In this episode of Cascade Conversations, Cascade Partners Managing Director, Jon Doehr and McDonald Hopkins Chair-Mergers and Acquisitions Group, Christal Contini talk about the recent trends from both a legal and financial side of M&A transactions resulting from the pandemic, recent changes in the economy and news coming from Washington, D.C.

Video Transcript

00:00:00:11 – 00:00:16:25
Announcer
Welcome to Cascade Conversations. Join the team at Cascade Partners and their network of trusted advisers as they work to demystify details, terminology and strategies in the world of acquisitions, divestitures and financings.

00:00:16:27 – 00:00:39:18
Jon Doehr – Managing Director, Cascade Partners
Hello, I’m Jon Doehr, managing director with Cascade Partners. And welcome back to Cascade Conversations. Today, I’m here with Christal Contini, chair of the M&A group at McDonald Hopkins in the Cleveland office. And we’re here to talk about some of the trends that we’re seeing both on the legal and financial side of M&A transactions as a result of the pandemic.

00:00:39:18 – 00:00:47:28
Jon Doehr – Managing Director, Cascade Partners
And the recent changes in the economy and some of the things that are coming out of Washington. Christal would you like to say any more about your practice?

00:00:48:01 – 00:01:21:24
Christal Contini – M&A Group Chair, McDonald Hopkins
Sure. So McDonald Hopkins is a middle market law firm. We represent primarily from an M&A perspective, buyers and sellers of businesses on the sell side, we represent a lot of family offices, a lot of entrepreneurs, small family businesses, people who have spent their life building up a company. And now they’re ready for a liquidity event to either sell to private equity, sell to a public company, maybe sell to one of their competitors down the street.

00:01:21:27 – 00:01:34:14
Christal Contini – M&A Group Chair, McDonald Hopkins
And then on the buy side, we represent independent sponsors, private equity funds and people who are trying to make strategic acquisitions. So definitely the full gamut and I’m excited to be here. So thank you for inviting me.

00:01:34:19 – 00:01:57:12
Jon Doehr – Managing Director, Cascade Partners
Excellent. Thank you. So as you can see, McDonnell Hopkins is in the same playground that Cascade Partners is in terms of M&A. We work on transactions that are generally around 20 to $250 million in deal value companies with EBIT between four and 25 million. So playing in the lower middle market, middle market. And that’s why we’re excited to talk to Crystal today.

00:01:57:15 – 00:02:17:22
Jon Doehr – Managing Director, Cascade Partners
So what the changes going on from the pandemic and from everything that we’re seeing in the economy, I know that the deal process has changed. The planning has changed. When is the best time to bring in your team? When it’s pretty clear there’s going to be a transaction.

00:02:17:24 – 00:02:37:06
Christal Contini – M&A Group Chair, McDonald Hopkins
As soon as possible. And actually, even when you’re thinking about doing a transaction, but you’re not really sure that’s actually the best time because we can kind of have a conversation about what are some estate planning things you can talk, you can think about what are some things in the company you might want to do with a little bit of a lead time before you sell your business.

00:02:37:09 – 00:03:07:15
Christal Contini – M&A Group Chair, McDonald Hopkins
Often times we are not always there at the very beginning when this is just like the first thought, the first moment when you start considering a potential sale. So at the very latest, I would say, before the letter of intent. And the reason for that is that when that is when sellers have the most leverage, that’s when they can really try to set the tone not just for economic terms, but for legal terms that could end up having an economic impact.

00:03:07:17 – 00:03:31:08
Christal Contini – M&A Group Chair, McDonald Hopkins
Indemnification is one of those key items, which is just a fancy legal word for reimbursement. If there’s a pre closing breach, those are the types of terms that if we can get in favorable indemnity terms and to the letter of intent, lawyers can really help do that on the front end. When you have the most leverage. We also have clients who sign the letter of intent and then call us afterwards, right?

00:03:31:10 – 00:03:32:01
Christal Contini – M&A Group Chair, McDonald Hopkins
And that happens.

00:03:32:04 – 00:03:32:25
Jon Doehr – Managing Director, Cascade Partners
It’s always fun.

00:03:32:27 – 00:03:50:27
Christal Contini – M&A Group Chair, McDonald Hopkins
Yeah. And it’s not fatal. I mean, it is a thing that you could do and we’ve certainly dealt with it. And one of the things we can do is try to use that as an opportunity to say, okay, we weren’t involved in the letter of intent, but maybe there are some reasons we want to do something a little bit different in the purchase agreement.

