Middle Market Mergers and Acquisitions by Colonnade Advisors – Details, episodes & analysis

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)
• What are the biggest challenges for the independents as they look to be “bank ready” for an acquisition? (4:00) 
• What are some of the biggest challenges for banks pursuing an acquisition of an equipment leasing company? (9:30)
• What determines the level of a premium in the sale price that an ELF company can expect? (20:00)
• What has M&A activity looked like in recent years and what are the prospects? (23:00)
• What about Private Equity buyers in this space? (26:30)

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 outside of the company and put it in a separate entity so that what is left is sellable and simple to understand? Compare that to a buyer looking at the company and thinking, “I like this, I like this. I hate that. Therefore, I’m not doing it [the acquisition].”

For example, say that there is a heavy services component of the (ELF) business; services component being something that has morphed, be it operational leases or servicing equipment that is leased. A bank can’t be in that business. If that is an absolute key critical component to your leasing business, then a bank buyer is probably never going to be the buyer, which is going to leave you looking at non-financial institutional-type buyers, and they’re fairly limited, so that’s a problem. That is when you look at it and go: “If that’s what we’re always going to do, then this maybe is just going to be a lifestyle business. Let’s just find ways to improve the income generation, the profitability, and keep it as a lifestyle business.”

What are some of the biggest challenges for banks pursuing an acquisition of an equipment leasing company? (9:30)

1) The banks must use experienced advisors who understand the appropriate valuation models.

Bob: If the bank has not been in the business before and their only experience with acquisitions has predominantly been buying other smaller banks, the first challenge is the valuation models. Banks are used to paying a multiple of book value. Leasing companies are not valued that way; their valuation is based on a multiple of earnings or pretax adjusted net income. In a typical leasing company, most of the leases are on a fixed term, fully amortizing type of a structure; therefore they just generate income. But the assets don’t stay on the balance sheet that long, they continually roll-off at a rapid rate, so you’ve got to keep putting on more. It’s really not an asset play as much as it is a net income play.

Jeff: When we talk to banks as acquirers of these businesses, from either the buy-side or the sell-side, you’re absolutely right. It’s all about the income-generating opportunity. Yes, there are assets associated with it, but much more importantly, it’s “What’s the potential earning stream for this business within the bank?” (See: Discover the Rationale for a Synergistic Business Merger).

Bob: That really comes down to the financial institution’s advisor, a buy-side advisor. If they’ve not had much experience in the equipment leasing space, especially current experience like Colonnade has, they’re already at a very big disadvantage because now you’ve got two entities that are blind and stating the same thing and focused on book value, so they’re getting bad advice along with their own preconceived ideas. That’s like a double whammy right out the gate.

It’s common when you find that a bank or their board, for whatever reason, have just got very comfortable with a buy-side advisor, who has never had that much experience at it but they’ve just gotten very comfortable with them and they wouldn’t even conceive of going outside. A lot of this gets really back down to, “Is the bank nimble? Is the bank flexible? Does the bank have a CEO that has cut a bigger vision?” The same thing with the board, the death of any kind of an institution is just getting so stuck in your way that you just can’t get out of it.

2) The CEO of the bank must have a visionary leadership style that allows the acquired company to thrive.

Bob: It all still goes back to the CEO of the bank and how progressive they are, how aggressive they are. And aggressive does not mean they’re careless.

Jeff: The folks that we generally work with on the banking side have made that decision. They said, “Okay, we’re going to get into specialty finance. We want to do it in X, Y or Z asset class, and we have the headset to bid accordingly, and that these businesses are valued differently than bank deals. The multiples are different, the metrics are different. We’re committed, we’ve got board approval, we’ve got senior leadership approval and we’re going to go ahead with it.”

Bob: You and I know one of the smartest, most aggressive community bankers: Chuck Sulerzyski ​of Peoples Bank of Marietta, Ohio. Peoples Bank is located in the Southeast corner of Ohio, squarely in Appalachia country.

How does a bank that size, originally ~$1 billion in assets when he took it over and roughly $7 billion today, make such successful leasing company acquisitions? One located in Vermont and one located in Minnesota? If you take a look at the numbers, the ROA and ROE of the bank have improved dramatically. Their yields and spreads have increased dramatically. Their asset growth has increased significantly in the commercial real estate (CRE) and in the commercial and industrial (C&I) sectors. His shareholders are being rewarded handsomely and will continue to be.

Jeff: Chuck sets a great example. He has been aggressive in good ways. Peoples Bank also acquired an insurance premium finance company, and they’re diversifying. 

Chuck has the right headset in that he looks to acquire businesses to expand and diversify their geographical footprint. That’s a real success story, in my view. 

Bob: If you’re going to acquire a leasing company that’s growing, that’s used to growing assets, the last thing you want to do is turn them into a bank. That’s the whole premise for why you’re going to buy a leasing company – is to expand the scope of the bank, not to contract it. It requires an introspective look of the CEO and his team: can they make an acquisition and not micromanage it and end up turning it into a bank?

3) Banks must be able to create objectives around diversification of geography and asset classes. 

Bob: Equipment leasing is not a geographic-specific industry unlike, let’s call it, commercial real estate. Banks are very familiar with commercial real estate. Real estate is always local. Commercial real estate is local, you’ve got to know the geography that you’re in very well so that you understand the commercial real estate in that market.

Banks must understand what they’re trying to achieve in three to five years in terms of what percentage of their (Commercial and Insurance) C&I assets they want in various sectors.  How much do they want to get to in ELF? What do they want it to look like in three years, four years? Depending upon how big that number is, that determines the modality of the type of equipment leasing business you could get into. There are multiple facets to the equipment leasing industry: 1) small ticket, (transactions less than $250,000), middle-market/mid ticket (up to $5 million per transaction size), and large ticket (above $5 million per transaction).

Jeff. Take Wintrust. They’re not really “a bank”. More than 40% of their loan portfolio is insurance premium finance. They’ve got a big equipment finance business on top of that. There’s probably 50% to 60% of loans that are non-traditional banking assets. As a result, the ROA on that bank is considerably higher than its peers; and as a result, the stock trades higher. 

And Peoples, as we’ve discussed, has the right headset that they need to acquire or look to acquire national platforms outside of Marietta, Ohio. Obviously, they’ve done some bank acquisitions too in footprint, but expanding to get national business is part of the CEO’s strategy. 

What determines the level of a premium in the sale price that an ELF company can expect? (20:00)

Bob: It falls under the quality of earnings, platform, and quality of human resources.

1. Quality of earnings: I think about the repeatability of the earnings, as opposed to having a trend line of earnings that is a sawtooth (up and down, up and down). Quality of earnings should be fluid and show continued ramped-up growth over a period of time.
2. Platform: The ability to scale. What’s their technological capability? What’s the platform built off of, is it homegrown? Is it well protected? Is it SOC compliant? If you had more capital, can you scale it?
3. Quality of human resources: What does the management team look like? What’s the average age of the team? What are their qualifications? What does the core management team look like behind them?

If you cover all three of those pretty darn well, you’re going to get the higher end of the premium scale for sure.

What has M&A activity looked like in recent years and what are the prospects? (23:00)

Bob: Activity’s been strong for the past few years. Part of the activity was exacerbated when everybody thought that in 2021 there was going to be a new tax act and capital gains were going to go up.  The biggest reason over the past four to five years is because you’ve got an aging-out (in the midst of the Great Resignation) of the Principals of these companies. It’s just a normal progression, and it happens every five years or so. You get a number of individuals who have had their own leasing companies who started them 20 odd years ago. If they started 20 years ago, here we are 20 years later, they’re in their mid-60s to late 60s. If they don’t get out now, when are they going to exit? Because typically there’s going to be an earn out. If you wait till the age of 70 to get out, you may be working on an earn out between the ages of 70 and 73.

On top of that, there’s the aspect of an ELF company having a capital constraint. At some point, their capital is not going to hold them to keep borrowing on their line of credit because the debt-equity ratios will get too high and they’ll have a hard time borrowing. It’s really at about that time when they have to start thinking about what’s next. Do we bring in another equity partner? Do we bring in some sub-debt? All that does is kick the can down the road. And I always tell them at that point: “You’re already selling part of the company. Just sell the whole thing.”

