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CORPORATEGROWTH

SPECIAL ADVERTISING SECTION

INSIDEPRESIDENT’S LETTERACG Cleveland’s presidentreports that the organizationcontinues to add membersand host exciting events despite the tough economy.● PAGE S-2

THE M&A LANDSCAPELocal middle-market merger& acquisition experts antici-pate a slow recovery in 2010.● PAGE S-4

SUCCESS STORIESCompanies find NortheastOhio a good place to growtheir business. ● PAGE S-8

TURBULENT TIMESCompany executives sharetheir insight on navigatingthrough tough times. ● PAGE S-10

CASH TRAPAccess to capital will be achallenge for some businesseswhen the economy turnsaround. ● PAGE S-5

ADVICE FOR SELLERSAdvanced preparation notonly will make the seller’s business more marketable,but can increase the pricepaid for the business. ● PAGE S-6

long historyBRIGHTFUTURE

Cleveland rocks middle-market deal-making

See BRIGHT on Page S-2

By Ann M. Gynn

The middle-market deal-making world knowsCleveland. Home to more than the Rock andRoll Hall of Fame and Museum and world-renowned Cleveland Orchestra, Northeast Ohio

boasts a middle-market deal-making sector that far surpasses most cities of comparable size.

Proof of Cleveland’s prowess came last Septemberwhen, in the depth of the recession, more than 600registrants from across the country attended the first-ever Great Lakes Capital Connection, a two-day confabof middle-market private equity firms, investmentbankers, capital providers and transaction advisers.

“It was a spectacular success,” says Dennis White,chairman of the board of ACG Global and senior counsel at McDermott, Will & Emery LLC in Boston,who was one of the 600 in attendance.

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20100118-NEWS--15-NAT-CCI-CL_-- 1/11/2010 4:36 PM Page 1


CORPORATE GROWTH and M&A S-2 January 18-24, 2010 Advertisement

At Calfee, we begin with a single objective:

to help our clients succeed. Everything

else stems from that objective. From our

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ACG Cleveland offers events, education and networking for dealmakers

It will not be news to anyreader of Crain’s ClevelandBusiness that 2009 was atough year for dealmakers.

The economy crashed, creditmarkets locked up, defaultsspiked, and erstwhile buyers focused on strengtheningtheir existing businesses.

You might have expect-ed a professional organiza-tion whose members aredevoted to corporategrowth and deal-makingto lose members and seeattendance decline in suchan environment. But thatdid not happen. Reflectingthe value that ACG Cleve-land provides, our membership continued its upwardtrend, increasing slightly to 435 atlast count, and programs were wellattended.

Our January 2009 Deal MakerAwards event was a sellout, and the inaugural Great Lakes CapitalConnection in September 2009 wasa smash. The event, a collaborationof ACG chapters in Cincinnati,Columbus, Detroit, Indianapolisand Pittsburgh, attracted 600 regis-trants—the majority from outsidethe Cleveland area. We are alreadymoving forward on the second annual Great Lakes Capital Connection in September 2010.

ACG Cleveland is one of thelargest and most vibrant chaptersin ACG, the Association for Corpo-rate Growth. With 12,000 members,ACG is the world’s preeminent organization for corporate develop-ment and middle-market M&A

professionals. Chaptermembership includes ac-cess to the full suite of ACGGlobal benefits and services.

ACG Cleveland members work in public &private companies, privateequity, corporate & invest-ment banking, finance, accounting, law, and otherprofessional services. Theyjoin ACG Cleveland fortwo primary reasons:

1) educational events that helpthem build value in their companiesand for their clients; 2) the oppor-tunity to network with a diverseand influential community of business people.

If this sounds like an organiza-tion for you, we encourage you toattend one of our events or applyfor membership. Visit us atwww.acgcleveland.org or call me at(216) 781-2400 and I’ll be happy totalk with you. ■

Mr. Gallagher is president of ACG Cleveland and senior vice president ofEdward Howard.

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Bright

Private equity firm participationis the driver of attendance at mostACG events, and Cleveland startswith a solid base.

“We just have a phenomenalgroup of private equity firms here inCleveland,” says Tom Freeman,

Continued from Page S-1

transaction advisory services partnerat Grant Thornton. “We’re blessedfor the size of the city here.”

Jim Marra, director of businessdevelopment at the private equityfirm Blue Point Capital Partners,agrees that it’s unusual for a cityCleveland’s size to be home to adozen or more private equity firms.

“In the footprint of the GreatLakes, you don’t see anywhere elsewith near as much private equity

concentrated as it is here in Cleveland,” he says.

Pioneers of PEMr. Marra explains that the

private equity industry began herebefore the term “private equity”even existed.

“It started with Frank Linsalata,David Morgenthaler and those earlyprivate equity guys in the late ’70s

and early ‘80s who thought itmade sense to buy companies on aleveraged basis,” he says.

Cleveland always has had astrong industrial base, whichmakes it fertile ground for invest-ment opportunities. In addition,Cleveland has had people withsignificant wealth who wanted toparticipate in such deals.

“It was a confluence of theunique,” Mr. Marra says. “Therewere companies to buy, money willing to be devoted to acquisi-tions, and some pretty smart guyswith a vision of what private equitycould do.”

One of those visionaries wasDavid Morgenthaler, who found-ed the eponymous firm morethan 40 years ago. Today the pri-vate equity and venture capitalfirm has $3 billion in funds undermanagement and has funded 300companies.

“Private equity firms have beenhere a long time,” says Al Stanley,co-managing director of Morgen-thaler ’s private equity practice.“Cleveland’s a strong player in thelower-to-middle segment of the private equity market.”

Mr. Stanley says that the early beginnings of private equity happened here because Clevelandhad both a strong industrial and astrong banking base. Other middle-market transaction services spunoff from this core of operators andfinanciers.

Powerhouse“Cleveland as a deal-making

powerhouse is more than privateequity,” Mr. Marra notes. “Privateequity is the nucleus, but there

are many more components —other capital, senior and mezza-nine debt, major banks who areexperienced lenders in that mar-ket, and so on.”

The presence of three big banks [National City Bank, nowpart of PNC; AmeriTrust and Society (now Key)] also supportedprivate equity, Mr. Freeman says. In fact, he notes, Blue Point itself spun off from Key EquityCapital.