00:03:51:02 – 00:03:56:24
Christal Contini – M&A Group Chair, McDonald Hopkins
But if we can set the tone at the letter of intent, that’s surely the best way to do it, Right?

00:03:56:26 – 00:03:58:06
Jon Doehr – Managing Director, Cascade Partners
So, yes.

00:03:58:08 – 00:04:07:02
Christal Contini – M&A Group Chair, McDonald Hopkins
What about you? What’s kind of your philosophy on that? Because I know oftentimes investment bankers are on the front end of this and you actually talk to the client sometimes before we.

00:04:07:02 – 00:04:24:13
Jon Doehr – Managing Director, Cascade Partners
Do, right? Yeah, Well, certainly a cascade. We like to be brought in as soon as possible. Mean we like to meet business owners. We always like to meet business owners, whether they’re thinking about a transaction or not. But you know, whether it’s a year in advance or a month, we want to be introduced to the situation as early as possible.

00:04:24:15 – 00:04:46:14
Jon Doehr – Managing Director, Cascade Partners
Some of the key issues surrounding transition for for a seller include a succession plan, right? Like does that if the owner plans on exiting the transaction or exiting the company within six months to a year after a transaction, most buyers are going to want to know that there’s a second command that can step up and take over the business.

00:04:46:17 – 00:05:14:16
Jon Doehr – Managing Director, Cascade Partners
So it’s important to identify that person. And then what other management depth is there beyond that individual so that, you know, the entire business isn’t hinging on this one person who’s going to be walking away. And then from a financial standpoint, you know, we want to make sure that the balance sheet is as clean as possible, that they are limited tax issues, contingent liabilities, any receivables issues, just make sure deals are cleaned up before before we enter into a transaction.

00:05:14:16 – 00:05:45:04
Jon Doehr – Managing Director, Cascade Partners
And then you know, what’s become critical with the pandemic and with all the supply chain issues is diversify, diversify, diversify. So it’s important to whether it’s your vendors, customers, your your partners. You have to be flexible, you have to be adaptable. And part of that means you have to be investing in technology, automation, artificial intelligence, machine learning, robotics.

00:05:45:06 – 00:06:11:23
Jon Doehr – Managing Director, Cascade Partners
It’s just the way the world is going. So we try to put all these issues on the table while in advance and make sure business owners are thinking about them before they before they start marching down the path of a transaction. So as it is, the process is changing as a result of the pandemic. What are some of the key legal issues or trends that or challenges that you’ve seen in transactions?

00:06:11:23 – 00:06:14:07
Jon Doehr – Managing Director, Cascade Partners
And how is McDonald Hopkins helping to try and resolve those?

00:06:14:12 – 00:06:41:05
Christal Contini – M&A Group Chair, McDonald Hopkins
Sure. So as you know, it’s been a seller’s market, right? So sellers have been able to command a pretty high purchase price. But with that comes, I would say, more rigorous due diligence. And I think a lot of that had to do not just with the market but also the pandemic impacting certain things about the business and people wanting to be buyers, wanting to be more sure that they are getting what they’re paying for.

00:06:41:10 – 00:07:08:00
Christal Contini – M&A Group Chair, McDonald Hopkins
And so you mentioned supply chain, you mentioned customers and suppliers. People want to buyers want to make sure that those relationships are intact. They want to understand how the how the pandemic has potentially impacted those relationships. And what have you had to do in order to diversify. Are you using the same suppliers? Have you gone out to market and found new suppliers with new contract terms?

00:07:08:00 – 00:07:40:24
Christal Contini – M&A Group Chair, McDonald Hopkins
Are you in a force majeure situation which is essentially a supplier saying like, look, for market reasons we can’t actually supply therefore the contract terms are no longer applying. So that’s one area. I would say another key area has been the impact of the pandemic on your employees. Did you have to cut your workforce and did you do it properly right, or did you enter into new incentive arrangements in order to keep people in place and incentivize them to stay?

00:07:40:27 – 00:08:05:13
Christal Contini – M&A Group Chair, McDonald Hopkins
And did you do that in compliance with law Because employment incentive plans can get a bit tricky. And if you didn’t work with a lawyer to do that, did you do it properly in compliance with all laws? And then actually you mentioned going in using more technology and making sure that you have appropriate ways to work remotely and things like that.