Listen to this podcast episode/read through the shownotes to see the Four Reasons Company Owners Consider a Transaction (15:25)

What about Private Equity buyers in this space? (26:30)

Jeff: We regularly get calls from folks looking to find platforms to acquire and build upon. There are some opportunities there: To remain independent, nimble, and flexible outside of the bank model, and take in additional capital to grow and potentially enhance the financing capabilities through securitizations and others.

Bob: The equipment leasing industry is a fairly mature industry. It’s fairly sophisticated. For an independent leasing company to bring in private equity, I see that as only a solution if you don’t believe you’re able to sell the whole company right now. The PE firm is investing to get double-digit returns, so that means they’re going to come in and put you (as the owner/operator) on a huge ramped-up treadmill. You are going to have to keep up or they’re going to lose interest. And you’ve sold part of the company.

Now, granted, you’ve got a smaller piece but now have a bigger pie. 

Jeff: That makes sense. There are some examples of successful private-equity-backed equipment finance companies, but as we have found – the universe of financially oriented sponsors that really want to put a lot of capital into the business and are willing to wait a long time to get their return – is quite limited. Most folks attack it from the financing standpoint. It can be a good option if you have an aging founder that wants an opportunity to take some chips off the table and let the next generation continue to run it. But you’re right, it is a different exercise being put on that treadmill.

Bob: It’s a much different exercise. On the other hand, where it does work really well, is when a PE firm is backing a very experienced individual or a team who is going to start up a new entity. They could start this new entity and scale quickly with the help of private equity. They’d have a chance to really leverage that with some serious growth. Then it makes complete sense.

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: 

1. FAIR, Mert and Mark’s framework for a successful exit, (3:00) 
2. The“Exit Talk” and how we suggest that all companies adopt this practice with their board (15:00), and
3. Who is involved in the Exit Talk and why? (28:00)

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 financial implications to Rationale. Transactions are typically based on looking backward using a multiple. When you create a rationale that says one plus one equals a hundred, if it’s a strategic investment, you take your product and we plug it into the larger company’s sales force or the larger company’s customer base. What could we do inside the larger company?

What’s the impact of your product on the larger company? The way to maximize value is not looking backward as a multiple, but looking forward using the rationale. Strategically, why is the combination so valuable? If you can get everybody aligned around the rationale and the financial implications of that rationale, that’s how you’re going to drive a better price for an exit.

Mert: No one’s going to just sit down and tell you, “This is our rationale.” You uncover it. You unearth it over years. That’s why we urge entrepreneurs to put their party dresses on. Talk to many competitors. Talk to strategics. Get out the door.

You need to build this trusted relationship over time with fundamental questions.

How can I help?
How can I help you push your agenda forward?
How can I help my customers?

This is what great partnerships really look like. We’re not saying go share your financials with your competitors or give away all your IP to a larger strategy, but you need to be that trusted partner that advances the mission on all sides and creates a situation where everybody wins.

Mark: We wrote the book about exits, but it turns out that the decisions that entrepreneurs make at the beginning of their journey have an outsized impact at the end of the journey. Even though this book is really about the exit, there is really good advice there about the beginning of the journey as well.

Jeff: That’s exactly right. This book is really about the journey.  All of the steps on the journey influence the end. There’s so much wisdom in the book and insights about all the things that you can do to proactively get to the right end. Management meetings are oftentimes the first time that business owners meet their potential acquirers, whether they’re competitors or strategics, or investors. But the longer that relationship can be developed, the more that you can uncover in terms of the shared common goal of what can we do together. And the best valuation and the best terms will just naturally evolve.

What is an “Exit Talk”? How can founders use it to reach alignment in their boardrooms? (15:00)

Jeff: The Exit Talk really struck a chord with me. Let’s encourage clients and future clients to have these discussions and this thought process through the FAIR framework to really think ahead.

Sometimes we as investment bankers get brought in late in the game. But most of our transactions and our best relationships really span years. We get to know the business, the goals, and importantly the people involved, the operators, the owners, the founders, and the investors. Some of these relationships for us span a decade or more. We give them advice on how to grow their companies.

This concept of an exit talk is missing from my perspective. Exit discussions are often secretive or clouded in secrecy. It is a very small universe of folks within a company that knows that a transaction is imminent. It’s rarely discussed openly among the senior leadership team until late in the game.

What you guys propose is proactive. Through your work and sharing your work with my future clients, I’d like them to embrace this philosophy.

I love this quote that you said, “Instead of fueling the awkwardness of the exit topic by staying silent, we are putting forward a new norm that we believe the entire industry should adopt, which is the Exit Talk.”

Mark: This is one of our favorite topics. But before we dive into the Exit Talk: We are such big believers in trust. Every deal has its ups and downs. It has its emotional turbulence, it’s the journey. Trust is the lubrication that gets deals done through to the conclusion. I just wanted to put a fine point on that topic of trust because it permeates everything we do.

The Exit Talk. 

It turns out that there’s a stigma to talking about exits. CEOs are afraid. They’re afraid that if they bring up the topic of an exit that their board and their investors are going to think their heart’s not in it. They’ve lost hope. They’ve lost faith.

In the Venture Capital or Private Equity world, we have a time horizon. When you take our capital, you take our agenda, and you take our time horizon. We’re looking for X return over Y timeframe. And if you’re in year one of a fund, we’ve got plenty of time.  Let’s go build and grow. If you’re in year 10 of a fund, we’ve got to start returning capital back to our LPs.

With the Exit Talk, what we’re proposing is that once a year, maybe your first board meeting of the year, you have a regularly scheduled annual talk where the CEO, without fear of being perceived as their heart’s not in it, can talk about the exit.

The reason it’s so incredibly helpful is that you have the luxury of time. If you had 18 months or two years, you have the luxury of saying, “Who’s going to be the most likely acquirer? Is it going to be a strategic acquirer? And why? Who is it and why would they want to acquire us? Or is it going to be a financial buyer and what are they looking for? Are they looking for top-line revenue?” 

If we’re going to sell to somebody who really cares about growth, we may invest a little bit more heavily in sales and marketing. If it’s somebody who is more financially oriented and really cares about EBITDA, we might tighten the ship and focus on profitability. 

It gives you the luxury of time to get your intellectual property in order, make sure that every single employee has a signed agreement, and make sure that trademarks and patents are filed appropriately. Get your data room pristine. If you have the luxury of time, you can optimize and present your business. And you could take the time to find the best bankers and attorneys who really are going to represent you well.

Mert: An outcome of this talk doesn’t necessarily have to be “we’re ready to sell, or we’re not ready to sell”. It can also be an opportunity to start prototyping some of the theories around how you add more value to your customers. This is a great centerpiece for what we believe an exit should be reasoned around. This will help our customers faster/better than what we could do on our own by just raising more money or gathering more capital or resources.

For instance, if you are going to have a strategic alignment with a larger company like Google, but you’re not ready to sell, it’s still an opportunity to start a relationship. Maybe we work on a mutual customer together. Maybe we create some content together where we tell our stories and we share our wisdom with theirs. You want to start charging up that trust battery over time. When you are ready, you are a known entity.

The reality is these M&A (Corporate Development) leaders want to buy companies from trusted entities. They don’t want an egg on their face either. They want to know the company that they’re investing in. They’re not viewing this as an acquisition, they’re really viewing it as an investment. They want to know they can trust you. They want to know that you can go the distance.

It’s a really difficult thing to do to create that kind of trust. You’re not going to rush through trust. You’re going to build it incrementally over years. Even the identification of a strategic partner when you’re not ready to sell is extremely valuable because that’s an opportunity to generate a relationship. Find out what their priorities are. See if your solution helps move those numbers forward. 

Mark: We’re big believers in empathy. We have an empathy framework. There are three rules of empathy:

1) It’s not about you. It’s always about the person sitting across the table from you.

2) Do your homework.  Deeply and truly understand what’s important. Mert just said, “Go listen to the quarterly earnings report.” They’re going to tell you what they care about.