Add into that mix about adozen law firms with the neces-sary experience and capabilitiesplus Big 4 accounting firms andstrong regional accounting firmsthat can audit portfolio compa-nies and help in acquisitions.

“All the services that buyers of businesses need have reallygrown up here in Cleveland,” Mr. Marra says. “When you havethese components and can pull in others such as environ-mental and risk managementconsultants then you can rightlycall yourself a deal-making powerhouse.”

Stewart Kohl, co-CEO of TheRiverside Company, says the professional community in Cleve-land is remarkably developed andsophisticated.

“We can bring all the special-ists we need to complete a deal,including attorneys, accountants,insurance, environmental advisersand others,” Mr. Kohl explains.“Cleveland has broad and deepbenches, much more so than inour peer cities. It’s an embarrass-ment of riches.”

One advantage to operating inCleveland is that there are a lotmiddle-market-type companies,

20100118-NEWS--16-NAT-CCI-CL_-- 1/11/2010 10:19 AM Page 1


CORPORATE GROWTH and M&A Advertisement January 18-24, 2010 S-3

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Mr. Freeman says. Prior to themost recent economic downturn,the biggest accounting firms didn’t pay much attention to themiddle market, but other firms,such as Grant Thornton, were paying attention.

About half of Grant Thornton’sclients in Cleveland fall into the$50 million to $250 million rangeand are owned by private equitygroups, he says.

Grant Thornton finds more companies are switching the auditand tax work that they historicallysent to Big 4 firms to regionalfirms with a national presence. “Acompany in California owned by aprivate equity firm in Clevelandcan use our services. The privateequity firm likes to have one pointof contact that is local and this isone of our core strategies,” Mr.Freeman says.

Other Attractions Riverside, Morgenthaler and

Cleveland’s other private equityfirms have offices and deals outside the area, which meansthey travel a lot. Thus, having aContinental Airlines hub at Cleve-land Hopkins International Airport is a big plus, both Mr.Kohl and Mr. Stanley say.

Having a hub means our staffdoesn’t have to change planes asfrequently, Mr. Kohl says. Havingcontent employees is critical forthe firms’ success.

Riverside finds Cleveland is agreat location to attract sophisti-cated professional talent who appreciate the quality of life theycan have in the area.

“I love it when kids who grewup in Cleveland, spent time onthe coasts and intentionally comeback in their 30s because theywant to raise a family here,” Mr.Kohl says.

Mr. Stanley concurs. “Clevelandis a great city. There’s somethingabout a Midwest reputation that isreassuring to sellers.”

That regional reputation canhelp when Morgenthaler is doingdeals too. Although the firm doesn’t intentionally promote itsroots, sellers perceive the Midwest location as a signal the firm isdown to earth and trustworthy.That’s especially appealing for family businesses deciding tosell, Mr. Stanley says.

But that doesn’t mean Morgen-thaler limits its investments to theMidwest. “Our portfolio goes fromMaine to California. We look fordeals everywhere,” Mr. Stanley says.

Riverside invests globally too.As for Ohio-related deals, River-side has a special place in its heart.“There are a lot of great entrepreneurs here,” Mr. Kohlsays, adding he sees big growthpotential locally in the healthcare sector, including medical servicesand biotech enterprises.

Technology has allowed firmsto grow globally and remain basedin Cleveland. As Mr. Marra, whojoined Blue Point in 1991, explains: “Twenty years ago, itwas harder to buy a company thatwasn’t in your footprint geographically. We looked at operations outside Ohio, but weweren’t looking far afield.”

As private equity grew, it becameobvious to Blue Point that it neededto expand its horizons if it were tohave the best portfolio possible.

Through technological advancessuch as videoconferencing, the

Internet, e-mail, and cell phones,Blue Point has been able to stay inCleveland and do deals aroundthe globe.

“Ohio remains an importantpart of our portfolio as a dealsource,” he says. “I doubt that willchange because we’re in constantcontact with a number of compa-nies. It’s still easier to keep intouch in town.”

Private Equity EvolutionAnother deal-making evolution

has been the growth of intermedi-aries such as Brown Gibbons Langand Western Reserve Partners,who serve as deal connectors between buyers and sellers.

Twenty years ago, a $50 millioncompany without a strategic (corporate) buyer didn’t have many

options, Mr. Marra says. It had tofind the private equity firm andcoax it into buying business.

In the 1990s, buyers would signletters of intent without the cash andthen approach private equity firms.

As private equity investmentsproduced unusually large returns,new firms organized and the inter-mediary function grew. “Ourworld is a lot more competitive,”Mr. Marra says.

Cleveland’s private equity firmshave their own specialties so thecommunity has an excellentbreadth to tackle all types of mergersand acquisitions, Mr. Freeman says.

Mr. Kohl says that Cleveland’sprivate equity community hasheld on well during the last down-turn even when a significant number of firms disappeared. “I’m

not aware of any in Clevelandclosing,” he says.

In fact, Mr. Freeman says, aCleveland-based private equityfirm was created in these challenging times.

Supply Chain Equity Partners is the only private equity firm in the world that focuses exclusively on the distribution industry. “They have a great management team that really understands this space,” he says.

Another Cleveland firm posi-tioned itself well to tackle thedownturn opportunities. ResilienceCapital always has focused on un-derperforming companies. So nowis a great time for the firm to play ina space that it already understood,Mr. Freeman says. “They’re prettybusy right now,” he adds. ■




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Middle-market M&A looks for a slow recovery in 2010

Like the Indians’ andBrowns’ seasons, the middle-market merger & acquisition (M&A) world

suffered its woes in 2009, saysJoseph Carson, managing directorat Western Reserve Partners, aCleveland-based investment banking firm.

Year-to-date through Septem-ber, he says, total transaction volume for the middle market(deal values between $25- $250million) was down 55 percentyear-over-year, and total transac-tion value was down 59 percent.

And there was no pickup in thethird quarter. Activity fell fromsecond quarter levels as totaltransaction volume decreased 19percent and total transaction value decreased 23 percent.

“The new normal is a reductionin valuation multiples from thehighs of 2007 and 2008,” says Mr.Andrew Petryk, managing director at Brown Gibbons Lang &Co., a Cleveland-based investmentbanking firm.

Mr. Carson says, “Limited credit availability is one of the pri-mary drivers of this decline.” Total

Gibbons Lang currently is workingwith a Mexico-based client buyinga U.S. business and is handling at least three other foreign trans-actions.

