multi-year escrow Other episodes in our series about deal structuring include price and terms, earn outs, rollover equity, and roll ups. Later in this episode, Gina is joined by our guest Mike Wolf, who specializes in R&W insurance at Willis Towers Watson's M&A Group. In this episode, Colonnade Advisors addresses the following questions as related to R&W insurance: What is R&W insurance? (00:27) Jeff: "R&W insurance insures the seller and buyer from a breach of representation and warranties in the purchase agreement. " What is the difference between R&W insurance and an escrow? (01:27) Jeff: "R&W insurance avoids utilizing an escrow. An escrow is deferred consideration that is withheld to make sure that these reps and warranties survive and that they are fulfilled post-transaction." How often is R&W insurance used in transactions? (02:38) Jeff: "R&W insurance is a relatively new concept in the M&A world." Gina: "It really came into being about seven years ago. Now, it is used in almost 95% of all transactions." What is the purpose of R&W insurance? (02:48) Gina: "In a purchase agreement, there's always a section called reps and warranties regarding the company and the seller. The seller has to represent fundamentals such as that the organization is in good standing, is licensed in the state, and the sellers have the authorization to do the transaction and have the consents. " What are other typical reps and warranties in the purchase agreement? (03:45) Gina: "There is usually a representation that the capitalization is correct, all subsidiaries are listed, the financial statements are in GAAP or other accounting standards used, there is an absence of undisclosed liabilities, the contracts are true and all have been disclosed, all obligations to related parties have been disclosed, all real property has been disclosed, all intellectual property has been disclosed, listed, and truthfully identified, litigation has been disclosed, privacy and data security representations are made, taxes have been paid, and employees and labor matters have been disclosed." What is the typical coverage amount? (06:12) Gina: "The coverage is typically 10% to 15% of the purchase price. For deals under the size of $50 million, the coverage percentage may go up.” What is the typical premium for R&W insurance? Are there any other fees? (07:11) Gina: "Typically, we see premiums between 3% to 5% of the coverage amount. Economically, it does get cheaper with more coverage. Small deals are more expensive on a percentage basis; larger deals get a break. Another fee is the underwriting fee charged by the insurer, typically around $50k." Who pays for the R&W insurance? (08:50) (13:29) Gina: "This is where the negotiation comes in. Everybody has a different view. The buyer wants the seller to pay; the seller wants the buyer to pay." Jeff: "It is really a buyer's policy. No matter who is paying the premium or who is paying their share of it, it is the property of the buyer." Why do buyers prefer R&W insurance versus an escrow? (09:51) Gina: "Buyers do like R&W insurance. A breach of a representation and warranty can cause a lot of conflict between the seller and the buyer when there is an escrow, especially when the seller is continuing to manage the company. It's easier if there is a breach of...

In this episode, Gina Cocking and Jeff Guylay continue their discussion on deal structuring. Today, we explore rollover equity, a form of contingent consideration in which the seller takes a portion of its proceeds as equity ownership of the new or acquiring company. In this episode, we cover: Why is rollover equity important? How often is it used? How is it structured? What happens in platform investments vs smaller add ons? How does it differ from management incentive pools and from taking stock as consideration in a publicly traded company? We talked about how the math works related to rollover equity in leveraged transactions and how we help manage these critical negotiations with buyers. Importantly, we talked about how rollover equity can set up all parties in the transaction for success through the alignment of interests. Other episodes in our series about deal structuring include price and terms, earn outs, R&W insurance, and roll ups. More than two-thirds of M&A transactions in recent times utilize rollover equity. The primary purpose of rollover equity is to align interests through shared economic ownership. Rollover equity gives the owner a second bite at the apple, as you’ll hear in the episode and read in the show notes. Rollover equity is also tax-deferred. Later in the episode, Jeff is joined by our guest Vernon Rew, a partner at Whitaker, Chalk, Swindle & Schwartz, who shares his perspective on closing conditions and the importance of staying on task and getting deals to the finish line. In this episode, Colonnade Advisors addresses the following questions as related to rollover equity: What is rollover equity? (00:55) Gina: "The sellers of the company, the founders, the owners are going to take some of their proceeds and roll it over into equity and ownership of what we call Newco. Newco is the new or acquiring entity." Why is rollover an important equity component of a transaction? (01:52) Jeff: "Probably the most important answer or topic here is that it aligns interests, particularly when you're talking to private equity-backed buyers." How often is rollover equity used in transactions? (02:56) Gina: "67% of the transactions in recent times have utilized rollover equity." What are the tax implications of rollover equity? (05:10) Gina: "Taking equity as consideration in a deal is tax-deferred. With equity that you are rolling over, no taxes are paid at the closing. You're not going to pay taxes until you sell that equity and convert it into cash." What are the other advantages of rollover equity? (05:55) Gina: "Another advantage of rollover equity is that it gives the owner a second bite at the apple. Rollover equity can be valuable. With that second bite at the apple, we have seen many cases of people that have gotten very wealthy with the second turn of the sale of the business, and even third turn." What is the seller demonstrating to the buyer when rolling over equity? (08:40) Jeff: "Showing commitment and confidence in the forecast and the business, and just setting up the business for success through mutual understanding." What is the role of a financial advisor, such as Colonnade, in rollover equity discussions? (09:30) Gina: "Rollover equity introduces a whole other component to diligence where it's the diligence of the other side. That is where a trusted advisor's perspective is helpful. In our case, with many of our clients on the deals we work on, we know the universe of potential buyers pretty well, so we can give our perspective." If selling the business to a private equity firm as a platform company, what type of diligence should be performed? (10:15) Jeff: "There is due diligence around the private equity firm and their experience and track record. The dating dynamics of some of these management meetings are fundamental because these are going to be your partners." If selling the business to a private equity-backed strategic company, what type of...