3) Bring a gift, add value. When I say bring a gift: what can you do? If you’re an industry leader, provide some thought leadership about where the market’s heading. Share new bits of technology. Not only can you gain knowledge about their strategic direction, you can also share knowledge and be thought of as a trusted thought leader. 

If you take those empathy rules and apply them to building relationships over time, that’s how you’re going to earn trust.

Jeff: I love the idea of a trust battery and charging that up over time. You can’t do that overnight. You can’t do that in one management meeting. You can’t do that in a really compressed timeframe. You really need to start early and think about what you can bring to the table. What can you bring as a gift to add value to somebody else so that they can see the value in what you are bringing? 

That’s really the roadmap that you guys layout in your book: what steps can we take proactively to get to the best outcome.

Who is involved in the Exit Talk, and why? (28:00)

Mark: Let’s separate out the annual exit talk from an actual transaction process. The exit talk is a board of directors-level conversation. Maybe you bring in one or two top lieutenants into that conversation, depending on the relationship between the CEO and maybe one or two C-suite members. But that’s a board-level, strategic conversation that’s not for the whole company.

(For an actual transaction process), there are lots of different ways of handling it. My own personal opinion is that there is a dance that takes place starting as an aperture that broadens over time. One of the challenges with telling any employee about a transaction is human nature. “What’s that mean to me? Am I going to have a job? Am I going to get fired? Am I going to become rich? What are my stock options worth?”

One of the challenges is that not all deals happen; deals fall apart all the time. So the team has to have their eye on the ball. For the CEO, when they’re going through a transaction, it can be all-consuming.  We’ve seen instances where companies started slowing down, missing their numbers because the CEO was distracted and not focused on running their business. 

The way I think about it is starting with the CEO and the board, keeping a really tight circle of information. And then as the conversations start to broaden and deepen in a transaction, then people are going to start the due diligence process. 

Make sure your C-suite is involved and your executive team is involved. The people who are going to be part of the due diligence process, obviously you’re going to have to inform them. I don’t think it’s a great thing to just wake up one morning and say to your entire employee base, “Hey, guess what? We just got sold.” There’s a middle ground someplace in that continuum. Try to keep it confidential through most of the process. As you start to get to certainty you need to start opening it up so it’s not a surprise to everybody.

Mert: There’s one major stakeholder that hasn’t been discussed and I just want to bring that up, and that’s your family. Most founders overlook that and think of this transaction as a business event. This is a life event.

Your family is a humongous stakeholder. We want to highlight that this is a critical component of whether an exit happens or not. What’s happening with your family is just as important as what is happening with your board and other stakeholders.

Mark: I couldn’t agree with you more. It’s not just us, it’s our families and our loved ones too that have a stake in this.

Jeff: It goes for all key constituents, starting with the family and then moving down to the board members and the C-suite and figuring out what’s the right communication style and method and frequency. These things are really critical decisions that most folks don’t really spend the time thinking about.

Mark: One of the questions we ask CEOs is: when you’re done with the transaction, will your employees come back to work for you in the next company you start? Will your investors want to invest in you in the next company you start? Will the biz dev lead of the large company who goes on to the next company, are they going to want to buy your next company?

I think what many entrepreneurs fail to understand is that the relationships you build and your legacy live on way past the deal and the transaction. 

We’re big believers in servant leadership and that the best CEOs don’t view life as a zero-sum game. They make sure that they take care of their customers, their employees, and their investors. They try to find the balance of supporting all relationships over time.

ABOUT OUR GUESTS

While a successful entrepreneur may exit a handful of companies in their lifetime, large buyers close deals all the time. Without decades of experience in mergers and acquisitions, founders don’t have the tools they need to get the best results for themselves, their teams, or the new parent company.

Through dozens of interviews with M&A leaders at the biggest Silicon Valley acquirers—as well as attorneys, bankers, and founders who have been through the trenches—Exit Right delivers the hard-earned lessons that lead to successful exits. From negotiation to valuation to breaking down a term sheet, managing legal costs, and handling emotional turbulence—this unparalleled guide covers every critical aspect of a technology startup sale.

Learn where deals get into trouble, how to create alignment between negotiating parties, and what terms you should care about most. Above all, learn how to win in both the short and the long term, maximizing your price while positioning your company for a legacy you can be proud of.

Author Biographies

An early employee of Apple and Head of Innovation at Redbox, Mark Achler has been creating and investing in tech startups since 1986. Today, he is a founding partner of MATH Venture Partners, a technology venture capital fund, and an adjunct professor at the Northwestern Kellogg School of Management.

Mert Iseri co-founded SwipeSense, a healthcare technology company acquired by SC Johnson in 2020. Prior to that, he co-founded Design for America, a national network of students using design thinking to create social impact, now part of the IBM Watson Foundation. He is currently an Entrepreneur in Residence at MATH Venture Partners.

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About the hosts

Gina Cocking serves as the Chief Executive Officer of Colonnade Advisors. Gina began her career in investment banking at Kidder Peabody, was an analyst at Madison Dearborn Partners and an associate at J.P. Morgan & Co. She was the Chief Financial Officer of Cobalt Finance, a specialty finance company. She went on to become the Chief Financial Officer of Healthcare Laundry Systems, a private equity-backed company for which she oversaw the successful sale to a strategic acquirer. Gina served as the Line of Business CFO – Consumer Banking and Lending at Discover Financial Services. Gina serves on the Board of Directors of CIB Marine Bancshares, Inc. Gina received her BA in Economics and an MBA from the University of Chicago.

Jeff Guylay is a Managing Director of Colonnade Advisors. Prior to joining Colonnade in 2000, Jeff was an investment banker at J.P. Morgan in the firm’s Mergers & Acquisitions and Fixed Income Capital Markets groups in New York. He also spent several years in J.P. Morgan’s Chicago office. Jeff has over 20 years of M&A and investment banking experience and has served as lead execution partner on over 25 M&A and financing transactions at Colonnade. Jeff received an MBA from Northwestern University’s Kellogg Graduate School of Management and a Master of Engineering Management from the University’s McCormick School of Engineering. Jeff received a BA from Dartmouth College and a BE from Dartmouth’s Thayer School of Engineering.

About the Middle Market Mergers & Acquisitions Podcast

Get the insiders’ take on mergers and acquisitions. M&A investment bankers Gina Cocking and Jeff Guylay of Colonnade Advisors discuss the technical aspects of and tactics used in middle market deals. This podcast offers actionable advice and strategies for selling your company and is aimed at owners of middle market companies in the financial services and business services sectors. Middle market companies are generally valued between $20 million and $500 million.

If you enjoyed this episode, please subscribe and consider leaving us a short review:

https://podcasts.apple.com/us/podcast/middle-market-mergers-acquisitions-by-colonnade-advisors/id1521532548?mt=2&app=podcast https://open.spotify.com/show/21iDm1sMdeKVlPsIzEKJlq

