After an extraordinarily busy year in merger and acquisition activity in 2021, the Business Courier held a forum featuring experts in that space who assessed the current environment for deals and looked ahead to what might be next given the current economic conditions.
The featured panelists were: Kevin Bruegge, a private wealth advisor and managing director of The Evelo|Singer|Sullivan Group wealth management firm; Keith Carlson, managing director and shareholder in VonLehman CPA and Advisory Firm; and Michael Hurley, a partner at Calfee, Halter & Griswold LLP, who practices in the corporate law and finance arena. The forum was held Sept. 29 at the offices of the Cincinnati USA Regional Chamber and was moderated by Steve Watkins, a Business Courier reporter who covers banking, finance, and investments.
Watkins began by noting that 2021 saw $2.6 trillion worth of deals in the U.S., a record. He asked the panelists to comment on what kind of dynamics are affecting the M&A market currently. Hurley commented that this year has still been very strong, but not nearly as much volume as last year. He usually represents companies in the middle-market range, $30 million to $100 million in revenue, who are seeking to do private deals, so broader market forces in the overall economy have not yet trickled down to that level. “I would say it’s not last year, but it’s still a very good year,” he said.
Bruegge remarked that 2021 was so busy it was almost an anomaly. But economic dynamics have changed, the biggest one being rising interest rates. Last year saw interest rates near zero percent, a very healthy banking system and massive amounts of capital after years of good returns in the public markets. “There was this euphoria out there,” he said. “People just felt so great about the wealth effect and sentiment was good.” Rising interest rates have affected valuations and sentiment, he said. But he said it’s still a good time to sell a business because there’s still a significant amount of capital available to buy businesses, which is driving demand for quality companies.
Carlson agreed that demand is still good and capital is available. But he also sees a change in buyer sentiment. “There’s a flight to quality,” he said. “People are getting sector-specific with what they want. They’re being a lot more choosy.”
Watkins asked whether shifting market dynamics and buyer sentiment has affected business valuations. Hurley responded that valuations are still very strong and very seller-friendly, but buyers are doing more due diligence on what they’re buying. “We’re seeing a decrease in the amount of transactions that are closing because people are walking away from deals that they weren’t walking away from in the past,” he said.
Carlson said businesses that have significant problems are seeing their valuations come down “in a fairly meaningful way.” Business with issues such as lack of succession planning, overly concentrated customer bases or earnings volatility are seeing the value of their companies drop, which might not have happened last year. “Lower quality assets have seen a pretty significant dent with respect to those valuations,” he said. He’s also seen a shift in the structure of deals, with less cash but more in other considerations, such as earnouts, “as people try to seek ways to mitigate the risk,” he said.
Bruegge added that valuations are still good, but have declined, especially in some sectors, such as tech, as interest rates have risen. The number of deals is slowing, and has declined every quarter since the fourth quarter of last year, he said.
Watkins asked the panel whether it was still a good time to sell a business. Bruegge responded that it is still a good time because there’s a structural demand for private businesses and still large amounts of cash available. Private equity firms will still be active buyers, he said. He recommended that sellers get professional representation because “Buyers are sophisticated; they buy businesses for a living.”
Carlson agreed that it’s still a good time to sell a business, but said the market has normalized from last year. “We’re in a very normal, more rational market,” he said.
Hurley suggested that business owners ask themselves what their plan is if they don’t sell their business. “Do you still want to be working a hundred hours a week running and maintaining your business? If the answer is no to that, then unequivocally, yes, you should be thinking about selling now,” he said. “And that’s irrespective of market conditions.”
Watkins shifted the discussion to inflation, asking the panel how rising costs are affecting the market for deals.
Carlson said there are no “hall passes” being given for inflation. “Clearly, inflation is baked into your profit-and-loss statement, which also impacts your earnings, which also impacts your valuation,” he said. “So there are no hall passes being given for that.”
Bruegge said most business owners were able to keep up with inflation and expand margins in 2021, but there’s been more pressure on margins this year, as businesses haven’t always been able to pass on the costs as rapidly as they’re rising. He also noted that a structural part of inflation now is wage pressure, which is related to the problem of finding enough people to work.
Hurley cited a recent project he worked on in which the prospect of increased wage costs affected the valuation of the business that was to be sold. “A higher-paid worker base is really starting to impact what has otherwise been an extraordinarily active and frothy market for professional service firms,” he said.
Watkins asked the panel to look a little farther out, a couple years ahead, to predict what the M&A market might look like in the future. Carlson said the market can change very quickly. “You can go from good to bad to great all in one year,” he said. The supply of capital will drive the market, he said, as will access to credit. “Credit drives a lot of these deals,” he said. “There’s still plenty of credit available out there to get good deals done,” he said. “But it’s something to keep a close eye on.”
Watkins then asked if the market dynamics were causing the structure of deals to change.