BGL is seeing consistent acquisi-tion interest from credible andwell-capitalized western Europeanbuyers.

Slow Improvement“A lot, though, is driven by the

credit market. It’s still choppy,”cautions Jim Hill, partner and executive chairman of Benesch,the Cleveland-based law firm.However, he sees deal activity improving in 2010.

Mr. Hill says lender consolida-tion and several non-regulatedlenders pulling out of cash-flowlending have constricted the market for borrowers but that willchange slowly, too, in 2010.

However, compared with the recent more robust times, lenderswill continue to be wary about to whom and how much theylend.

Mr. Petryk adds that there is increased scrutiny from sellerswho are concerned about buyers’ability to actually finance a dealgiven the tough credit markets.

Mike McMahon, managing director of M&A Advisory at Key-Banc Capital Markets, believes thequality of assets coming to marketis improving.

In addition, large publicly traded or privately owned compa-nies are beginning to think strate-gically again. During the last 12 to18 months, companies were mak-ing divestitures out of necessity toshore up over-levered balancesheets, he says.

Now they are beginning to return to strategic divestitures toshed non-core assets, freeing upcapital to make strategic acquisi-tions.

“They have been deep intrenches focusing on survival –now they can look at strategy,”says Mr. McMahon. “There’s noth-

“Not surprisingly, when these depressed multiples are applied to deteriorated earnings, buyer and

seller expectations diverge.”—— JJoosseepphh CCaarrssoonn,, WWeesstteerrnn RReesseerrvvee PPaarrttnneerrss

prices — in some cases, involun-tarily.”

To be sure, there are exceptions,adds Mr. Carson. Financiallysound companies with compellingstories still attract well-capitalizedstrategic buyers and financialsponsors. In these cases, acquisi-tive interest has been robust, andsome sellers have received premi-um valuations. In particular, saysMr. Carson, foreign strategic buyers have become increasinglyactive in the acquisition of U.S.companies, leveraging favorableexchange rates.

Mr. Petryk says though interna-tional opportunities were limitedlate last year and in early 2009,the volume has appreciably increased thru year end. Brown

ing like a recession to encourageexecutives to increase their focuson their long-term strategy.”

Creative SolutionsMr. McMahon says he thinks

financial buyers will be more active in 2010 even if they need touse creative solutions to get thetransactions done, such as puttingmore equity into deals or invest-ing in non-control situations.

Mr. Carson concurs. “Despitethe tight credit availability, finan-cial sponsors who are flush withcapital and hungry for good dealshave shown their willingness tobridge financing gaps by contributing additional equity,turning to mezzanine financing,or structuring seller notes with aclear path to liquidity.”

Mr. Hill also expects continued,creative financing structures byprivate equity firms in order to getdeals done now.

“The fund managers expect thatas lending gets looser in the nextcouple years, they will refinanceand get out some of that equity,”Mr. Hill explains. “When you lookat history, the most successful acquisitions in terms of return oninvestment are bought during recessions.”

Peaks and Valleys Mr. Petryk advises that while

the market cycles through peaksand valleys, he expects the valleysand peaks to be wider through thenext cycle as the market turnsmore slowly. Though cautious, hesees a brighter future.

“I’m a lot more optimistic todaythan I was six months ago,” hesays.

Mr. Hill points out that whilemarkets cycle and the relative advantage between strategic buy-ers and financial sponsors fluctu-ates, the generational influence onselling is a constant. Time and tidewait for no man.

Mr. Petryk concurs, noting thatvalue multiples are obviously akey driver of deal activity, but other considerations are equallyimportant such as business risk associated with the potential for aprolonged economic downturn orno-growth environment, antici-pated increases in capital gains orjust being the right time for theprivate equity firm or family.

“Are you better selling today for

leverage for the middle marketdropped from a high of 4.4 times EBITDA (earnings before interest taxes, depreciation and amortization) in 2007 to approximately 3 times today, henotes.

Middle market loan issuance inthe third quarter was down 46percent year over year and 13 percent from second quarter levels.

Significantly, he notes, of thisamount, 80 percent was used forgeneral corporate purposes ratherthan transaction financing.

And credit spreads widenedthrough September as lendersaligned return requirements withmarket conditions and highercosts of capital.

Understandably, Mr. Carsonsays, the tightening credit marketnegatively affected EBITDA multi-ples.

“Not surprisingly, when thesedepressed multiples are applied todeteriorated earnings, buyer andseller expectations diverge,” hesays. “This has caused transactionsto be delayed, canceled or completed at reduced purchase




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TRANSACTION SERVICESin tune with the middle market

$75 million or waiting and maybegetting $100 million at somepoint in the future?” says Mr.Petryk.

Some owners looking to cashout now are saying no to the wait,especially given the potential forhigher tax rates on capital gainsand dividends.

“You would really have to significantly increase EBITDA (tostill be ahead) if the capital gainstax rate goes to 25 percent or 28percent,” as compared with 15percent now, Mr. Hill says. “This will create significantly greaterdeal flow in the second half of2010.”

Investors Gain Comfort“Despite the challenges, the

overall market has shown signs ofimprovement and should gainmomentum as we enter 2010,”says Western Reserve Partners’ Mr.

Carson. “Credit spreads havetightened as investors have gainedcomfort with the economy andearnings visibility. In the privatemarket, high-quality credits (BBBpublic equivalent) are now issuingat less than 6 percent.”

Mr. Carson also notes that theapproximately $400 billion overhang of un-invested capitalsuggests the potential for an M&Arebound.

“However, middle-market trans-action activity will likely remainsoft through the first quarter of2010, while the credit markets andeconomy slowly recover,” he says.“Though multiples will recover,middle-market M&A participantsshould expect tempered attitudes.

“As with the beginning of everynew Indians and Browns season,hope springs eternal,” he says.“Let’s just hope the market faresbetter than our summer and fallsports teams have.” ■

The coming cash trap

As sales volumes taperedand profits declined ordisappeared over the past18 months, companies re-

sponded in two ways, says LloydBell, director, with the Cleveland-based accounting firm Meaden &Moore.

First, they cut back on expenses.Existing inventory was used to fillnew orders. In addition accountsreceivable from past sales were being collected, albeit a little moreslowly than before, but at a ratethat exceeded new sales.