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? (05:15)
Jeff: "We keep the non-winning bidders warm and engaged in a limited fashion to make sure that we have backups if the deal falls apart.”
How do you assess the certainty to close a deal? (06:30)
Jeff: "Assessing the certainty to close comes from years of experience working with buyers and thinking through key items such as where is the capital coming from, what their acquisition history is and how likely they are to close on the terms that we have outlined."
Are there particular buyer types that are more problematic in terms of the certainty to close? (06:35)
Gina: "One group that has caused us problems with the certainty of close in the past is search funds or unfunded sponsors, which are private equity investors that do not have a dedicated fund. These funds tend to bid the highest prices, which is appealing, but they will still need to raise the capital once in exclusivity from institutional investors. Those institutional investors will want to do their diligence, almost restarting the deal process, which creates more risk of the deal not getting done."
Jeff: "About ten years ago, family offices were also in this category to some degree. Family offices had smaller dedicated investment teams, so the certainty of closing was considerably lower than traditional private equity firms or a strategic buyer. But that has changed over the last decade where family offices have shifted to become credible buyers."
How long does it take to get from signing the LOI to closing? (08:45)
Gina: "We generally put 30 to 45 days in the LOI with a provision that both parties can extend the period of exclusivity by mutual written consent based on putting forth best efforts. The time to close depends on the industry. For example, some industries may need regulatory approval or use complex accounting methodologies, which would require more time."
What are the components of confirmatory diligence, and how are these workstreams sequenced? (10:06)
Jeff: "There is HR, accounting tax compliance, regulatory, legal, IT, and others. Running these workstreams in parallel is key because it is the easiest way to minimize time to close, but you cannot get to the legal documentation until all these other workstreams are completed."
At what point do you expect the first turn of the purchase agreement from the buyer? (12:30)
Gina: "Pushing to get that first turn of the purchase agreement is very important. We frequently put the purchase agreement in the data room before the LOI, and we expect a markup of it along with the LOI or an issues list, which will help expedite the process.”
Who pays for the costs associated with confirmatory diligence and documentation? (13:38)
Gina: "The seller pays for the seller's costs, and the buyers pay for the buyer's cost."
Jeff: "In the context of a rollover deal, where the company is getting bought by a sponsor, the surviving entity ends up absorbing costs from both sides."
What are the typical costs incurred during this phase for sellers and buyers? (14:31)
Gina: "The seller can expect to pay for tax counsel or tax accountants if there is tax work to be done, an attorney to assist with negotiating terms, a tax lawyer, and other types of counsels. Buyers can expect to encounter legal fees, accounting fees, consulting fees, IT, technology consulting, and HR consulting."
How much does this phase cost for both the sellers and buyers? (14:31)
Gina: "Ballpark is anywhere from $75,000 to a couple hundred thousand for a seller. On the buyer's side, a couple hundred thousand easily on diligence for a middle market transaction that's valued $75 to $125 million.”
From the seller's side, who is typically involved during the confirmatory diligence phase? (15:55)
Gina: "Confirmatory diligence is a big undertaking, and sometimes the knowledge level about the company needs to go beyond the deal team that has been involved to date. At this stage, other people in the company may need to be made aware of the transaction (e.g. sales management, IT, HR, etc.), which can be tricky."
What types of issues generally come up in employment contract discussions? (18:57)
Gina: "One issue that comes up is pay, which we manage by building out expected compensation levels in the financial model. The second issue is the bonus structure, and the third is vacation. The most important issue that comes up is non-compete, who gets one and what the terms are."
Which employees will generally be subject to non-competes? (19:25)
Jeff: "There is usually a non-compete for selling shareholders that will be getting proceeds from the deal and non-equity participants that are key to the ongoing entity.”
What are the risks associated with employment agreements and non-competes, and how do you mitigate these risks? (20:52)
Jeff: "The risk with non-equity participants that are key to the business is that they could choose not to go with the new buyer for whatever reason. This can result in a domino effect from a price change to the deal not happening at all. One tactic that we use is to encourage our seller clients to put in place some type of transaction and retention bonus."
Gina: "When Colonnade is working on a transaction, we ask a lot of questions upfront. We will often ask who has employment agreements and what are the terms of those agreements. For business owners that are thinking about selling in a few years, they should be thinking about who their key employees are and how to get them under employment agreements now."
What are the different types of employee bonus plans associated with a sale? (23:17)
Jeff: "One is transaction bonuses which are for employees who are essentially doing two jobs during the deal process. The second is the retention bonuses that ensure employees are not going to leave when the deal closes."
What is Hart Scott Rodino ("HSR"), and how does it impact the transaction? (23:59)
Gina: "HSR is one type of regulatory approval that might be needed to close a deal. HSR applies to companies of a certain size, which will need to be approved by the government for anti-trust reasons.”
Jeff: "The amount increases every year, but HSR impacts transactions roughly around $80 million in transaction value. There is a filing fee, and it is about a 30-day process.”
How long does it typically take from signing the legal documents to closing? Who owns the company during this period? (26:13)
Jeff: "It can be 30 days or longer, depending on the different types of approvals. For financial services deals where there is generally regulatory approval, it is often 30 or 60 days. During this period, the seller and buyer essentially both own the company."
Can sellers request a break fee if the deal does not close? (27:00)
Gina: "In highly competitive, larger transactions, there will be break fees, but in middle market M&A, it's highly unusual to have a break fee. That is because there is not enough diligence that has been done before the signing of the LOI. Without all the information, it is unlikely that buyers will agree to a break fee because they may find out many things during confirmatory diligence."
What are typical pitfalls encountered during the exclusivity/documentation phase? How does Colonnade mitigate these risks with seller clients? (28:58)
Gina: "One is indemnification, which reps and warranties insurance can mitigate.”
Listen to Colonnade’s podcast episode 010: Escaping escrow: Reps & Warranty Insurance: https://www.coladv.com/podcasts/010/
Jeff: "Another pitfall that we have seen involves who owns the intellectual property. To mitigate this risk, we address this issue early in diligence.”

Gina: “Another is when the buyers want to speak with the seller company’s top clients. We try to delay that conversation until as late as possible in the process. We want to get to the point where we feel comfortable that we have covered all the major issues, and we're likely to close."
Jeff: “The last pitfall that comes to mind is tax, where two parties can have a different view on tax regulations in a given jurisdiction. Our job is to push things forward and cut through all the issues as quickly and efficiently as we can.”

What dynamics are typically in play right before a deal closes? (39:02)
Jeff: “What I find is when people are the angriest and they're about to throw up their hands, that's when we know we've got a deal, it's sort of where everyone's been pushed to their limits. Everyone's had to give and take, and they're just about ready to walk away, and then the deal signs.”
Gina: “And then we celebrate.”

Host Information
Gina Cocking
Gina Cocking serves as the Chief Executive Officer of Colonnade Advisors. She returned to Colonnade as a Managing Director in 2014. Gina began her career in investment banking at Kidder Peabody, was an analyst at Madison Dearborn Partners, and an associate at J.P. Morgan & Co. She was a Vice President at Colonnade Advisors from 1999 to 2003. She left Colonnade to gain operating experience as the Chief Financial Officer of Cobalt Finance, a specialty finance company. She went on to become the Chief Financial Officer of Healthcare Laundry Systems, a private equity-backed company for which she oversaw the successful sale to a strategic acquirer. Gina served as the Line of Business CFO – Consumer Banking and Lending at Discover Financial Services. Gina serves on the Board of Directors of CIB Marine Bancshares, Inc., a bank holding company based in Brookfield, Wisconsin, that operates banking offices in Illinois, Indiana, and Wisconsin. Gina received her BA in Economics and an MBA from the University of Chicago. Additionally, Gina holds the Series 24, 28, 79, and 99 securities licenses.
Jeff Guylay
Jeff Guylay is a Managing Director of Colonnade Advisors. Prior to joining Colonnade in 2000, Jeff was an investment banker at J.P. Morgan in the firm's Mergers & Acquisitions and Fixed Income Capital Markets groups in New York. He also spent several years in J.P. Morgan's Chicago office. Jeff has over 20 years of M&A and investment banking experience and has served as lead execution partner on over 25 M&A and financing transactions at Colonnade. Jeff received an MBA from Northwestern University's Kellogg Graduate School of Management and a Master of Engineering Management from the University's McCormick School of Engineering. Jeff received a BA from Dartmouth College and a BE from Dartmouth's Thayer School of Engineering. Jeff holds the Series 7, 24, 63, and 79 securities licenses. Jeff serves as a director of the non-profit Nurture, an organization dedicated to enhancing the nutrition and wellness of children and families.
About the Middle Market Mergers & Acquisitions Podcast
Get the insiders' take on mergers and acquisitions. M&A investment bankers Gina Cocking and Jeff Guylay of Colonnade Advisors discuss the technical aspects of and tactics used in middle market deals. This podcast offers actionable advice and strategies for selling your company and is aimed at owners of middle market companies in the financial services and business services sectors. Middle market companies are generally valued between $20 million and $500 million.

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? 
• What topics are covered during management meetings?
• Who is invited?
• What’s the format for a successful management meeting?
• How has COVID19 changed how management meetings take place?
• How do we best prepare our clients? 

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 offsite location. Some people will dial into the meeting."

