IN THIS ISSUE:
www.masource.org
NO.03
ISSUE
FALL 2023
© M&A Source. All Rights Reserved. | The insights and opinions expressed herein are those of the authors and do not represent professional counsel nor an endorsement by M&A Source.
The Bridge
U P D AT E S & I N S I G H T S
F O R T H E L O W E R M I D D L E M A R K E T
A Charlotte Nightcap
The Biggest Impact
of TLPE
An Interview With
Chuck Harvey
Lessons Learned
From Broken Deals
Market Pulse
Selling Price is Important,
But Total Preceeds Are King
Inside the M&A Source:
Meet the Education
Committee
A QUARTERLY PUBLICATION
OF THE M&A SOURCE
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2 | T h e B r i d g e | F a l l 2 0 2 3
Updates + Insights
for the Lower Middle Market
T h e B r i d g e | F a l l 2 0 2 3 | 3
Content.
Missed the conference? Learn more
about the experience and education
in Charlotte.
A CHARLOTTE
NIGHTCAP
04
Find out why having no surprises in Total
Proceeds can help your seller close.
SELLING PRICE IS IMPORTANT,
BUT TOTAL PROCEEDS ARE KING
10
Explore a snapshot of data from the
Q3 2023 quarterly report.
MARKET PULSE
08
Learn how this tool can help maximize the
changes of a successful deal.
LESSONS LEARNED FROM
BROKEN DEALS
14
Discover how TLPE can help
remove a significant amount of
stress from deals.
THE BIGGEST
IMPACT OF TLPE
06
Read personal insights into a career in M&A
with our latest member interview.
AN INTERVIEW WITH M&A SOURCE
MEMBER, CHUCK HARVEY
12
NO.03
ISSUE
FALL 2023
The Bridge
A QUARTERLY PUBLICATION
OF THE M&A SOURCE
Learn more about this group of member
volunteers and get involved.
INSIDE THE M&A SOURCE:
MEET THE EDUCATION COMMITTEE
16
4 | T h e B r i d g e | F a l l 2 0 2 3
A Charlotte
Nightcap
AS I SIT DOWN AND ATTEMPT A RECAP OF THE RECENTLY CONCLUDED CHARLOTTE CONFERENCE, I
REALIZE THAT ANY THING I TALK ABOUT TO THOSE WHO WERE NOT IN ATTENDANCE IS LIKE SERVING
THE LEFTOVERS OF A GREAT MEAL. IT JUST ISN’T GOING TO BE THE SAME.
As I sit down and attempt a recap of the recently
concluded Charlotte conference, I realize that anything
I talk about to those who were not in attendance is like
serving the leftovers of a great meal. It just isn’t going
to be the same. It will be a dry recast of a class or
workshop without the flavor of the great conversation
with a colleague that you haven’t seen for a few years,
or dinner with a new friend who lives in a different part
of the country and is working on a project that is truly
fascinating. I just can’t do it justice. With that in mind, I’m
going to pull out the pumpernickel bread and see if I can
make a leftover sandwich that will make you come back for
seconds.
The Charlotte conference began with a host of classes.
Personal time constraints prevented me from taking
a full contingent of courses, but I was able to see Jim
Afinowich in action as he explained the proper way to
hold an auction. Funny that I became the winner of a T6
ride with John Zayac at the hands of Jim’s exceptional
auction abilities. What IS a T6? Do I really want to do
this? Why were there no other bidders? Jim is always
able to transmit some great information about his vast
experiences with a gleam in his eyes, and a story that
inevitably has some humorous details sprinkled into solid
information. A colleague who admitted not having taken a
course in “a long time” was reinvigorated by new content
and angles to a process that most of us do over and over
on a daily basis. The four hours went by quickly.
Kathy Theil, a fellow New Yorker, and an upcoming M&A
Source Chair relayed her experience to me about Bob
McCormick’s class #465 “Corporate Finance in Lower
Middle Market Transactions.” This class provided a wealth
of information on how corporate finance can enhance
the M&A process, including: valuation, evaluation of
multiple offers, decision making, sell vs wait, impact of
capital structure, evaluating equity rollover and quality
of earnings, and net working capital and its role in the
process. Whew! Having recently experienced this
class, I am sure that all of the attendees had a challenge
soaking up all the information doled out by “The Man, The
Legend,” Robert McCormick. Thanks, Bob. I’m sure that
the remainder of the classes were just as stimulating and
informative.
Speaking of Quality of Earnings, many of the free
workshops kept coming back to the topic of QOE on the
sell-side. The consensus was that if you can get your
seller to agree to the costs of an upfront review, it is
extremely beneficial, but there was also an agreement that
getting every business owner to pay for this analysis is
challenging. I’m sure this is a topic that will be returning to
Louisville.