00:08:05:15 – 00:08:43:05
Christal Contini – M&A Group Chair, McDonald Hopkins
So if you have expanded your technology that usually comes with more legal risk, you doing more things remote. And so what happens if there’s a data breach? Do you have the right policies in place? Right. So when I first started the practice, my practice, the data security breach representations and warranties and a purchase agreement or maybe two sentences, now it’s like three pages of information and reps and warranties that buyers want about how you think about data security, how do you think about protection of your clients and customer information, that kind of thing.

00:08:43:05 – 00:08:45:22
Christal Contini – M&A Group Chair, McDonald Hopkins
So buyers are very much so focused.

00:08:45:22 – 00:09:08:19
Jon Doehr – Managing Director, Cascade Partners
On that, right? You know, I know McDonald’s Hopkins has a a reputable national practice in cybersecurity. And we’re hearing more and more stories every day about companies being impacted by ransomware and other issues. So you can’t so it can’t be emphasized enough how important it is with your remote workforce to make sure you’re on top of that, because you could be put out of business pretty quickly.

00:09:08:24 – 00:09:39:08
Christal Contini – M&A Group Chair, McDonald Hopkins
Right. And that’s I mean, when you mention, like the sooner the better getting involved. That’s one of those things even if you’re not thinking about selling, you might just want to reconsider. How are you thinking about your data security? But you’re right. I mean, having lawyers that know these things about data security employees, vendor supplier relationships, we can kind of help make sure those things are appropriately documented, that they comply with law before clients go to make representations and warranties and their purchase agreement.

00:09:39:11 – 00:10:00:25
Christal Contini – M&A Group Chair, McDonald Hopkins
Right. So legal side is definitely complex, but that’s what we’re here to help with, just just like you are for on the financial side, right? So on the finance side, I guess, what are some things to consider, especially now during after the pandemic or during the pandemic, depending on how you look at it? And how do you help your clients prepare?

00:10:00:25 – 00:10:01:11
Christal Contini – M&A Group Chair, McDonald Hopkins
Yeah.

00:10:01:14 – 00:10:30:17
Jon Doehr – Managing Director, Cascade Partners
Well, it’s been an interesting couple of years for sure. I mean, I think in April or May of 2020, everybody expected that the pandemic would have a huge impact on the economy and companies and there’d be a lot of negative performance. As it turns out, for the most part, companies have been pretty healthy with the amount of liquidity the government injected into the economy in 2020 and 2021, most M&A providers had had banner years in 2021.

00:10:30:17 – 00:11:02:04
Jon Doehr – Managing Director, Cascade Partners
So yes, it’s been Nishi, you know, obviously the hospitality sector, some of the services were impacted dramatically, but other companies that there are plenty companies that benefited from the pandemic and had had great years and for the most part valuations remain, remain really strong. I think part of what Cascade is paying attention to now is as that large government largesse kind of the liquidity gets withdrawn from the economy, how is that going to impact businesses?

00:11:02:04 – 00:11:33:00
Jon Doehr – Managing Director, Cascade Partners
And we’re starting to see the interest rates or obviously there is a 75% basis point increase yesterday. So cost of money is going to start going up. So we do expect to see an increase in in the challenges of some companies performance in on distressed assets. So part of what we want to again, while we want to meet with business owners and get out in front of it, is have you plan for for both the strategic and financial impact of the both the micro and the macro economy?

00:11:33:00 – 00:11:51:25
Jon Doehr – Managing Director, Cascade Partners
And these are the issues you should be thinking about. And for some companies it’s going to be it’s going to be charged ahead as planned and others are going to have to kind of take a step back and understand how some of these issues are going to impact them. So it’s planning, trying to get out in front of it and make making sure that they’re aware of the issues.

00:11:51:28 – 00:12:16:00
Jon Doehr – Managing Director, Cascade Partners
I think two areas where we’ve seen the most dramatic impact are is labor. And you’re still seeing industry saying, I just read an article yesterday how the textile industry is still 20% short on labor. They need more, more, more people to come into the workforce and they’re actually reaching down into junior high schools in order to find to fight to get to start those relationships and train those people.

00:12:16:00 – 00:12:38:08
Jon Doehr – Managing Director, Cascade Partners
So and as it relates to do that, you know, we’re hearing more and more about companies investing in robotics and and that doesn’t necessarily displace the workforce. It just means you you need to upskill your workforce. So investing in robotics, in automate, automate, automate your factories is going to make you more efficient and help you be able to compete in the long term.