Jeff: "Typically, after the management meeting, the group goes out for dinner. Historically, these dinners have been significant in building relationships and deciding who our clients like and who they don't. A lot comes out in these dinners.

From the buyers' side, who attends, their seniority, and how prepared they are, are an important reflection of their interest level.

The best meetings are interactive, going back and forth, and the attendees don't even touch the (presentation) books."

How has COVID19 changed how management meetings take place? (12:47)

Gina: "Historically, there are typically four to eight people attending meetings in person. During the COVID pandemic, things have changed. We’ve had Zoom management meetings, and because people don't have to travel, the meetings have gotten larger.”

Jeff:  “The management meetings being virtual versus the (traditional) in-person meetings can be challenging. One of the major purposes of these management meetings is to build a relationship between the buyer and seller. An important role we play is working with our clients to manage this relationship-building inside of the virtual culture that we're living in right now.”

How does Colonnade best prepare clients for management meetings? (17:41)

Gina: "At Colonnade, we will do a profile of each attendee and the firm, a list of questions that they have asked, documents that they have requested, and where we think their interest lies. We also do dry runs with the management team."

Jeff: "In preparing our clients on what to present, we will draft the management presentation and then have the management team review it. We spend a lot of time talking through how it might go, particularly with the list of potential questions that we pull together."

Gina: “We prepare our clients for questions that are likely to come up. One question almost every management team gets is, 'why are you selling now, or why are you raising capital now?' Another common question is 'what keeps you up at night?'

We also prepare our clients for questions to ask of the buyer. One question we encourage everybody to ask is, 'what is your experience in this industry, and what trends do you see in this industry that I should be paying attention to?'
Other great questions are:
'describe an ideal partnership for our firms', and
'tell me about some of your other deals that were successful?'

Jeff: "It is also good for the financial sponsors to talk about some of the deals that didn't go well. If you can get somebody to open up about some challenging situations/investments they've had, that can be insightful.”My favorite question is: 'beyond the capital, why should we pick you? Why are you the best partner for us?'  

At Colonnade, we do our best to prepare our clients and get them ready and through the process as fast as we can."

Host Information

Gina Cocking

Gina Cocking serves as the Chief Executive Officer of Colonnade Advisors. She returned to Colonnade as a Managing Director in 2014. Gina began her career in investment banking at Kidder Peabody, was an analyst at Madison Dearborn Partners, and an associate at J.P. Morgan & Co. She was a Vice President at Colonnade Advisors from 1999 to 2003. She left Colonnade to gain operating experience as the Chief Financial Officer of Cobalt Finance, a specialty finance company. She went on to become the Chief Financial Officer of Healthcare Laundry Systems, a private equity-backed company for which she oversaw the successful sale to a strategic acquirer. Gina served as the Line of Business CFO – Consumer Banking and Lending at Discover Financial Services. Gina serves on the Board of Directors of CIB Marine Bancshares, Inc., a bank holding company based in Brookfield, Wisconsin, that operates banking offices in Illinois, Indiana, and Wisconsin. Gina received her BA in Economics and an MBA from the University of Chicago. Additionally, Gina holds the Series 24, 28, 79, and 99 securities licenses.

Jeff Guylay

Jeff Guylay is a Managing Director of Colonnade Advisors. Prior to joining Colonnade in 2000, Jeff was an investment banker at J.P. Morgan in the firm's Mergers & Acquisitions and Fixed Income Capital Markets groups in New York. He also spent several years in J.P. Morgan's Chicago office. Jeff has over 20 years of M&A and investment banking experience and has served as lead execution partner on over 25 M&A and financing transactions at Colonnade. Jeff received an MBA from Northwestern University's Kellogg Graduate School of Management and a Master of Engineering Management from the University's McCormick School of Engineering. Jeff received a BA from Dartmouth College and a BE from Dartmouth's Thayer School of Engineering. Jeff holds the Series 7, 24, 63, and 79 securities licenses. Jeff serves as a director of the non-profit Nurture, an organization dedicated to enhancing the nutrition and wellness of children and families.

About the Middle Market Mergers & Acquisitions Podcast

Get the insiders' take on mergers and acquisitions. M&A investment bankers Gina Cocking and Jeff Guylay of Colonnade Advisors discuss the technical aspects of and tactics used in middle market deals. This podcast offers actionable advice and strategies for selling your company and is aimed at owners of middle market companies in the financial services and business services sectors. Middle market companies are generally valued between $20 million and $500 million.

 

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 kinds of things that are better addressed ahead of a transaction."

Who is typically involved in the private wealth management team? (14:41)
Raj: "Private wealth advisor, accountant, estate planning attorney, and tax advisor."

Are there structures to minimize capital gains tax on the transaction proceeds? (18:04)
Raj: "Sellers should plan on how much they need in their lifespan. Then plan the amount for gifting to children, grandchildren, or charity. We can use gift structures that are right down the middle of the fairway with what is permissible by the IRS, etc. Sellers would need to check with their tax advisor and the estate planning attorneys, but there are many proven structures."

"Marrying what we do on an after-tax basis with what M&A advisors do on a pretax basis can be a home run. With proper structuring, the assets are protected from creditors and predators and can be passed down from generation to generation with minimal tax consequences.

What are the three main questions that business owners should be thinking about regarding post-transaction wealth management? (21:40)
Jeff: "What are your lifestyle needs? What do you want to give to your kids and grandkids or future generations? And then philanthropically, what do you want to accomplish?"

Are business owners generally prepared to answer those three main questions? (25:32)
Raj: "Those questions should be asked year in, year out for generations or decades. Many business owners will stress about the transaction side, as they should, but they do not marry it with stressing about the after-tax side, which does matter a fair amount."

As a wealth management advisor, what are key factors to consider to advise your clients successfully? (25:50)
Raj: "Understanding the risk appetite of the client, which entails hardcore planning and analytics on the client and the family and what they need. We have structural conversations with the client to understand the constraints and navigate that on a real-time basis over many years. Also, building in the flexibility structurally so that clients can adapt over time."

Can you give an example of one of your private wealth clients? (26:18)
Raj: "One of my clients was a Fortune 500 company CEO who just retired. Over the past ten years, he brought down his estate tax from $30 million to $4 million. The wealth transferred successfully on a multi-generational basis, with charity benefits and tax efficiency throughout the portfolio. That doesn't happen by accident. It happened by continued conversations and being smart about pre-planning and post-planning."

Ideally, when is the optimal time for business owners to meet with private wealth management advisors? (31:16)
Raj: "A year or two before a transaction would be wonderful, but the reality is most people do not do so for various reasons. When business owners decide to hire an advisor to sell the business, that is a good breakpoint to engage an estate planning person and have a team on a parallel path. Another good breakpoint is when the seller is in the letter of intent phase in a transaction."

"Even if business owners engage a private wealth advisor post transaction, there is still a lot of good work that can be done, but it just takes a lot longer."

Featured guest bio and contact information:

Raj Rathi
Email: rajeev.rathi@ml.com

Raj Rathi is a graduate of The University of Chicago and Dartmouth's Tuck School of Business. Early in his professional life, Raj was an investment banker with JP Morgan and Lehman Brothers, eventually serving as a co-leader in the investment bank's industrial practice.

After working in banking for over 15 years, Raj shifted his business activities to private clients from corporations and co-founded The Rathi Singh Private Wealth Management practice. For the past 15 years, Raj & his team have focused on providing a coordinated approach to wealth management that overlays risk, estate, tax, and portfolio considerations to maximize outcomes for clients.

Raj's clientele includes Fortune 500 CEOs, business owners, and individuals with generational wealth. Ultimately he views his role as helping clients understand the nuances of how best to manage their wealth with a purpose and how best to define that strategy based on their goals.

Please note that neither Merrill Lynch nor Colonnade Advisors provides legal or tax advice. Please consult with your advisors as appropriate.