Charlotte’s Deal Market exceeded the attendance of San
Diego’s, and the tables were at capacity. Lamar Stanley
and the Conference Committee did a great job! Lamar
emphasized that the Deal Market is as much about farming
as fishing - even if you don’t have a deal in hand, it is
always a good idea to make new relationships and hear
what is happening on the other side of the table.
By Mark Travis
CM&AP, CEPA
It will be a dry recast of a class or workshop
without the flavor of the great conversation
with a colleague that you haven’t seen for a few
years, or dinner with a new friend who lives in
a different part of the country and is working
on a project that is truly fascinating. I just can’t
do it justice. With that in mind, I’m going to pull
out the pumpernickel bread and see if I can
make a leftover sandwich that will make you
come back for seconds.
T h e B r i d g e | F a l l 2 0 2 3 | 5
Finally, I want to mention a new initiative that is close to me
as a Conference Committee member: first-time attendees.
Every effort is being made to make the new attendee‘s
experience as rewarding as possible. I hope they found
their experience a positive one. We all have thoughts
of “the conference needed more…” or “the conference
needed less…,” but I think the overall result struck a
balance to benefit as many as possible. As we continue
to refine the process, our professional staff, Lamar, and
the committee welcome any feedback from those who
either took the leap to attend their first conference or
long-time members of this organization. I also encourage
all of you who haven’t been to arguably the best part of
being an M&A Source member to save the date of May 13-
15 for the Louisville joint conference with the IBBA.
I assure you that this organization has a strong group of
volunteers and professionals who are driven to make your
conference the best it can be, and I have confidence that
Louisville will be a feast of information and camaraderie.
Join us at the table. Bon Appetit!
2023 M&A Source Chair Award Winners:
Jeff Swiggett and Lamar Stanley
2023 Fellow of M&A Source:
Monty Walker
2023 M&A Source Champions Award:
Russell Cohen CBI, M&AMI, CM&AP, LiveOak Bank,
KeyBank
2023 M&A Source Service Award:
Kyle Giffith CBI, CM&AP, Monty Walker CBI, Jeff
Swiggett CBI, M&AMI, Robert McCormack CBI,
M&AMI, CM&AP, Philip King CBI, CM&AP
2023 M&A Source Leadership Award:
Scott Mashuda
2023 M&A The Darrell Fouts Award:
John Zayac CBI, M&AMI
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Let’s take a moment to congratulate some of the
award winners who were presented in Charlotte:
6 | T h e B r i d g e | F a l l 2 0 2 3
The Biggest
Impact of TLPE
By Patrick Stroth
CEO at Rubicon Insurance Services.
Trusted Authority on Executive
and Transactional Liability.
First, why do Buyers want those holdbacks?
Often there’s not enough data or information available
for the parties in a deal to reach an adequate level of
certainty when it comes to risk, so Buyers use escrows/
holdbacks as a hedge. This way the Buyer has cash to
immediately respond to a breach, if one occurs.
The amount held back is usually 10% of purchase price. This
may be reasonable to the Buyer, but it can be significant for
Sellers of small companies looking for an exit.
In recent times, Representations & Warranty insurance
has emerged as the most significant risk transfer solution
in years. With this coverage, if there is a breach of the
Seller reps, the Buyer is able to recover any losses
without going after the Seller. The Buyer simply makes a
claim with the insurer.
TRANSACTIONS ARE MAJOR DECISIONS IN THE LIFE OF A BUSINESS,
FOR BOTH SELLERS AND BUYERS.
In a standard transaction a Buyer will request money
from the purchase price be held in escrow. And, while I’ll
admit there is a strong argument justifying those types
of requests, there are also viable alternatives.
“Unlike traditional R&W
insurance, TLPE is a Sell-Side
policy where the Seller, rather
than the Buyer, is the policyholder.
The policy is designed to be
triggered when the Buyer makes
a claim against the Seller.”
T h e B r i d g e | F a l l 2 0 2 3 | 7
R&W coverage is ideal. Claims are paid. It works. And it
has become increasingly popular in the M&A world.
There is a wrinkle:
it ’s not readily available for sub $20M EV deals.
But there is a solution:
Transaction Liability Private Enterprise insurance (TLPE).
Unlike traditional R&W insurance, TLPE is a Sell-Side
policy where the Seller, rather than the Buyer, is the
policyholder. The policy is designed to be triggered when
the Buyer makes a claim against the Seller. Instead of
going after the Seller directly, the Buyer simply collects
from the insurer. Easy.
Think of TLPE as a simplified version of R&W coverage
that can be placed in days rather than weeks and at a
fraction of the cost.
Sellers benefit from this insurance as well, and we’ve
seen the results first-hand. The lesson we’re learning
after 10 months of small business placements is that
TLPE is effectively reducing escrow levels in deals from
10% to 1% of purchase price. (TLPE is only 1% of EV or
$10,000 whichever is higher.)