This resulted in positive cashflow, but lower accounts receiv-able levels. So companies werefunding themselves from the cashtrapped in the balance sheet in the form of inventory and accounts receivable rather thanprofits.

“You can only squeeze the cashout of the balance sheet for solong,” says Mr. Bell.

As companies find their under-lying markets improving in 2010,they will see varied opportunitiesfor growth, he says.

“The problem for many of these

“I think thesurvivors are goingto be the companiesthat ... can adapt tochange quickly.”

—— LLllooyydd BBeellll,, MMeeaaddeenn && MMoooorree

companies will be liquidity,” Mr.Bell explains. Cash needed to fund a build-up of working capitalor to invest in new fixed assetswill be unavailable without current access to capital. So financing will be the primary challenge for companies whosemarkets are improving just as itwill be for those companies whosebusinesses are not rebounding.

“I would expect limited assis-tance from banks in fundinggrowth opportunities, much less

refinancing existing obligations,”he says. “Businesses will need tocontinue to use as few resources aspossible to conserve availablecash. Ensure credit facilities are in compliance. If they are not,communicate with the bank immediately. Find out which customers are truly profitable afterall costs are considered. And see ifprice increases or softer creditterms are possible.”

How companies manage the recovery will be as critical as howwell they managed the downturn.Mr. Bell says.

“I think the survivors are goingto be the companies that are nimble and can adapt to changequickly. Companies need to workon developing shorter cash cycles,which will reduce the amount ofcapital required. Business ownersneed to recognize that equity has a cost too, and it’s higher than the cost of debt. Reducingthe total amount of capital required and finding the rightblend between debt and equity isparamount to maximizing share-holder returns.” ■

WHAT BUYERS AND SELLERS NEED TO KNOWRon Stepanovic, national

head of the private equity prac-tice at Cleveland-based BakerHostetler, offers this perspectivefor buyers and sellers.

BUYERS SHOULD KNOW:—- Deals will take longer to

consummate than in the recentpast.

—- Both lenders andseller will conduct moredue diligence, so buy-ers should have theirown house in order andbe ready for this addi-tional scrutiny beforeapproaching sellers andlenders.

—- Deal costs as apercentage of the pur-chase price will in alllikelihood increase as a result ofadditional due diligence andhigher financing costs.

—- Buyers cannot rely on thesignificant level of leverage thatwas available before the new“normal.” Deals will require moreequity.

—- Yields for buyers will con-tract unless they squeeze addi-tional yield from the seller in theform of a reduced purchaseprice.

SELLERS should adjust theirexpectations, be more flexible ingeneral and know:

—- Market uncertainty means abuyer cannot take a chance bypaying an aggressive multiple onthe seller’s forward-looking earn-ings estimate or even historicearnings.

—- Deal multiples havefallen, and sellers shouldnot expect them to in-crease in the near future.

—- Deal terms haveswung in favor of thebuyers.

—- Indemnity periodsare longer. Indemnitybaskets are smaller. Indemnity caps are higher and indemnity

escrows as a percentage of thepurchase price are greater.

—- Buyers will seek to bridgevaluation gap by asking sellersto finance a portion of purchaseprice or accept an earn-out.

—- Buyer and buyer’s lenderswill conduct enhanced due dili-gence and scrutiny becausethey want assurance that theearnings stream is for real andthat cost-containment measuresare in place.

RONSTEPANOVIC


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Credit market reversalsover the past 18 monthshalted one of the mostfavorable sellers’ markets

in M&A history. Methodical conservatism now rules the day,with buyers calling the shots. Aseller unable to withstand rigor-ous scrutiny need not apply.

Once a company makes the decision to explore a sale or recapitalization, one of the firststeps in this process: seller-sidedue diligence, advises Brian M.O’Neill, chair of the business/taxdepartment at Cleveland-basedUlmer & Berne LLP.

Seller-side due diligence is theprocess of a seller reviewing andshoring up its own financial, busi-ness and legal records in prepara-tion for a buyer’s discerning eye.

“While all businesses have weaknesses, latitude for seller mis-steps has become razor thin,” Mr.O’Neill says. “One unexpected obstacle or financial statement dis-crepancy can ruin a deal. Advanceddue diligence allows a company toidentify, and if possible eliminate,these types of problems before abuyer becomes involved. This inturn allows the parties to stay focused on the quality of earningsand other value drivers of the business. The key is to leverage thevalue drivers.”

With M&A activity consider-ably slowed, most companies arechoosing to delay taking them-selves to market, says Tom Bechtel,director of the Transaction Services Group at the Cleveland-based CPA and consulting firm,Cohen & Company.

“Now is time to get the housein order to prepare for a saledown the road,” he says. Ulti-mately these are things youshould be doing, but now youmay have the time to do them.”

Mr. O’Neill explains that advanced preparation will notonly make the seller’s businessmore marketable, but will helpmaximize the price paid for thebusiness. Early investigation, including the use of third partiesto perform financial and legaldue diligence, gives the sellerboth credibility and the opportunityto clean up issues that could beused against it later in the process.

Wary Buyers“A potential buyer may be wary

of even beginning the due dili-gence process knowing that theseller has never had the benefit ofhaving the financial statementsand other key elements of its busi-ness independently reviewed,” Mr.O’Neill says. “Any buyer willing tolook past an unprepared and disor-ganized seller is sure to apply a discount to offset any (real or perceived) concerns.”

Mr. Bechtel, who typically advises on the buy side, says buyers look for several key factorsthat focus on quality of earnings,quality of assets and human

capital.As to quality of earnings,

buyers will want to identify thecompany’s profit sector by sector.He advises prospective sellers todo everything they can to controlcosts and manage away from unprofitable sectors.

“As much as possible, get fixedcosts to be variable,” Mr. Bechtelsays. For example, a companyshould consider staffing alterna-tives such as using temporaryhelp instead of rehiring full-timeemployees or implementing tem-porary furloughs to reduce costs.

“It’s about controlling costsand managing the timing of expectations,” Mr. Bechtel says.“Ultimately the buyer will ask,‘How did this company respondto difficult market conditions?’”

Quality of assets is another areascrutinized by buyer, says Mr.Bechtel. Sellers should examinetheir inventory and move itrather than hold on in hope ofhigher prices in the future. Holding less inventory may alsoenable the company to cut thecost of storing inventory.