Host Information
Gina Cocking
Gina Cocking serves as the Chief Executive Officer of Colonnade Advisors. She returned to Colonnade as a Managing Director in 2014. Gina began her career in investment banking at Kidder Peabody, was an analyst at Madison Dearborn Partners, and an associate at J.P. Morgan & Co. She was a Vice President at Colonnade Advisors from 1999 to 2003. She left Colonnade to gain operating experience as the Chief Financial Officer of Cobalt Finance, a specialty finance company. She went on to become the Chief Financial Officer of Healthcare Laundry Systems, a private equity-backed company for which she oversaw the successful sale to a strategic acquirer. Gina served as the Line of Business CFO – Consumer Banking and Lending at Discover Financial Services. Gina serves on the Board of Directors of CIB Marine Bancshares, Inc., a bank holding company based in Brookfield, Wisconsin, that operates banking offices in Illinois, Indiana, and Wisconsin. Gina received her BA in Economics and an MBA from the University of Chicago. Additionally, Gina holds the Series 24, 28, 79, and 99 securities licenses.
Jeff Guylay
Jeff Guylay is a Managing Director of Colonnade Advisors. Prior to joining Colonnade in 2000, Jeff was an investment banker at J.P. Morgan in the firm's Mergers & Acquisitions and Fixed Income Capital Markets groups in New York. He also spent several years in J.P. Morgan's Chicago office. Jeff has over 20 years of M&A and investment banking experience and has served as lead execution partner on over 25 M&A and financing transactions at Colonnade. Jeff received an MBA from Northwestern University's Kellogg Graduate School of Management and a Master of Engineering Management from the University's McCormick School of Engineering. Jeff received a BA from Dartmouth College and a BE from Dartmouth's Thayer School of Engineering. Jeff holds the Series 7, 24, 63, and 79 securities licenses. Jeff serves as a director of the non-profit Nurture, an organization dedicated to enhancing the nutrition and wellness of children and families.
About the Middle Market Mergers & Acquisitions Podcast
Get the insiders' take on mergers and acquisitions. M&A investment bankers Gina Cocking and Jeff Guylay of Colonnade Advisors discuss the technical aspects of and tactics used in middle market deals. This podcast offers actionable advice and strategies for selling your company and is aimed at owners of middle market companies in the financial services and business services sectors. Middle market companies are generally valued between $20 million and $500 million.

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 drawbacks of starting with a small group of buyers? (12:17)
Jeff: "One of the drawbacks of starting with a small group of buyers in a negotiated deal, small process, or the targeted auction is that it is sometimes challenging, depending on how far along you are in the process, to switch to a broader auction. Sellers have to carefully select the appropriate process upfront."

What are the considerations for doing a broad auction? (14:04)
Gina: "The most important reason to do a broad auction is full market price discovery.”

What is Colonnade's approach to assessing the buyer universe? (14:30)
Gina: "Colonnade focuses on specific industries in business services and financial services and the intersection between those two, so we know the private equity universe and strategic buyers in these industries."

Does a broad auction require more work for the seller? (15:30)
Jeff: "A broad auction does not mean that our clients have to do more work than in a targeted auction. All the materials that we put together are the same. We still have to go through rigorous due diligence, putting the book together, building the financial model, and making sure that the story ties out."

What is Colonnade's typical broad auction process? (16:00)
Jeff: "We create a curated list of buyers, which is approved by our seller clients, and we approach this broad group with a no-name teaser. We contact this broad group and find out the conversations they are having internally and determine whether there is a fit. Sometimes the most obvious top five names are not interested, so it is good that we went to a broader universe. Our team goes through the list on a no-name basis, then under a non-disclosure agreement with specifics. We work the funnel down through indications of interest, management meetings, final bids, and down to the winner."

Is there confidentiality risk in a broad auction when reaching out to 100 or more potential buyers? (17:25)
Gina: "The 100 or more potential buyers do not all get the information. In the funnel, the 100 or more get the teaser and NDA on a no-names basis. Then at the next stage in the funnel, after the execution of an NDA, some subset will get the confidential information memorandum, which has a lot of information, but it still is limited. The next subset gives us an indication of interest letter, and we will invite them into the next stage, in which they then have access to a limited data room and perhaps a management meeting. Only that final buyer in exclusivity has access to what can be considered the company's trade secrets and have access to the contracts, etc."

Jeff: "The buyer list is highly curated. "

Can you give an example of a negotiated process? (19:02)
Jeff: "TD Bank was selling a national commercial finance business to Wells Fargo. TD Bank hired Colonnade after they started talking about price. Colonnade's role was negotiating the deal and giving TD confidence that they were getting a fair price and what valuation should be in a broader process—creating a credible threat. We worked diligently to negotiate the deal with Wells Fargo and put a book together so that we were ready to go to market if needed. We had the 40 logical names ready to be contacted at any minute if the deal with Wells Fargo failed, and Wells Fargo knew it too. To Well Fargo's credit, they came through and offered a fair price and came through on the timing and offered a great platform for the team."

Can you give an example of a broad auction? (20:54)
Gina: "Last year, Colonnade advised Smart AutoCare on its sale to Fortegra, a Tiptree subsidiary. We started with over 100 potential buyers in a broad auction. We received eleven indications of interest, so it was a very robust auction, and we had great price discovery. At the time, we did not go to Tiptree because Fortegra was a supplier to the company. We had three or four LOIs, and we went forward with the winning bidder, and it was a great price. We ended up pivoting away from that buyer because the business owner felt that the private equity firm did not understand his business, so we went to Tiptree. We were able to negotiate a transaction with Tiptree and successfully close. It was a fantastic result."

Can you give an example of a hybrid between a small process and a targeted auction? (22:37)
Jeff: "A few years ago, we advised ADG on its sale to APCO. APCO had approached ADG and its private equity owner and made an offer. ADG hired Colonnade to run a small process or a targeted auction to the obvious buyers. There were many potential buyers, but we narrowed it to a list of 15 and worked that list to generate competition and drive up the price and terms. APCO, who had essentially triggered the auction, was ultimately the winner, and they paid market price and terms. It was a great outcome for the team."

How do sellers determine which auction process is the best option for selling their businesses? (24:16)
Jeff: "Each situation is unique, and it depends on lots of different circumstances. It is all part of the pre-planning process that we work with our clients to think about what's going to get the best outcome based on their objectives."

Host Information
Gina Cocking
Gina Cocking serves as the Chief Executive Officer of Colonnade Advisors. She returned to Colonnade as a Managing Director in 2014. Gina began her career in investment banking at Kidder Peabody, was an analyst at Madison Dearborn Partners, and an associate at J.P. Morgan & Co. She was a Vice President at Colonnade Advisors from 1999 to 2003. She left Colonnade to gain operating experience as the Chief Financial Officer of Cobalt Finance, a specialty finance company. She went on to become the Chief Financial Officer of Healthcare Laundry Systems, a private equity-backed company for which she oversaw the successful sale to a strategic acquirer. Gina served as the Line of Business CFO – Consumer Banking and Lending at Discover Financial Services. Gina serves on the Board of Directors of CIB Marine Bancshares, Inc., a bank holding company based in Brookfield, Wisconsin, that operates banking offices in Illinois, Indiana, and Wisconsin. Gina received her BA in Economics and an MBA from the University of Chicago. Additionally, Gina holds the Series 24, 28, 79, and 99 securities licenses.
Jeff Guylay
Jeff Guylay is a Managing Director of Colonnade Advisors. Prior to joining Colonnade in 2000, Jeff was an investment banker at J.P. Morgan in the firm's Mergers & Acquisitions and Fixed Income Capital Markets groups in New York. He also spent several years in J.P. Morgan's Chicago office. Jeff has over 20 years of M&A and investment banking experience and has served as lead execution partner on over 25 M&A and financing transactions at Colonnade. Jeff received an MBA from Northwestern University's Kellogg Graduate School of Management and a Master of Engineering Management from the University's McCormick School of Engineering. Jeff received a BA from Dartmouth College and a BE from Dartmouth's Thayer School of Engineering. Jeff holds the Series 7, 24, 63, and 79 securities licenses. Jeff serves as a director of the non-profit Nurture, an organization dedicated to enhancing the nutrition and wellness of children and families.
About the Middle Market Mergers & Acquisitions Podcast
Get the insiders' take on mergers and acquisitions. M&A investment bankers Gina Cocking and Jeff Guylay of Colonnade Advisors discuss the technical aspects of and tactics used in middle market deals. This podcast offers actionable advice and strategies for selling your company and is aimed at owners of middle market companies in the financial services and business services sectors. Middle market companies are generally valued between $20 million and $500 million.