00:12:38:14 – 00:13:02:07
Jon Doehr – Managing Director, Cascade Partners
And then you look at need to look at how you train your workforce. So some of these are some of the important issues that are facing companies today and that we’re trying to make sure that they’re thinking about as they look to either grow or exit their businesses in the near future. So how do so what are some of the other key trends that you’re seeing?

00:13:02:07 – 00:13:22:17
Jon Doehr – Managing Director, Cascade Partners
I know that we’ve seen there’s still a ton of capital in the marketplace, right? There’s no shortage. There’s like two and a half trillion dollars of private equity money. I think I saw that there’s $7 trillion of corporate cash on balance sheet. So, yes, there’s a lot of negative news out there, but there’s still a ton of liquidity in the marketplace.

00:13:22:19 – 00:13:34:07
Jon Doehr – Managing Director, Cascade Partners
What are some of the unique structures that you’re seeing? Abigail Hopkins, in terms of how businesses are have options available to them to to to seek liquidity?

00:13:34:09 – 00:14:05:10
Christal Contini – M&A Group Chair, McDonald Hopkins
So I think there’s you know, there’s the traditional just make an acquisition and a buyer will buy the business and that still happens and they buy 100% and the buyer takes over and runs the business going forward. There’s kind of the next step, which I would say is a buyer makes a control acquisition, maybe puts in anywhere from, you know, 60 to 80% of or essentially buys 60 to 80% of the business.

00:14:05:10 – 00:14:35:05
Christal Contini – M&A Group Chair, McDonald Hopkins
And the seller rolls over anywhere from 20 to 40% of their existing equity in their business and invests with the buyer. So they continue a stake in the business going forward. That is still another big thing that’s happening right now. There’s and I know you and I have talked about this now there is okay, let’s not take a control position, but in order to put some of our money to work, buyers are also looking and saying, well, we will make a minority investment.

00:14:35:06 – 00:15:07:00
Christal Contini – M&A Group Chair, McDonald Hopkins
Right? We will invest in the management that currently exists. We will try to improve upon it, but it is more so a smaller or tiny piece of the business. And usually with that, buyers still want some of the, I guess, legal rights that they had when they were buying a majority. Part of it is that they are putting in money and with that money, cash is king and they want to make sure that they get certain legal.

00:15:07:03 – 00:15:13:09
Christal Contini – M&A Group Chair, McDonald Hopkins
But what’s the word I’m looking for governance and control and ways to make sure that their investment is safe.

00:15:13:13 – 00:15:14:11
Jon Doehr – Managing Director, Cascade Partners
Right.

00:15:14:14 – 00:15:37:06
Christal Contini – M&A Group Chair, McDonald Hopkins
And I know a lot of my clients are saying, well, they’re only putting in a minority investment. Why? Why should they get all of these legal terms that might be more akin to a majority investment in things that we are seeing are things like they want a board seat, even though they are just a minority. They might want certain what I call veto rights.

00:15:37:06 – 00:16:11:14
Christal Contini – M&A Group Chair, McDonald Hopkins
So before the company does anything big like take on significant debt, sell the business, try to think of some other examples, change the tax structure of the business. The buyer wants the ability to potentially say, No, you can’t do that. Right? And then on the other side they might also say, Oh, and in addition, in exchange for investment, we want a preferred return that might even have priority over the existing family or companies owners.

00:16:11:14 – 00:16:22:09
Christal Contini – M&A Group Chair, McDonald Hopkins
So it’s it’s a different way to think about it. It’s supposed to be viewed as more of a partnership, but because they’re putting in cash, these buyers want more rights. And I don’t know if you’re seeing it.

00:16:22:09 – 00:16:44:20
Jon Doehr – Managing Director, Cascade Partners
Yeah, yeah. So, I mean, I can’t I don’t think that can be emphasized enough that there is there’s just a plethora of options available to business owners today, whereas say ten years ago, you know the is generally do you sell 100% of your business or maybe 80% Minority recaps are definitely a core focus for many capital providers today.

00:16:44:20 – 00:17:09:09
Jon Doehr – Managing Director, Cascade Partners
And we we’ve had success in the last two years doing minority transactions where we’re business owners are able to to take some chips off the table in an amount that provides them some financial security landscape partners them with a group that can provide capital going forward. And in many cases it really re-energized the company, re-energize as the business owners.