Carlson said he likes to look at the percentage of cash in a deal as a proxy for the overall market. In the last couple of years, he was seeing deals done with 85% or 90% cash. That’s now typically become a more normal percentage, he said, around 80%, and some buyers have even offered only 65%, he said. “It’s swinging back in the way of the buyer,” he said. But much of that depends on the quality of the business, he said. “The better the quality, the more that advisors like VonLehman can go out and demand higher cash considerations for the business,” he said.
Bruegge said private equity firms may become more prevalent buyers. He also said more deals may be structured with earnouts as a bigger part of them. “The world’s telling us they want to put as much certainty on their side of the table as they can, and an earnout is the perfect way to do it. It locks you into sharing some of that risk,” he said. “We’ve seen that ramp up and expect that to continue.” Bruegge also said rolled equity can be a powerful wealth creator for sellers.
Watkins asked if the COVID-19 pandemic and its effects on businesses is having an impact on how deals are structured now. Carlson said there’s a lot of nuances in structures but he is seeing more deals hinge on continuity of earnings. “Can you continue to deliver what you had historically delivered?” he said.
Bruegge agreed, saying many of the earnout deals he’s seen in the last 12 months have been based on earnings continuity. “That was the biggest question we found from COVID, and it’s a way for buyers to rationalize what they were paying based upon financials,” he said.
Watkins then asked what business owners can and should do as they prepare to sell. Bruegge said any perceived risk will discount the price. “The more you can prove that your revenue is recurring, the more the buyer will pay for that,” he said. He also said a strong middle management helps drive value too. He also said there’s tax-saving strategies that can be accomplished before the transaction closes. “It’s really not hard to save millions of dollars pre-transaction,” he said. The key is to begin looking at those options at least 12 months before the M&A process is started, he said.
Hurley also emphasized starting to prepare early. He suggested talking to wealth advisors and accountants early in the process.
Carlson agreed, saying “I think the most important thing is to nail your team.” Preparing for a sale is not the time to cut corners on service providers, he said. An M&A advisor, wealth advisor and an M&A attorney should be consulted and hired early in the process, he said. “Dealing with people who handle transactions every single day of their lives will give you that advice in your corner well before you actually go to sell your company,” he said. Some clients have even hired his firm to conduct a simulation of a deal, to run it through a stress test a year or more before selling the company. “There’s a lot of benefit to being around smart people who do transactions every day,” he said. “And it never hurts to simulate what a sale is like before you go to sell your company.”
Watkins asked the panelists about how and when they are typically approached in the buying and selling process.
Carlson said he sees many referrals from attorneys or wealth advisors who recommend his firm. Bruegge said the most fruitful and successful relationships are when business owners come to him years in advance, “five years, if not greater, in advance,” he said. “There’s no money to manage, but there’s a human process. There’s the process of planning, there’s a process of helping them find the professionals they need.”
Carlson said the mergers and acquisitions field in general takes specialists. “It takes a lot of closing deals; it takes a lot of repetition,” he said. He cautioned against business owners trying to do it on their own. “There is no possible way for business owners or even people that might be in their sphere to get smart super quick on mergers and acquisitions,” he said. “It just takes closing deals. The best piece of advice is to find people who are serial deal closers and put them in your corner as soon as the notion of selling your business is thought of.”
Watkins asked about the emotional aspects for business owners who are selling off and what advice the panelists had for those who will be adjusting to life after running a business. Bruegge said those considerations should be part of the planning process. Owners should have a vision for what they want their future to be like. They should also think about what kind of buyer they want to sell to. Strategic buyers may not care about the legacy of the business or its role in the community, he said. “Within a couple years, your business will be a hugely successful part of their business, but your business as part of the public is gone,” he said. “That may not sit well with you.”
A private equity buyer may need the owner as consultant for six or nine months, he said. Some may want to integrate the owner into their platform of companies, which could open doors, and provide opportunities to someone who is not quite ready to call it.
Carlson recommended that when owners plan to sell their business to be somewhat open-minded about what life after the sale can look like, especially if they want to maximize the value of the business. “If you come into a transaction with hard and fast rules … you’re completely neutering your advisor’s ability to go out and get the most value for your business,” he said. He also recommended thinking about what their purpose in life will be after the transaction. Many entrepreneurs have worked all their lives to grow their businesses, and if they don’t have a post-business plan, “There’s going to be a huge gaping void in your life,” he said. “I find that most entrepreneurs struggle with completely putting down the business.”
Hurley agreed, recommending that business owners make plans for a new life after they sell their firms because their identity has revolved around their work for so long. “Figure out what you want to do and plan for that,” he said. In some cases, when a buyer wants the owner to stay on for a period of time, he recommended getting to know the new operating partners to see if they are compatible. “Where am I going to actually fit in? That should be one of the discussions that happens right after you get the LOI (letter of intent). People who have done nothing but run their business as a sole arbiter of how things are decided, really struggle with playing in the sandbox,” he said. “You need to keep that in mind about what your role is going to be.”