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 interacted with much? (13:26)
Willard: "During non-COVID times, Chicago offered various events that allow people to meet. One medium that I have used in the past was the speaker dinners at the Economic Club. It gives you an informal, non-threatening environment to try to further a relationship."

How do you build trust in a relationship? (15:18)
Willard: "That is an important concept. People hire you because they trust you and feel you understand their business. It is hard to know what triggers trust. In my particular case, on the investment banking side, the people we represented, I knew well over several years. When you see how people behave in restaurants with waiters, how they behave on the golf course, and all that kind of stuff, that adds up to form a standpoint that I know this person and trust them, particularly, I can trust them to tell me the truth."

Gina: "We also talked about how follow-ups after meeting a person can build trust. It's a good way to start building trust."

What is one way to distinguish yourself when following up with business prospects? (18:39)
Willard: "You distinguish yourself by actually doing something you said you were going to do. It is super simple, but not everybody does that."

How often do you use handwritten notes, and when and why do you do that? (19:45)
Willard: "In meaningful situations, I think a handwritten note is a very nice idea. It shows a little extra effort."

Gina: "When I left Discover Financial Services, I wrote some of my colleagues handwritten notes a few days before I left. Then, I noticed several people had my note in their cubicles. I think because it was an unusual thing. People kept it and remembered it."

What are your thoughts on postcards? (21:26)
Willard: "Postcards are a very nice thing to send to people because it lets them know you're thinking of them in out of the way places."

We all have limited hours in a day; how do you politely decline someone who reaches out to you, but you may not be in the best position to have a conversation with them? (23:00)
Willard: "If someone wants your opinion about something, that is a nice compliment, so you don't want to seem ungrateful. If time is limited, tell the truth that it isn't anything you want to get involved with right now."

Do you have any advice for people who are starting their careers and starting to build professional relationships? (25:31)
Willard: "I'll give a piece of advice that I got from my father-in-law. When I was working in New York in the 70s, he advised me that I should get out every day and have lunch with somebody, and I did. Some of those lunches have led to great business ideas. My main point is to make sure you are out there seeing people, and lunch is a good time to do it."

Featured guest bio and contact information:

Willard Bunn III
Email: wbunn@coladv.com

Willard Bunn III joined Colonnade Advisors as a Managing Director in 2012. Willard has served as chairman, chief executive, and/or director of several commercial banks in the course of his 40-year career. Willard's long career in the banking industry began at Chemical Bank in New York before returning to Springfield in 1978 to serve as Executive Vice President and eventually Chairman and Chief Executive Officer of Marine Corporation, a multibank holding company with $1.2 billion of assets. Following Marine's merger with Banc One, Willard was appointed Chairman and Chief Executive Officer of Banc One Illinois Corporation, which he held until 1994. Willard went on to serve in various management positions with two investment banking firms. Willard served as a Director of Baytree Bank of Lake Forest, Illinois, from its founding in 2000 and as Chairman of the Bank from April 2010 to August 2012. Willard serves on the Board of Directors of CIB Marine Bancshares, Inc., a bank holding company based in Waukesha, Wisconsin, that operates banking offices in Illinois, Indiana, and Wisconsin. He also serves on the Boards of Midland National Life Insurance Company and North American Company for Life and Health Insurance, insurance subsidiaries of the Sammons Financial Group. In addition, Willard is Chairman of the Board for the Poetry Foundation, a literary organization, and a Poetry magazine publisher. He serves as an advisory director of Chicago-based Campus2Career Transition Services and a member of The Banc Funds Company's valuation committee. Willard holds a BA from Princeton University and an MBA from the University of Virginia. In addition, he has the Series 79 securities license.

Host Information
Gina Cocking
Gina Cocking serves as the Chief Executive Officer of Colonnade Advisors. She returned to Colonnade as a Managing Director in 2014. Gina began her career in investment banking at Kidder Peabody, was an analyst at Madison Dearborn Partners, and an associate at J.P. Morgan & Co. She was a Vice President at Colonnade Advisors from 1999 to 2003. She left Colonnade to gain operating experience as the Chief Financial Officer of Cobalt Finance, a specialty finance company. She went on to become the Chief Financial Officer of Healthcare Laundry Systems, a private equity-backed company for which she oversaw the successful sale to a strategic acquirer. Gina served as the Line of Business CFO – Consumer Banking and Lending at Discover Financial Services. Gina serves on the Board of Directors of CIB Marine Bancshares, Inc., a bank holding company based in Brookfield, Wisconsin, that operates banking offices in Illinois, Indiana, and Wisconsin. Gina received her BA in Economics and an MBA from the University of Chicago. Additionally, Gina holds the Series 24, 28, 79, and 99 securities licenses.
Jeff Guylay
Jeff Guylay is a Managing Director of Colonnade Advisors. Prior to joining Colonnade in 2000, Jeff was an investment banker at J.P. Morgan in the firm's Mergers & Acquisitions and Fixed Income Capital Markets groups in New York. He also spent several years in J.P. Morgan's Chicago office. Jeff has over 20 years of M&A and investment banking experience and has served as lead execution partner on over 25 M&A and financing transactions at Colonnade. Jeff received an MBA from Northwestern University's Kellogg Graduate School of Management and a Master of Engineering Management from the University's McCormick School of Engineering. Jeff received a BA from Dartmouth College and a BE from Dartmouth's Thayer School of Engineering. Jeff holds the Series 7, 24, 63, and 79 securities licenses. Jeff serves as a director of the non-profit Nurture, an organization dedicated to enhancing the nutrition and wellness of children and families.
About the Middle Market Mergers & Acquisitions Podcast
Get the insiders' take on mergers and acquisitions. M&A investment bankers Gina Cocking and Jeff Guylay of Colonnade Advisors discuss the technical aspects of and tactics used in middle market deals. This podcast offers actionable advice and strategies for selling your company and is aimed at owners of middle market companies in the financial services and business services sectors. Middle market companies are generally valued between $20 million and $500 million.

In this episode, Gina Cocking and Jeff Guylay focus on valuation - determining what your company is worth.

Key takeaways from this episode are:

• The right valuation methodology depends on the industry and the company
• Valuation should not be overly focused on the multiple. It also depends on what you to apply the multiple to
• Market price discovery through a competitive process will drive the highest valuation

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 to look at what the metric is. Different methods are used in different industries. Some industries use GAAP accounting, and some industries use some special purpose accounting. There are also add-backs to EBITDA so that anything unusual and extraordinary can be added back to increase EBITDA and valuation."

What is the significance of add-backs? (14:18)

Jeff: "Add-backs help demonstrate what the company's earnings stream looks like going forward. It gives a sense of the pure earnings of the business."

What are pro forma adjustments to EBITDA? (14:58)

Gina: "It involves adjusting historical EBITDA for known future or recent arrangements, such as a decrease in expense or increase in operating efficiency. The adjusted EBITDA demonstrates how the business is going to operate going forward."

What is synergy in an M&A transaction, and can the seller benefit? (17:13)

Gina: "Synergy is when two companies combine, and instead of being one plus one equals two, one plus one equals three. That could be because of expense reductions or revenue enhancements. Buyers will benefit from synergies in the future. A competitive process will increase the likelihood that a seller will get paid for at least a portion of the synergies a buyer may achieve."

How does customer concentration impact valuation? (19:26)

Gina: "Customer concentration or any distribution channel concentration will typically reduce valuation. Customer concentration involves anything greater than 15%."

How does the transaction process impact the price and term? (20:49)

Jeff: "There are various factors that could lead to a potential buyer dropping out. Therefore, finding the greatest number of highly qualified buyers and working diligently through the process delivers the best price and term for sellers."

What is the difference between enterprise value versus equity value? (21:47)

Gina: "If a company has debt on the books, then the debt is subtracted from the enterprise value to get to the equity value."