00:17:09:09 – 00:17:28:23
Jon Doehr – Managing Director, Cascade Partners
They’ve been running the company for for 20 years and they feel like they’ve kind of reached the end of the road. And then this partner can bring capital, it can bring relationships. And we’ve seen where it just changes the whole dynamic of the business and and they’re poised to now grow and increase the value and take a second bite of the apple down the road in 3 to 5 years.

00:17:28:23 – 00:17:56:04
Jon Doehr – Managing Director, Cascade Partners
And it can both increase the financial value for sure and the amount of money that they’re going to take off the table at the end of the day. But also it just it just creates a great improvement in culture and in their outlook on the business. So we’ve seen that. And whether it’s Minority Recap or Majority recap, it’s just it’s a very different dynamic and that capital is definitely available.

00:17:56:04 – 00:18:23:01
Jon Doehr – Managing Director, Cascade Partners
And then even beyond that, if you’re just looking to grow, leverage recaps are also a great option now. So there are a lot of debt funds that have been have raised a significant amount of money and they’re looking to put that capital to work in companies, you know, both both healthy and distressed. And so that’s an that’s an opportunity, again, for a business owner to take chips off the table, get some financial security.

00:18:23:05 – 00:18:41:20
Jon Doehr – Managing Director, Cascade Partners
Yes, you’re putting some leverage on the business, but generally they’re not going to overleverage. But this isn’t a situation where they’re they’re they’re they’re lending to own. They want to just partner with the business owner to create that opportunity to grow the business. So it’s a win win for everybody. So a lot of options out there to create liquidity today.

00:18:41:23 – 00:18:52:12
Jon Doehr – Managing Director, Cascade Partners
And it’s a lot different than it used to be five or ten years ago when when it was know sell your business or just or just keep it and do the best you can. So no.

00:18:52:12 – 00:19:15:28
Christal Contini – M&A Group Chair, McDonald Hopkins
I would agree with that. I think the thing that has struck me about that kind of recent change is that before sellers would just sell their business, kind of ride off into the sunset, maybe they stay on for 2 to 3 years because they that’s part of the deal. They’re going to remain employed. What is really unique about what you’re talking about is that this starts to look more like a partnership.

00:19:15:28 – 00:19:49:13
Christal Contini – M&A Group Chair, McDonald Hopkins
And there really is an alignment of interests be I don’t know if it’s it. The issue is now everyone has to think about, okay, what does the legal landscape look like going forward and how does how do decisions get made? And so I think having great advisors, great legal counsel to kind of talk about what is normal for that process, because it’s not easy, because instead of you being the captain of your own ship and you make all the decisions now you have a partner, right?

00:19:49:13 – 00:20:23:09
Christal Contini – M&A Group Chair, McDonald Hopkins
And like working through that from a documentation standpoint, from a culture standpoint, I would say that just takes a little bit more time than your traditional M&A transaction where you sell your business. You maybe work for a couple of years and walk away. So I think it’s a very unique opportunity. I think it comes with just more time to consider what the Post-Closing world looks like because we have to have documentation and a culture that everyone can agree to and get aligned on on the front end.

00:20:23:11 – 00:20:46:03
Jon Doehr – Managing Director, Cascade Partners
Right? Right. And I’m actually looking at a situation now working through our term sheet. And, you know, the business owner is is of course, I want to make sure I’m not I’m not going to end up in a bad situation in here, even though it’s a minority investment. And and it’s important, I think, to bring McDonald, Hopkins and or the legal team in to look at that.

00:20:46:03 – 00:21:09:23
Jon Doehr – Managing Director, Cascade Partners
Right. Don’t just assume it’s just a financial document. Right. Right. That there are especially with with the pandemic and all the issues surrounding that some of the legalese has just changed in the last couple of years, has it not, in terms of what you need to be looking out for and some of the risks, like you said, force majeure, some of the risk that could that could impact the business owner negatively, negatively, even though it’s only a minority deal?

00:21:09:25 – 00:21:39:20
Christal Contini – M&A Group Chair, McDonald Hopkins
Yep. And it or it might be in the form of debt or equity. So even the debt companies that you mentioned are coming in and they are putting covenants that look a little bit more like equity type control, which again, if you understand what they are, you can kind of walk into things eyes wide open. And I think the thing sellers need to remember is, yes, there are legal implications, but the goal is to try to align interests and the lender or the buyer.