Watkins then asked the panel about common mistakes they see in the transaction process. Carlson said failing to hire a team of advisers from the beginning is a big mistake. Owners sometimes believe they can negotiate deals without professional help, he said, and then consult professional advisers late in the process. “That’s the worst nightmare for an advisor because there’s no negotiating power for your advisors to come in and negotiate a market deal.”
Bruegge agreed with that, and also mentioned lack of confidentiality as a big mistake. If owners do some “soft marketing” about the possibility of selling or talk about it in social circles, it can damage the process. “When that gets out, it can spread like COVID and it’s going to get back to people you don’t want it to get back to,” he said, such as key employees, vendor, suppliers, and customers.
Hurley said a common mistake is not just failing to form the right team early on, it’s failing to bring them together to work as a team, including having the advising team working with the professionals in the business, such as the accountants and tax experts.
An audience member asked about the hot areas for acquisitions currently. Carlson reiterated that there’s been a “flight to quality,” as potential buyers are looking for businesses that might be able to capitalize on current economic conditions and on the issues with the supply chain. Manufacturing, value-added distribution and business-to-business services are attractive industries now, as is health care, he said. “There’s a pretty healthy degree of skepticism outside of those three or four core areas about what has happened and what is going to happen in the next 12 months,” he said.
Bruegge said he’s seen high demand and big valuations for physician practices, and for registered investment advisors, financial brokerage firms that operate independently. “There’s still frothiness out there in some markets,” he said.
Hurley said “anything touching health care” is still attractive, as are professional services firms. “Anything that doesn’t require a lot of capital expenditures to scale the business,” is being viewed favorably now, he said.
Watkins closed by thanking the panelists for their time and sharing their expertise.
Panelist Bios
Kevin Bruegge, Private Wealth Advisor, Managing Director,
The Evelo|Singer|Sullivan Group
Kevin joined The Evelo|Singer|Sullivan Group in 2002 and today is a principal partner. He serves families of substantial wealth – private business owners, entrepreneurs and multigenerational families – with complex investment and financial planning needs. Kevin is a trusted advisor to owners helping them to optimize liquidity, tax, wealth transfer and investment strategies as part of their overall financial situation during each phase of a business transition; including being purposeful about wealth’s impact post-deal.
On Wall Street named Kevin one of the nation’s elite advisors in its “Top 40 Advisors Under 40” list (2017 – 2020). Forbes named Kevin to its list of America’s “Best-In-State Wealth Advisors” in 2022 for the fourth consecutive year, and notably the Cincinnati Business Courier named him to its 2018 Forty Under 40 class.
Kevin graduated from Ohio University and earned his MBA from Xavier University. Kevin is a board member with The Salvation Army and the Cincinnati Parks Foundation.
Keith Carlson, Managing Director of M&A and Shareholder,
VonLehman CPA & Advisory Firm
Keith Carlson, Shareholder and Managing Director of Mergers and Acquisitions, has devoted his entire career to Mergers and Acquisitions and has executed transactions with both large and corporate clients (billion dollar +). However, Keith has devoted the vast majority of his career to both the lower-middle-market and middle market segments ($5-$250 million dollar transactions). In addition to the diverse array of transaction size experience, Keith has completed transactions as both an advisor and a direct investor (on behalf of private equity funds). The dual experience allows Keith to provide clients with a multi-faceted approach given he can call on experiences from both his advisory and direct investment capacity. Keith’s transaction experience includes 175+ closed transactions totaling in excess of $20 billion in value.
Michael B. Hurley, Corporate & Finance Partner,
Calfee, Halter & Griswold LLP
Michael Hurley counsels privately held and public clients and private equity firms and their portfolio companies on a wide range of business and legal concerns, with a focus on representing buyers and sellers in the M&A/sales process and assisting clients in accessing capital markets through angel- and venture-funding rounds. Serving as outside general counsel to private company clients, Michael advises on legal matters, including commercial contract negotiation, implementation of privacy and cyber-security policies and procedures, corporate governance, organizational structuring, succession planning, and ESOP transactions. As a member of Calfee’s Privacy and Data Security group, Michael has significant experience allocating transactional risks associated with data privacy and security protocols and policies, cross-jurisdiction data transfers, and compliance concerns.
Michael is ranked as an “Up and Coming” attorney by Chambers USA 2022 in Corporate/M&A Law in Ohio: South & Central. He serves as a Board Member for the Association for Corporate Growth – Cincinnati Chapter, and he presents regularly at the Queen City Angels Boot Camp and is active with the Goering Center for Family and Private Business.
Michael earned his B.A. degree from Yale University and his J.D. and M.B.A. degrees from the University of Cincinnati.
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