As for human capital, the economic downturn means a lot ofquality displaced people are in thejob market, says Mr. Bechtel. “Thatkey ‘A player’ you’ve always wantedmay now be available,” he says.

House in OrderGet all your documents in one

place, says Mr. Bechtel. Set up adata site now so the company canjust update it quickly when it’sready to sell. Information to beloaded onto the site includes topcustomer, vendor and other perti-nent data as well as updated keycorporate agreements.

“When an opportunity doesbecome available, you’ll be moreready and responsive to buyer’sneeds,” Mr. Bechtel says.

Joe Juster, co-chair of the corporate practice group at theCleveland-based law firm Calfee,Halter & Griswold, agrees. “Don’tscramble to set up a data site atthe last minute,” he says. At thatpoint in the process, manage-ment should be focused on responding to requests for detailsfrom prospects. Anticipatingneeds, not hurrying around,highlights the managementteam’s credibility, which can affect the price.

“When you go in and every-thing is in disarray, it’s a big negative for the buyer,” Mr. Bechtel says. They ask, ‘What elsedon’t we know?’”

Mr. Juster advises that ownersshould operate as if their businessis for sale, seeking to consistentlyincrease sales and earnings. “Ifyou can show consistent salesand earnings growth, you’ll get ahigher valuation,” he says.

A major advantage for privatecompanies over publicly tradedcompanies is that they don’t have to respond to the quarter-to-

“While all businesses have weaknesses, latitudefor seller missteps has become razor thin.”

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quarter volatility of the public markets. They can take a longer-term view, sometimes sacrificingmargin to capture market share ormaking significant investments inthe business. Companies should,however, be careful to documentthose investments as one-timeevents so EBITDA can be positivelyadjusted at sales time.

Mr. Juster offers this example.A company purchased capitalequipment in 2008 to improveits operations or enter a newmarket. The investment impactedits earnings for the year. However,proper documentation persuadedthe buyer that some of the expense can be added back tothe 2008 earnings on which themultiple is paid to determine afair sales price.

Check That Agreement “Business is about relation-

ships,” says Mr. Juster. “In everyrelationship there is both oppor-tunity and risk.” Owners shoulddo a check-up involving all thecompany’s key relationships. Doemployees have non-competeagreements? Dokey customersand suppliershave writtenagreements thatspell out whathappens in a dispute? Do majority ownershave agreementswith minorityshareholders totake them alongin the sale?

As Cohen &Company’s Mr.Bechtel says,“Address yourcompany’s skeletons before aprospective buyer does.”

“It’s all about getting thehouse in order and eliminatingobstacles” says Ulmer & Berne’sMr. O’Neill.

Remember too, it’s not justthe property, plant and equip-ment numbers that matter.“Now balance sheets are farmore nimble,” Mr. Juster says.“It’s intellectual property that’scritically important to the buyerin maximizing value.”

Privately owned companiesalso should pay attention to

ownership issues such as succes-sion planning and buy-sellagreements. Once a sale oppor-tunity arises, those issues canprevent a company’s ownersfrom maximizing their invest-ment, Mr. Bechtel says.

Uncle Sam’s ShareWhen it comes to maximizing

the selling price of a business,“It’s not necessarily what youget, but what you keep,” Mr.Juster says. He, of course, is referring to Uncle Sam and thetax implications of the sale. After the sale is completed is notthe time to determine how tominimize the tax impact.

The type of entity – C corp., Scorp. or LLC – and how a deal isstructured – asset sales, stock sales,mergers – affects the net proceeds.In addition, whether you receiveall-cash at closing, take a sellernote or have an earn-out willhave an impact on present value.

“There are tremendous oppor-tunities before the sale to do creative planning to avoid estatetaxes,” Mr. Juster says. Significant

value can be savedand transferred tochildren, grand-children, a grantortrust or a charita-ble foundation,thus reducing theestate tax impact.“You can do goodand do well withcareful foresight.”

But advanceplanning is critical. It allowscompany ownersto bring in appraisers to set avalue for family

and charitable gifting purposesThese appraisals need to be donewell before a sale occurs.

“Once you have a letter of intent, it’s harder for an appraiserto come in and say it’s notworth that,” Mr. Juster says.

Despite the considerable effortrequired, the entire seller-side duediligence process is worth it, Ulmer’s Mr. O’Neill says. “A well-prepared seller can expect that thehuman capital and monetarycosts incurred in this process willbe offset by the advantages it willhave in today’s market.” ■

A major advantage for private

companies ... is thatthey don’t have torespond to the ...volatility of the public markets.

Brian O’Neill, partnerat Ulmer & Berne LLP,says the optimal seller-side due diligenceshould include:

ACCOUNTING TEAM:Accountants should review and verify thecompany’s financial information and prepare pro-forma interim and trailing 12-month financial state-ments. Establishing thequality of financial information is crucial tomaximizing the value of the company. The accounting team should analyze possible adjustments to EBITDA as ameans to maximize the value of the company.

LEGAL TEAM: Counsel should review the company’s records and contracts and clean upoutstanding issues. The legal team should workwith the seller to develop a strategy to deal withtypical concerns of buyers such as third-party assignments and consents, regulatory and employee matters and environmental and tax issues.

INVESTMENTBANKER: For largermore sophisticatedtransactions, an investment banker isan integral part of thedeal team and will take the lead to provide estimates ofvalue, develop a marketing strategy,and eventually drive of-fers from prospectivebuyers.

DEAL STRUCTUREAND TAX PLANNING:

Preliminary deal structure and tax issues shouldbe addressed by the legal, accounting and invest-ment banking teams. As part of this process, theaccounting and legal teams should also provideadvice on possible estate planning strategies tocreate the most efficient tax structure for wealthtransfer.

DATA ROOM: Organizing due diligence information, including legal documents, financial statements and business reports in a secure online data room can speed up the due diligenceprocess and lower both sides’ transaction costs.

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Companies find Northeast Ohio a good place to grow

Afew years ago, Bob Fritzconsidered selling hisfamily business, AvtronManufacturing Inc., a 56-

year old technology company. Independence-based Avtron designs and manufactures electricalcontrol and test equipment foraerospace, industrial automationand other applications.