00:21:39:23 – 00:21:48:19
Christal Contini – M&A Group Chair, McDonald Hopkins
They are just trying to protect their investment. So there’s a little bit of tension, but I think there’s a way to work through it. If everyone understands what the terms are. Right.

00:21:48:21 – 00:22:14:20
Jon Doehr – Managing Director, Cascade Partners
Right. And it’s interesting, one of the best quotes I’ve heard recently on this subject from a business owner is, look, John, I’m looking at this document and I’ve dealt with investors in the past and their attitude was, what’s mine is mine and what’s yours is mine. And and so, you know, to our horror a little bit and yours as well, is that part of what we bring to the table is we’ve been doing this a long time.

00:22:14:21 – 00:22:41:08
Jon Doehr – Managing Director, Cascade Partners
Right. And we know the groups that we’ve partnered with over the years and we’ve done a followed through and do what they say they’re going to do. Right. And others who, as I mentioned earlier, are lending now. And there’s without a doubt, there’s good partners out there and there’s bad partners out there. And yes, the money is green, but we really pride ourselves at Cascade in finding you the right partner.

00:22:41:16 – 00:22:57:11
Jon Doehr – Managing Director, Cascade Partners
So you don’t, you know, the day after closing, you feel good about the transaction and six months down the road it’s even better. So that’s where it works out for the best for for everybody. And that that’s important to consider when you’re going through the process.

00:22:57:13 – 00:23:14:19
Christal Contini – M&A Group Chair, McDonald Hopkins
No, I definitely agree. And you mentioned kind of the changing landscape. So what would you say are other private M&A market evolutions that have occurred over the past couple of years? And I guess, do you expect them to continue?

00:23:14:19 – 00:23:35:22
Jon Doehr – Managing Director, Cascade Partners
Right. Yeah. I mean, I think without a doubt they’re going to continue. There’s just so much money floating around out there. I mean, we get we get hit up every week from some new fund or search fund that’s looking for an acquisition. So the capital is going to be out there going forward. It’s just the dynamics are going to change and they’re going to be looking for companies that are investing in technology.

00:23:35:22 – 00:24:02:25
Jon Doehr – Managing Director, Cascade Partners
First and foremost. I can’t emphasize that enough, especially on the manufacturing side. The digital factory is here to is is here to stay. And if you’re not versed in that technology, you’re going to fall behind. So, yes, I mean, it’s the old saying, wait, investor die. And in this case, it’s keeping up with all the changes going on around the supply chain, keeping up with the changes around remote workforce.

00:24:02:25 – 00:24:25:26
Jon Doehr – Managing Director, Cascade Partners
And so that’s that’s going to be first and foremost, some of the important issues that we’re seeing going forward in terms of the private money market, yeah, the public markets are down, but the private M&A markets are still strong for companies that are performing. It’s still a great time to sell and it’s still a great time to be seeking partners to to to grow in 2023 and 2024 and beyond.

00:24:25:27 – 00:24:44:14
Jon Doehr – Managing Director, Cascade Partners
So it’s going to be niche for sure. I mean, as we’ve seen, some service businesses got hit really hard, but now they’re bouncing back. I mean, we all know what the cost of an airfare is today, what the cost of hotels are. So those markets are bouncing back. It’s going to be niche. It’s going to ebb and flow.

00:24:44:16 – 00:25:08:01
Jon Doehr – Managing Director, Cascade Partners
But for the most part, I think the private equity markets are going to remain strong. And we anticipate we’ve got several new proposals that we’re considering here that have just come out in the last couple of weeks. So it would still a good time. We expect, as I mentioned earlier, there will be some distressed asset activity as interest rates climb and the banks start to pull back a little bit.

00:25:08:01 – 00:25:11:29
Jon Doehr – Managing Director, Cascade Partners
But for the most part, we were cautiously optimistic.

00:25:12:01 – 00:25:33:27
Christal Contini – M&A Group Chair, McDonald Hopkins
I mean, I would say the same thing. I mean, on the legal side, we are still seeing M&A transactions. Our clients are still selling, our clients are still buying. And so people are still interested in being inquisitive, finding opportunities. I think what has also been interesting is that they have they’re being creative with how they structure their purchase price too.

00:25:34:04 – 00:25:59:17
Christal Contini – M&A Group Chair, McDonald Hopkins
So it’s not just the straight we’ll pay you cash at closing if there is a little bit of uncertainty. I think buyers and sellers are finding ways to bridge the gap earnout, which essentially is a post-closing payment for performance of the business that was sold after closing. So essentially we will pay you X if certain hurdles are met.

