The Opportunistic M&A Market

The CFO Forum gathered on Wednesday, September 20th to discuss the opportunistic M&A market. We were joined by Glen Braganza, CFO of EasyPark Group, Patrick O’Boyle, VP, Corporate Development at Cox Automotive, and Jim Modak, Managing Director of Results Consulting, LLC. Our moderator Hunter Davis, Co-Head of Aon M&A and Transaction Solutions, kicked us off.

How do you see the M&A market evolving?

Jim: You must “pause” and “position” the portfolio to be ready.

Glen: My previous company raised $90M before everything shut down. We saw assets starting to look distressed. As we head into this phase, many PE and investors are waiting for the market to come down. People are ready to deploy capital and we are seeing auction prices come to market. With distressed assets, the board and investors need to ensure they have runway. Even though there are cheap assets available, venture capital growth funds were not ready to put a hand in their pocket.

Patrick: There is a disconnect with valuations in the market.

Jim: Must be careful with distressed assets 9/10 there is a reason they are distressed.

Hunter: Cost of capital for PE was a major challenge in getting deals done. Capital for PE firms is more expensive than corporate capital.

Patrick: On the surface we love it - 18 months ago it was hard to compete against PE. Healthier for Cox now. We are ready to go but assets are on hold.

Jim: It’s a tough market and leads to a reality check with founders. We are seeing much more patience from PE firms than expected.

Describe the CFO’s role in an M&A situation where the CEO wants to do a deal vs pumps the brakes.

Jim: During acquisition, it is all about Project Management. I’ve completed 3 acquisitions in the past 18 months. One of which I asked about the integration plan. Unfortunately, they had none. Vision is one thing and execution is another. You must have a plan, and not let the vision get in the way of execution.

Patrick: We must unlock value with integration. Deals are easy, the people part is hard. Our biggest challenge is with people and culture. When we buy smaller companies, it overwhelms the other side. We conduct culture assessments pre-close and take learnings of variance and can help with change management.

Glen: Project management rigor, clarity about what is happening, and people aspect. EasyPark is out of Nordics and buys companies with diverse cultures. We haven’t imposed one culture on every organization.

What are some financing strategies?

Patrick: Invest in early-stage companies and buy them out. Have hard conversations with startups, tell them if they want to do a deal “this is what we need”. We typically don’t work with JVs due to misalignment and focus on earn-outs and challenges with valuation gaps and risks.

Jim: There has been a shift to earn-outs vs rollbacks. I can’t tell if it’s a trend, but interesting to see. It’s a dynamic that’s hard to negotiate. Seeing data points: 10% holdbacks or 10% earn-outs that are growth related which involves keeping the founder – which is often good, sometimes bad.

What are you ESCROWING?

Patrick: There are risk-related issues with startups. We escrow 30% over 6 years to protect Cox. If you want to do a deal this is where we are.

Jim: $100M healthcare IT business. Escrow was for sales tax.

What makes a deal successful? Exit Strategies? Key Metrics?

Glen: Write down what we are expecting to get out of this transaction. Otherwise, it’s quick to lose sight of the end goal. Measure yourself by key metrics. Assign point people, steering committees, etc.

Patrick: 4 points of view: 1. Strategy 2. People 3. Operations 4. Did we Deliver against the business case when we add up 1-3. “Make sure the acquisition is healthy.”

Jim: Most PE companies are concerned with top-line growth. Find key performers and strategically lock them in or create a mentoring plan. “Did we achieve retention in addition to revenue growth?” “These people make or break it. If they are gone – it’s not a successful transition.” Must be quick and decisive, things don’t get better in time.

Glen: Critical to keep people that run the business and spend time with them.

Jim: You never want to investigate a transaction without having alternatives. PE side – far more eagerness to do transactions earlier with lower value deals.

Time to IPO is important on the PE side. How do conversations go?

Jim: Recently worked on a deal that net $30M to the founder. I encouraged him to pause and say it will change his life for generations. Once he set his ego aside, he did the deal.

Hunter: One must cultivate relationships with targets that they are interested in.

Patrick: Roll up strategy for mom & pops – life events, new stage growth, transformation deals. Make sure they have multi-year relationships but still people that change their mind. As a private company, we have time.

On the founder side, there is good access to venture capital.

PE side transformational – combo of right valuation that’s supported by the business. PE is open to conversations. It’s about money and does the business support it? Have a network and go-to partners.

Jim: Be careful what expectations are, the numbers are against you. Be prepared for the inevitable.

Patrick: Don’t fall in love with company, be patient. Don’t make poor decisions at the end to get the deal done.

Glen: Try to get experience in. Get the team game ready. Having been through the process is so valuable when it’s time for the right deal.  Start to build that muscle memory, you must be ready to go.

Hunter: It’s strategic to have flying formation of advisors to have locked and loaded for a transaction.

Q&A:

Due Diligence – to what extent do you outsource vs use in-house teams?

Jim: Mixture. You must have someone in-house who knows your business and have key leaders involved. Maybe the CFO could be the Controller. Create a collaborative team.

Patrick: Own it internally, but a third-party point of view is crucial. It’s objective. Use vendors for talent gaps and find trusted advisors.

Hunter: Depends on financing, underwriting, etc. having a third-party or known entity doing that work smooths processes. Building that muscle over time is essential.

How quickly do you think the market will come back?

Jim: Timing is everything. Hard to predict. Lenses of a founder: Don't try to time the market, you can't. You must be rational about other options and go with your gut. Out of pause and into positioning state.

Hunter: Tax changes and regulatory changes drive transactions. The problem is so many varied factors inflation, interest rates, geopolitical issues. PE continues to raise capital and needs to put it to work.

Glen: Founder-led vs CEO/Operator. Figure out a timeframe for Founder. Operator – PE or venture-backed is more realistic. Great assets are coming to the market and money is being deployed.

Deals with Debt? How to finance Deals? Valuation Criteria for multiple offers.

Jim: Cost of Capital is high in a debt-financed situation. PE firms are a little different than big banks, but most daunting is the debt-financing aspect.

Run sensitivity tables, figure out the right gap or cushion.

What are the immediate Red Flags in Deals and how can you uncover them?

Jim: Incestuous Transactions – related parties doing deals = Time to Walk.

Hunter: When CEO/Founder doesn't let anyone else talk.

Patrick: When we buy technology, we struggle with getting under the hood. Make sure we get what we pay for prior to the transaction.

Glen: Connecting the dots, get the team to be vocal and talk about issues. A transparent seller is key!