As he was exploring his options, he found and came torely on the Cleveland-based investment banking firm WesternReserve Partners to help him inthe sales process. “You don’t justwing it — doing it right takestime,” Mr. Fritz says.

He was amazed at the deal-making resources to be found inCleveland. “I’ve lived here all mylife and didn’t realize the deal-making infrastructure available,”he says.

Ultimately, Mr. Fritz sold thecompany to the Morgenthaler,one of Cleveland’s long-standingprivate equity firms. He says heliked that the firm understoodmanufacturing and wasn’t just

“New York financial guys.”Mr. Fritz’s experience illustrates

one reason why Northeast Ohiois a good place for owners ofsmall and mid-sized companies togrow their business and ultimatelyrealize value from their invest-ment.

The region offers access to capital, professional services anda skilled workforce, along with acentral location and the technicaland scientific resources of leadingcolleges and universities.

Deal Structure Works Mr. Fritz was pleased to be able

to structure the deal so manage-ment received stock options andhe would stay on as CEO. “Beforeprivate equity that wasn’t possi-ble,” he says.

Weekly phone meetings andquarterly board meetings havebecome part of the routine, and achief financial officer, Rich Garcia, was brought in to providemore strategic overview of the financial side of operations.

“Properly handled and man-aged, private equity is a goodthing for a company,” Mr. Fritzsays. “We didn’t lose a single employee due to the acquisition.”

Employees are a critical compo-nent at Avtron, which differentiatesitself with the long-term support itprovides to its customers.

That wasn’t always the case.When Mr. Fritz joined the company in 1974, about 20 yearsafter his family opened a smallplant in Cleveland, turnover washigher.

The workforce caliber has improved in part because employees are compensated welland receive excellent benefits,

including profit sharing, what Mr.Fritz has been told is a “Cadillac”health plan.

Top Talent RequiredAvtron employs more than 400

people, many of whom are engi-neers and other professionals.

Top talent is essential becauseAvtron produces highly engi-neered products that cannot beproduced by unskilled people.

“We now hire impact players,”Mr. Fritz says, noting one hirebrought in $2 million in businessand now has customers requesthim.

“Avtron is able to grow year in, year out with low turnover,and we can find quality peoplewhen new hires are needed,” Mr. Fritz says. Even that success,though, doesn’t mean the employeeswould be willing to pick up andmove if Avtron did.

“If I walk in and say we’re going to move to Georgia, theyprobably would not go,” Mr. Fritzsays, noting the company isn’tasking them to make that decision.

Avtron will continue to operate from its five plants in

Independence and Valley View.It does so with a global view.

About 30 percent of its customerbase is outside the United States.The company shipped to 78 countries in 2009.

Avtron also has experiencedsales records for five or six years through 2008 and expects to post an all-time profit recordfor 2009 even though salesdipped.

“We’ve grown rapidly. As you grow, your culture and outlook change. Morgenthaler hashelped us in that process,” Mr.Fritz says.

Concept Fills a VoidWhen Richfield-based Construc-

tion Labor Contractors had its first40 people on the job, they poppedthe champagne cork. If they did that today, they would bepopping corks more than 20 timesa day.

“On an average day we have850 full-time workers on the job,”says Vice President Rob Reese.

Construction Labor Contractorsis another Northeast Ohio successstory.

The company provides skilledlabor to construction contractorsand industrial project managers.By leasing craftsmen, contractorscan control their costs while delivering high quality construc-tion work.

Founder and CEO Tim Cherottisays the company was created tofill a void. Although non-unioncontractors comprise about 85percent of the labor pool, they didnot have a “union” hall where thejobs were distributed.

“The non-union sector needed abetter way to provide skilled laborto ‘merit’ construction contrac-tors,” he says.

Operating from 15 offices innine states, Construction Laborbuilt its own corporate headquar-ters in Richfield four years ago. In2008, the company posted itsmost successful year with $40 million in revenue.

That’s a long way from 1997when Mr. Cherotti started thecompany with just $100 and an

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ACG Clevelandcongratulates

the winners of the14th Annual

Deal Maker Awards

216-696-8484 • 216-696-2582 [fax]1120 Chester Avenue, #470 • Cleveland OH 44114

www.acg.org/cleveland • [email protected]

2010 Award Recipients

Cliffs Natural Resources Inc.Dealer Tire, LLC

TransDigm Group Inc.

SPONSORS

office in his basement. He took the leap following four

to five years of experience workingfor staffing and headhuntingfirms.

“I decided I could do it on myown,” he says. I felt I understoodthe industry, had the experience, abit of luck and the good hires tobe successful.”

Mr. Reese joined six months after his former fraternity brotherat Kent State University started thecompany.

“It worked out well,” Mr.Cherotti says. “Long tenure is part of our corporate philosophy.We treat employees as if they’refamily.”

Longevity RewardedThe results speak for them-

selves. Over half the corporatestaff has worked at the companyat least five years.

Mr. Reese says the Ohio officestaff serves as an example for theentire company.

The Akron manager has workedthere 11 ½ years.

The Columbus manager hasbeen there nine years, and theCincinnati manager has beenthere seven.

Longevity is rewarded by Construction Labor, which pays100 percent of health care costs after an employee has been withthe company five years.

Mr. Reese says Construction Labor is not really a temp agencybecause full-time employees have benefits, such as paid holidays and vacations, 401(k)participation.

Employees would not find thoseopportunities working for a traditional temp agency or a smallconstruction firm.

A construction company with20 employees can’t offer the same benefits package that a largercompany like Construction Laborcan.

In 2008, Construction Laborsent about 2,000 W-2 forms. Inaddition, Construction Labor’s5,000-plus clients mean employ-ees won’t experience the layoffs they could working for a singleemployer who hits a down cycleand doesn’t have enough work.

Both Mr. Reese and Mr. Cherotti say that the secret behind Construction Labor’s success is how it treats its employees and its clients.

“A labor company is all about relationships,” they say.Without relationships, the company would be a commodityand pricing would be client’s onlyconsideration.

“The reason we’re so successfulis because we create a pleasantwork environment,” Mr. Cherottisays. “We put employees andclients first — it really promoteslongevity and only adds to stability. It’s rare we lose an employee we didn’t want to lose.”

Although 2009 brought disap-pointments due to the economy,Construction Labor already is

seeing an uptick for 2010. In fact, the recession has helped

their clients recognize the full value the company offers.