00:25:59:20 – 00:26:21:02
Christal Contini – M&A Group Chair, McDonald Hopkins
That is a big thing that we saw post-pandemic just because people wanted to make sure the revenue was actually there. I think as the market gets a little bit soft and people are trying to think, you know, is the value actually there, I think we’ll see more and more of those are now trying to figure out how do we incentivize people to perform.

00:26:21:08 – 00:26:29:24
Christal Contini – M&A Group Chair, McDonald Hopkins
But still give them the value that we think this business is actually worth. So I think we’ll see a little bit more of that, too, Right?

00:26:29:27 – 00:26:59:16
Jon Doehr – Managing Director, Cascade Partners
One thing we’ve seen I’d be interested in, in your thoughts as to how what have you seen in the last couple of years and what you think would be going forward is the timing of a process. Right? Yeah. So in 2021, it was it was a very busy time. So accounting firms, law firms, investment banks, commercial banks, everybody was really busy and transactions just took longer and everyone was trying to get through to close by the end of the year because of potential changes that were coming in the tax world.

00:26:59:19 – 00:27:14:24
Jon Doehr – Managing Director, Cascade Partners
What have you seen in that arena in terms of how long it takes to get a transaction done? Some of the challenges around the legal aspects of documenting a deal and how do you, you know, kind of what’s the near term forecast for how long of a business owner should expect a transaction to take?

00:27:14:26 – 00:27:40:19
Christal Contini – M&A Group Chair, McDonald Hopkins
I think generally the process is it just takes longer than it used to. And I think for business owners, it takes longer than they would have thought anyways. But now because of the market, because it is so busy, there’s still a little bit of backup from service providers that are ancillary to what we do. Like rep and warranty insurance would be one of those areas.

00:27:40:20 – 00:28:08:20
Christal Contini – M&A Group Chair, McDonald Hopkins
So maybe to give a little background, one of the products that is now present in most M&A deals passed a certain threshold is that buyers are purchasing representation or warranty insurance to effectively use the insurance policy to collect if there are post-closing breaches based on pre closing activity, which helps sellers because now the money’s not coming out of their pocket, the buyers are just hitting the insurance.

00:28:08:22 – 00:28:34:17
Christal Contini – M&A Group Chair, McDonald Hopkins
The thing that people don’t realize about this insurance product, not because the insurance providers are slow, but it’s the process takes longer to get underwriting because it’s another step. We we as the lawyers have to participate. If we are representing the seller, we have to help get all of the legal due diligence together and the buyer needs to write this really long due diligence memo to get the underwriting for the policy.

00:28:34:17 – 00:29:00:25
Christal Contini – M&A Group Chair, McDonald Hopkins
So that’s one thing. Even without the market pressures, taxes, things like that, rep and warranty insurance adds time to the deal. Right? I guess the other thing is that everyone I think is just nervous about taxes generally. And so if we can close a deal by a certain year end with all of the uncertainty, I think that’s what clients are pushing for.

00:29:00:25 – 00:29:08:02
Christal Contini – M&A Group Chair, McDonald Hopkins
So it’s now June, right? And if you’re a seller, now would be a time that would be a time to get out.

00:29:08:02 – 00:29:09:12
Jon Doehr – Managing Director, Cascade Partners
Now or no.

00:29:09:16 – 00:29:32:24
Christal Contini – M&A Group Chair, McDonald Hopkins
It’s now or it’s it’s neck it’s next fiscal year. Right. And so the process I mean with investment bankers, you guys are very efficient. You move very quickly. But sellers also need to provide a lot of information. And so you guys are the experts in compiling this information, putting together a book to go out and market the business.

00:29:32:27 – 00:29:51:12
Christal Contini – M&A Group Chair, McDonald Hopkins
But that takes time. And then you want to run a fair process to make sure that you get more bidders. That takes time. And then the legal process, I usually say from the signing of the letter of intent, it takes anywhere from 30 to 120 days. And there are a couple of reasons why one might be faster, the other.

00:29:51:17 – 00:29:54:23
Christal Contini – M&A Group Chair, McDonald Hopkins
So it just takes time, right?