What is the ultimate answer to "What is my company worth?" (23:30)

Gina: "Your company is worth whatever someone is willing to pay for it. Our job is to create a competitive environment to yield the highest price and the best terms."

Host Information

Gina Cocking

Gina Cocking serves as the Chief Executive Officer of Colonnade Advisors. She returned to Colonnade as a Managing Director in 2014. Gina began her career in investment banking at Kidder Peabody, was an analyst at Madison Dearborn Partners, and an associate at J.P. Morgan & Co. She was a Vice President at Colonnade Advisors from 1999 to 2003. She left Colonnade to gain operating experience as the Chief Financial Officer of Cobalt Finance, a specialty finance company. She went on to become the Chief Financial Officer of Healthcare Laundry Systems, a private equity-backed company for which she oversaw the successful sale to a strategic acquirer. Gina served as the Line of Business CFO – Consumer Banking and Lending at Discover Financial Services. Gina serves on the Board of Directors of CIB Marine Bancshares, Inc., a bank holding company based in Brookfield, Wisconsin, that operates banking offices in Illinois, Indiana, and Wisconsin. Gina received her BA in Economics and an MBA from the University of Chicago. Additionally, Gina holds the Series 24, 28, 79, and 99 securities licenses.

Jeff Guylay

Jeff Guylay is a Managing Director of Colonnade Advisors. Prior to joining Colonnade in 2000, Jeff was an investment banker at J.P. Morgan in the firm's Mergers & Acquisitions and Fixed Income Capital Markets groups in New York. He also spent several years in J.P. Morgan's Chicago office. Jeff has over 20 years of M&A and investment banking experience and has served as lead execution partner on over 25 M&A and financing transactions at Colonnade. Jeff received an MBA from Northwestern University's Kellogg Graduate School of Management and a Master of Engineering Management from the University's McCormick School of Engineering. Jeff received a BA from Dartmouth College and a BE from Dartmouth's Thayer School of Engineering. Jeff holds the Series 7, 24, 63, and 79 securities licenses. Jeff serves as a director of the non-profit Nurture, an organization dedicated to enhancing the nutrition and wellness of children and families.

About the Middle Market Mergers & Acquisitions Podcast

Get the insiders' take on mergers and acquisitions. M&A investment bankers Gina Cocking and Jeff Guylay of Colonnade Advisors discuss the technical aspects of and tactics used in middle market deals. This podcast offers actionable advice and strategies for selling your company and is aimed at owners of middle market companies in the financial services and business services sectors. Middle market companies are generally valued between $20 million and $500 million.

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. Part of the consideration to our client is likely going to be equity in this new entity, so we will think about how much to rollover, what's it worth, what are all the conditions around it, and who is in control."

What is one of the challenges for sellers in a roll-up? And what are the trade-offs? (13:23)
Gina: "One of the challenges for entrepreneurs when they go through a sale process is the sudden realization that they're going to have a boss. Entrepreneurs are entrepreneurs for a reason. They like running the show. It can be a challenge to be part of a larger organization and not be in charge."

Jeff: "There are the trade outs with control. Being part of a larger organization, the add-on company benefits from the growth of the larger organization, increased size, and resources for future acquisitions."

What is the potential upside for sellers that rolled over equity into the new entity from a financial perspective? (15:63)
Gina: "The upside can be enormous. The next exit with the platform could be worth just as much if not more than when the seller went in and did the first transaction."

What is your outlook on roll-ups used in transactions? (17:45)
Gina: "Roll-ups are used all the time. Going into the next decade, I do not see a slow down in roll-ups as a strategy being deployed by private equity firms."

Gina invites Rob Humble, Chief Revenue Officer at IAS, to share his insights from executing a roll-up strategy for IAS as the Senior Vice President of Strategy and Corporate Development.

What is the most effective structure for proceeds to the seller for a roll-up? (18:40)
• An acquisition under private equity ownership generally comes with an equity component
• For sellers that are not looking to be a long-term part of a bigger organization, they are likely maximizing value at closing, which means they are going to value cash and as little earn out as possible
• IAS was private equity-owned and was buying companies that bought into the private equity model, which is to invest the executive’s energy, and together produce greater value and then share in that value

How do you guide sellers that shy away from roll-ups because they want to protect their employees? (21:13)
• As the buyer, be honest and transparent as much as possible throughout the process
• Sellers can build a deep trust with the buyer and can trust that the deal that they entered into together is going to work out for not only what the buyers’ strategic intent is, but sellers’ as well
• It is best if the buyer can collaborate with the sellers on what are the ways that they can be more efficient together

How do you get business owners comfortable with working for someone post the transaction? (23:33)
• It comes back to honesty, transparency, and as much diligence both ways as possible.

What would you tell a business owner that is getting ready to sell into a roll-up strategy? (23:51)
• Get prepared and get organized. Perform diligence on your own company before you let somebody else look at your company
• Sellers should understand why they want to sell then find a buyer that they believe meets that criteria

Featured guest bio and contact information:

Rob Humble
Email: rhumble@iasdirect.com

Rob Humble is the Chief Revenue Officer at Innovative Aftermarket Systems. Before coming to IAS Rob held strategy and corporate development leadership roles with financial services firms NetSpend and Rent-A-Center. Prior to his time in financial services, Rob held strategy, finance, and operations roles at Fortune 500 companies spanning the automotive, defense & aerospace, and chemical industries.

Rob earned his bachelor's degree in mechanical engineering from Washington University in St. Louis, graduating magna cum laude. He also holds an MBA from Harvard Business School.
Rob lives in Austin, TX with his wife and two young kids. He enjoys hanging out with his family, distance running, binge-watching the hottest TV shows, watching Oklahoma Sooners football and indulging in random interests including knitting, furniture building, and home improvement.

Host Information:

Gina Cocking
Gina Cocking serves as the Chief Executive Officer of Colonnade Advisors. She returned to Colonnade as a Managing Director in 2014. Gina began her career in investment banking at Kidder Peabody, was an analyst at Madison Dearborn Partners, and an associate at J.P. Morgan & Co. She was a Vice President at Colonnade Advisors from 1999 to 2003. She left Colonnade to gain operating experience as the Chief Financial Officer of Cobalt Finance, a specialty finance company. She went on to become the Chief Financial Officer of Healthcare Laundry Systems, a private equity-backed company for which she oversaw the successful sale to a strategic acquirer. Gina served as the Line of Business CFO – Consumer Banking and Lending at Discover Financial Services. Gina serves on the Board of Directors of CIB Marine Bancshares, Inc., a bank holding company based in Brookfield, Wisconsin, that operates banking offices in Illinois, Indiana, and Wisconsin. Gina received her BA in Economics and an MBA from the University of Chicago. Additionally, Gina holds the Series 24, 28, 79, and 99 securities licenses.

Jeff Guylay
Jeff Guylay is a Managing Director of Colonnade Advisors. Prior to joining Colonnade in 2000, Jeff was an investment banker at J.P. Morgan in the firm's Mergers & Acquisitions and Fixed Income Capital Markets groups in New York. He also spent several years in J.P. Morgan's Chicago office. Jeff has over 20 years of M&A and investment banking experience and has served as lead execution partner on over 25 M&A and financing transactions at Colonnade. Jeff received an MBA from Northwestern University's Kellogg Graduate School of Management and a Master of Engineering Management from the University's McCormick School of Engineering. Jeff received a BA from Dartmouth College and a BE from Dartmouth's Thayer School of Engineering. Jeff holds the Series 7, 24, 63, and 79 securities licenses. Jeff serves as a director of the non-profit Nurture, an organization dedicated to enhancing the nutrition and wellness of children and families.
About the Middle Market Mergers & Acquisitions Podcast
Get the insiders' take on mergers and acquisitions. M&A investment bankers Gina Cocking and Jeff Guylay of Colonnade Advisors discuss the technical aspects of and tactics used in middle market deals. This podcast offers actionable advice and strategies for selling your company and is aimed at owners of middle market companies in the financial services and business services sectors. Middle market companies are generally valued between $20 million and $500 million.