Some examples from recent deals include:
•
$1.4M apparel wholesaler had their escrow fall from
$140,000 to $14,000.
•
$6M consumer product manufacturer had his escrow
fall from $600,000 to $60,000.
•
$11M SaaS company’s escrow fell from $1.1M to
$110,000.
I regularly hear from M&A professionals who observe
how R&W coverage, including TLPE policies, removes a
significant amount of stress in deals.
One big reason may be that Sellers are closing with
significantly more money in their pockets at no cost to
the Buyer. That ’s a very nice goodwill gesture, to be sure.
Please contact me, Patrick Stroth,
for more information at pstroth@rubiconins.com
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8 | T h e B r i d g e | F a l l 2 0 2 3
Market Pulse
Insights From the
Q3 2023 Report
THE MARKET PULSE IS OUR QUARTERLY SURVEY OF ACTUAL
TRANSACTION ACTIVITY AND CURRENT BUY/SELL TRENDS, PROVIDING
CRUCIAL INSIGHTS TO PROFESSIONAL ADVISORS, BUSINESS OWNERS
AND BUYERS/INVESTORS. QUARTERLY EXECUTIVE SUMMARIES
ARE AVAILABLE ON OUR WEBSITE WITH THE FULL SURVEY REPORT
RESERVED FOR SURVEY PARTICIPANTS.
Get More Insights
PARTICIPATE IN THE Q4 2023 SURVEY THIS JANUARY
TO GAIN ACCESS TO THE EXCLUSIVE INSIGHTS AVAILABLE
IN THE FULL REPORT.
CHANGE
CHANGE IN THE NUMBER OF NEW CLIENTS BY DEAL SIZE IN THE LAST 3 MONTHS
GREATLY DECREASED
DECREASED
STAYED THE SAME
INCREASED
GREATLY INCREASED
3%
18%
3%
10%
27%
3%
11%
3%
7%
24%
SCORE (1 TO 5)
3.6
3.8
T h e B r i d g e | F a l l 2 0 2 3 | 9
REASONS
#1 REASON FOR SELLER TO GO TO MARKET
BURN OUT
FAMILY ISSUES
HEALTH
NEW / BETTER OPPORTUNITY
RECAPITALIZATION
RELOCATION / MOVING
15%
5%
0%
5%
0%
0%
11%
0%
6%
11%
0%
0%
RETIREMENT
68%
39%
UNSOLICITED OFFER
0%
17%
OTHER
7%
17%
REASON
#1 MOTIVATION FOR BUYER
BUYING A JOB
BETTER ROI THAN OTHER INVESTMENTS
VERTICAL ADD-ON
HORIZONTAL ADD-ON
OTHER
22%
10%
27%
39%
2%
11%
6%
39%
28%
17%
CHANGE
FINANCING STRUCTURE
BUYERS EQUITY
SENIOR DEBT
SELLER FINANCING
EARN OUT
SELLER RETAINED EQUITY
OTHER
31%
43%
19%
3%
1%
3%
52%
29%
7%
7%
5%
0%
TYPE OF OPERATIONS
WAS IT A BUYERˈS OR A SELLERˈS MARKET IN THE LAST 3 MONTHS?
BUYERˈS MARKET
SELLERˈS MARKET
TOTAL RESPONSES
42%
58%
352
40%
60%
338
1 0 | T h e B r i d g e | F a l l 2 0 2 3
Selling Price is Important, but
Total Proceeds are King
(No Surprises)
THAT FAMOUS BUSINESS OWNER QUESTION…
WHAT IS MY BUSINESS WORTH, REALLY MEANS HOW MUCH WILL I GET IN MY BLUE JEANS?
Total Proceeds:
Typically, there are 3 main contributors
to Sellers’ total proceeds:
•
Offer Price - Cash at closing and any Promissory
Note;
•
Final Adjustments – including excess transferred
Working Capital settlement payment after Closing;
•
Balance Sheet Discharges.
Preamble
In most private lower mid-market transactions involving a
Share Sale which includes the transfer of an operational
balance sheet, the Offer Price is based upon a multiple of
cash flow – which includes all the assets in the business as
well as Net Working Capital – one of the most important
asset classes.
The definition of Working Capital can be anything the
Seller and Purchaser agree it should be. Generally
speaking, the accounting profession in North America
defines Working Capital as Current Assets minus
Current Liabilities. Commonly, in M&A advisor managed
transactions, Working Capital can be defined as simply
as Accounts Receivable + Inventory (including Work in
Progress) minus Trades Payable. To ensure sufficient
operating capital is left in the business at closing, some
level of Cash may also be included in the definition.
By Neil Thomson
CBI, M&AMI