In a construction boom people turned to us when theyneeded more hands,” Mr. Reesesays.

“Now they realize ConstructionLabor Contractors can help themsave money too.” ■

The region offers access to capital, professionalservices and a skilled workforce, along with a

central location and the technical and scientificresources of leading colleges and universities.

FEBRUARY 9Dinner Sandy Cutler, CEO, EatonCorp., (Joint meeting with FEI)

MARCH 17BreakfastSpeaker to be announced

APRIL 22BreakfastTom EmbresciaSecond Generation Ltd. — The Embrescia Companies

APRIL 29Afternoon WorkshopTopic to be announced

MAY 20BreakfastChris ConnorCEO, Sherwin-Williams

JUNE 15Social and Networking ReceptionThe Shoreby Club

SEPTEMBER 8-9

ACG Great Lakes Capital ConnectionRenaissance Hotel

OCTOBER 4

Annual Golf OutingFirestone Country Club

JANUARY 2011

Deal Maker Awards DinnerMarriott at Key Center

All events at The Union Club unless otherwise specified

ACG CLEVELAND EVENTS

For more information, contact ACG Cleveland at (216) 696-8484 or www.acgcleveland.org




www.bglco.com

When the M&A and Financing

Markets get tough, the tough

work harder.Corporate Finance Experts From Your World™

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Turbulent times bring management challenges

Successful businesses arefounded and funded on thepremise of growth and anoptimistic view of the

future. But a deep and enduringrecession like this one turns thoseaccepted notions on their head.Here are some views from thosepitching in on the front lines.

DENNIS KEBRDLE PARTNER, CHIKOL EQUITIESINC., GRANGER, IND.

“Our traditional practice of

tuck-in company with balancesheet issues but good operationsthat can be added to an existingplatform at a three to four multiple at the bottom of the cycle or for senior-secured debt values. The key to this opportunity is the relationshipwith secured lenders and the supporting cast of attorneys andconsultants.

“By working together to limit or reduce the lender’s loss or expo-sure, equity players can becomewelcome guests again in bankoffices.”

DAN D’AGOSTINOPRINCIPAL/GENERAL MANAGER, DEFINITY PARTNERS,CLEVELAND OFFICE

“Despite the tremen-dous pressures businessesare under today, we stillsee too many leaderssquandering precioustime and accepting a slug-gish pace of progress intheir organization. Theyare waiting for employeesto ‘get it’ and rise to theoccasion, or putting offacting in the hopes thatthings will improve ontheir own.

“The reality is thatmoving quickly will uncover the real prob-lems in the organization.Problems in decision-making, sense of owner-ship, teamwork, account-ability and motivationwill surface when the organization is asked tomove quickly.

“When people investthe time to make improvements and theresults are not seenquickly, people will behesitant to prioritize improvements in the future. However, when achange is made and thebenefits are realized within days,managers and employees willreadjust priorities.”

MICHAEL GERBASIMANAGING PARTNER, SAGERCOMPANY, CLEVELAND

“For 25 years, my company hasserved private-equity groups in recruiting top executives for man-agement teams. Lucrative returnslured risk-inclined entrepreneurswho remained dedicated through-out a deal—even the tumultuousones. That was then.

“Traditionally, private equitygroups literally banked on the loyalty of their key partners who

invested personal sweat and equity into a deal. As deals dragout and fears rise that things maygo south, these key players areever-more willing to leave invested

time and money for lessrisky, lower return deals.

“Now, some private equity groups are scram-bling to retain humancapital. The pot sweeteners that persuade management to stay arenot always monetary. Onthe flip side, we’ve been capturing fleeing talentand placing them with groups that are compatible.”

JEFF SCHWABM&A PRACTICELEADER, OSWALDCOMPANIES, CLEVELAND

“Even though the economy is bad, the risksthemselves haven’tchanged. Exposure to risk,though, may actually begreater because people are looking for any deeppocket. Some people gothrough an acquisitionthinking they don’t needto worry about insurancedue diligence. Meanwhile,

claimants may be thinking abouthow to make money by filing claims.

“Potential buyers should beaware of how targeted companiesare operating their insurance programs; professional due dili-gence would detail the choice and impact those programs. Forexample, a cash-flow-basis insur-ance program may be a liabilityfor the buyer if not explored thoroughly. In a cash-flow plan,the company pays a certain percentage of premiums andprospective claims at the begin-ning of the year. If losses aren’t as great as expenses, the companygets a refund. However, it’s a potential liability that the company will be paying more as

‘valuate, turn around and help implement long-termchanges’ has become one of ‘stabilize if possible and movethem out.’

“Our greatest fear today is thatthere is not enough time beingspent preserving enterprise valueand that equity is looking at it allthrough 2008 glasses. Those daysare over.

“With that as a backdrop, wecontinue to believe that buyerscan take advantage of the currentsituation to find bargains andbuild value. You can find a

DAND’AGOSTINO

Crain’s Cleveland Business

Custom Publishing staff

Ad director:Mike Malley([email protected])

Page designers:Kathy Carr ([email protected])Joel Hammond ([email protected])

Contributing writer:Ann Gynn, Wise Group

CONTACT USFor more information about Custom Publishing with Crain’sCleveland Business, please contact advertising sales directorMike Malley at 216-771-5070 [email protected].

MICHAELGERBASI

JEFFSCHWAB




Ulmer & Berne LLP Salutes the

Association for Corporate Growth

2010 Deal Maker Award Winners.

We congratulate our client

and all of the other

ACG Award Winners on their achievement.

Cliffs Natural

Resources Inc.

www.ulmer.com

Brian M. O’Neill

Peter A. Rome

216.583.7004

[email protected]

216.583.7124

[email protected]

claims accrue in the year. “This is especially true today.

We’re seeing employee makinggreater use of their health plans tomaximize its value. The effect isannual insurance rate increasesrising above 10 percent andgreater use of plans.

“As for property and casualtyinsurance costs, we see those asflat or even reduced in the coming year. However, financialcoverages and directors & officersinsurance is now typically moreexpensive thanks to the recent financial failures and scandals likeBernie Madoff, Stanford Invest-ments, etc.

“Don’t forget the role of suretybonds, which are especially neces-sary in a distressed environment.When buyers load up with debt,they must be mindful that theystill want to be bondable and thatis driven by the company’s finan-cials.” ■

ACG CLEVELAND 2009-2010 BOARD OF DIRECTORSPRESIDENT

Patrick GallagherEdward Howard

PRESIDENT ELECT

Theodore WagnerLibman, Goldstine, Kopperman & Wolf

EXECUTIVE VICE PRESIDENTS

Randy MarkeyCapital Acceleration PartnersJames P. MarraBlue Point Capital PartnersAl MelchiorreMelCap Partners

TREASURER

Joseph F. MaslowskiRoetzel & Andress

VICE PRESIDENT — PROGRAMS

Sean McCauleyPNC Business Credit

VICE PRESIDENTS — GOLF EVENT

Rudy BentlageChase Business CreditTerry R. LardakisMillisor & Nobil

VICE PRESIDENTS — SPECIAL PROGRAMS

Daniel G. BerickSquire, Sanders & Dempsey

Eric M. KuhenMarshScott SeelbachPrimus Capital FundsKaren TuletaMorgenthaler

VICE PRESIDENT — DEAL MAKER AWARDS

Murad A. BegLinsalata Capital Partners

VICE PRESIDENT — MEMBERSHIP

Daniel P. FilippiR. R. Donnelley & SonsMartin S. GatesCalfee, Halter & GriswoldHenry E. SeibertPorter, Wright, Morris & ArthurPeter J. ShipleyResources Global Professionals

VICE PRESIDENTS — GOVERNANCE

Jeffrey LeonardFirst Communications Corp.ACG CupDouglas K. WingetFirst Merit

VICE PRESIDENT — OUTREACH

Moses R. JhiradPNC Bank

VICE PRESIDENT — ECONOMIC DEVELOPMENT

Donald W. MajcherOhio Aerospace Institute

VICE PRESIDENTS — GREATLAKES CAPITAL CONNECTION

Timothy G. HealyLinsalata Capital PartnersJames M. HillBenesch, Friedlander, Coplan & AronoffJames P. MarraBlue Point Capital Partners

Al MelchiorreMelCap Partners

VICE PRESIDENT — TECHNOLOGY

David HadleyDavid Hadley Corporation

VICE PRESIDENT — NOMINATIONS

Mathew J. HansonEmprise Partners

ASSISTANT TREASURER

Scott R. SmileyConsultant

SECRETARY

M. Joan McCarthyMJM Services

DIRECTORS AT LARGE

Guy C. FabePricewaterhouseCoopersTom FreemanGrant ThorntonWendy S. NealGlobal M & A




Congratulations to ACG Deal Maker Award

winners and our clients

TransDigm Group Inc.Dealer Tire

Our attorneys work with deal makers to design and implement transaction structures, tax efficiencies, risk management measures and negotiating strategies. We bring together tax, antitrust, environmental, international, real estate, employee benefits, employment, executive compensation, intellectual property, technology and litigation lawyers to provide the necessary breadth and depth of representation.

© 2010 Baker & Hostetler LLP

CHICAGO CINCINNATI CLEVELAND COLUMBUS COSTA MESA DENVER HOUSTON LOS ANGELES NEW YORK ORLANDO WASHINGTON, DC

www.bakerlaw.com

For more information, please call (216) 589-0900 or visit www.wesrespartners.com

has been acquired by

a division of

The undersigned acted as exclusive financial

advisor to Cranel, Inc. in this transaction

ACG Cleveland honors top deal makers

The capstone of the ACGCleveland program seasonis the annual Deal MakerAwards dinner. Now in its

14th year, the event recognizesNortheast Ohio’s engines of cor-porate growth and deal-making.The 2010 awards program willhonor three companies on Thurs-day night, January 21:

TransDigmThis Cleveland-based global

designer, producer and supplierof aircraft components has grownsales from $48 million at its for-

mation in 1993 to $762 milliontoday. During that time Trans-Digm has acquired 27 businesses,including six in the last twoyears. In October 2009, Trans-Digm (NYSE: TDG) completed asuccessful $425 million notes of-fering as part of a capital restruc-turing that also included a one-time special cash dividend of$7.65 on each outstanding shareof common stock. TransDigmwas recognized recently by Fortune and Forbes magazines.Fortune ranked TransDigm No. 51on its 2009 list of the 100 FastestGrowing Public Companies in

America, while Forbes ranked itNo. 25 on its 2009 list of the BestMid Cap Stocks in America.

Cliffs Natural Resources

Cliffs Natural Resources (NYSE:CLF, Paris: CLF) is an internation-al mining and natural resourcescompany whose Cleveland rootsgo back to 1847. Following a series of strategic transactions beginning in 2002, Cliffs emergedas the largest producer of iron orepellets in North America, a major

supplier of iron ore out of Australia,and a significant producer of metallurgical coal. The companyhas continued to actively executea strategy designed to achievescale in the mining industry, focusing on serving the world’slargest and fastest-growing steelmarkets. Over the last two yearsthis has included more than $1billion in deals and an attempted$10 million merger with AlphaNatural Resources. Most recently,Cliffs announced a successful$240 million contested bid to acquire Canadian chromite explorer Freewest Resources Canada Inc. and the buyout of its three joint venture partners’73.2% interests in a Canadian ironore mining operation.

Dealer TireDealer Tire stands as one of the

most impressive corporate growthstories in Northeast Ohio over thepast two decades. Formed in the early 1990s to address the tire needsof automotive dealer, Dealer Tire’sfoundation rests on more than 80years of success in tire retailing asMueller Tire and Brake. In 2000, theMueller family sold the retail stores to

Nominate your favorite Deal Maker

Nominations for the 2011 ACGCleveland Deal Maker Awardsmay be submitted to ACG at anytime during the year. Each November, a selection committeereviews the nominations and selects the award winners. For anomination form, contact ACGCleveland at (216)-696-8484 or [email protected].

focus on Dealer Tire. From 2004 to2008, Dealer Tire grew 229 percent.Today it is the number one supplierof tires and wheels to U.S. automo-tive dealers and has programs inplace with Mercedes-Benz, BMW,Lexus, Toyota, Kia, Chrysler and numerous other automakers. In2009 Dealer Tire entered into a minority recapitalization of thecompany with the Boston-based private equity firm TA Associates.The transaction provided liquidityto previous institutional owners andmanagement investors along withan expanded debt facility for futuregrowth and acquisitions. ■


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