00:29:54:26 – 00:30:21:15
Jon Doehr – Managing Director, Cascade Partners
Right. Yeah. And we’ve seen the same thing. I mean, service providers, buyers, many who would last year towards the end of the year, when it got to a point where the buyers were really having to focus on, okay, what normally we would consider these ten transactions, we’re just really focused on these three. And so to make sure you have as large a buyer pool as possible from an investment banker perspective, it’s important to start as early as possible if you want to try and close by the end of the year.

00:30:21:15 – 00:30:50:22
Jon Doehr – Managing Director, Cascade Partners
So don’t expect any read reason to really push for a 2022 course based on taxes as we sit here today. Right. And we did have some deals kind of pushing it this year last year, but again, be thinking about those issues, planning ahead, just understanding that whereas you could kind of rely on getting a deal done in six months, six months, maybe five, ten years ago, it’s just not the way in the world today.

00:30:50:22 – 00:31:12:27
Jon Doehr – Managing Director, Cascade Partners
And as you mentioned with rep and warranty insurance, I mean, hopefully that makes the post your closing. Yes, the post your situation much better and easier and smoother. But it does take time pre closing to make sure that that that’s all lined up. So one other issue that we haven’t discussed that I think is is kind of speaks to our process at least on the banking side has been streamlined as technology.

00:31:13:00 – 00:31:22:12
Jon Doehr – Managing Director, Cascade Partners
So how has technology impacted the legal side of the transaction world and kind of what are some of the important issues around that?

00:31:22:15 – 00:32:05:02
Christal Contini – M&A Group Chair, McDonald Hopkins
I would say I think it’s helped improve the process. I mean, the purchase agreement for these bids for a sale transaction can be anywhere from 30 pages to 120 pages. I mean, they are dense, they’re long. And while I’m sure everyone is tired of being on Zoom and all of these like program is where you have to look at people and yourself while you’re talking, It has been really helpful for the deal process because one of the things we do is we screen share and we can use that to help our clients understand what is happening from a legal perspective, what the risks might be, what the changes in the language might actually mean, not

00:32:05:02 – 00:32:28:24
Christal Contini – M&A Group Chair, McDonald Hopkins
from the perspective of trying to teach our clients how to be lawyers, but so that they can kind of think through what is happening from a legal perspective. And we can put charts up on the screen, we can put it we can put the purchase agreement itself with the red line showing the changes up on the screen. And so it’s been able it’s been helpful because we can kind of help drive the process more efficiently.

00:32:28:24 – 00:32:55:26
Christal Contini – M&A Group Chair, McDonald Hopkins
So Zoom would be one or whatever program use. Yeah, another. I mean, honestly, it’s as simple as DocuSign before we had to have, you know, well, we kind of been moved away from in-person closings, but we had multiple PDF documents everywhere and clients would have to go, you know, print things off the sign or it is inevitable. There is always someone on vacation on the day of closing.

00:32:55:29 – 00:33:35:16
Christal Contini – M&A Group Chair, McDonald Hopkins
Always they’re on a cruise, someone’s in, you know, some remote location in the middle of nowhere and they’re selling their business. So there’s not like an easy place to print these documents. And so DocuSign ends up being a great way to do it, being able to remotely sign or just sign with the click of a button. So those I mean, they’re small, but they have really improved the process and then they’re just other things like card is another thing that I think many of our clients use to keep track of their stock or membership, interest rates or things like that to make sure that they track who’s getting what equity and what business.

00:33:35:16 – 00:33:38:25
Christal Contini – M&A Group Chair, McDonald Hopkins
So those have been great tools. I mean, anything on your.

00:33:38:27 – 00:34:04:19
Jon Doehr – Managing Director, Cascade Partners
DocuSign for starters? I mean, one of the most time consuming practices for us is non-disclosure agreements early on in the process, right? We try to get an NDA sign with all prospective buyers, which in some cases can be 100 or 150 buy it. Right. And so DocuSign has helped immensely there, you know, versus fax machines or even emails.

00:34:04:22 – 00:34:28:07
Jon Doehr – Managing Director, Cascade Partners
It’s that’s helped a lot. I think the biggest change technology wise that I’ve seen in my career is just how it’s helped streamline the process. And so it’s it there’s databases that we all use and the really the sell side process is pretty similar for for for most of us some bankers these days. And the buyers are all encapsulated in these databases.

00:34:28:07 – 00:34:49:14
Jon Doehr – Managing Director, Cascade Partners
Yes, we all meet with them and have relationships with them, but it’s less about, Hey, do you know who the buyers are and where to find them, and more about what creative ideas are you bring to the process in a cascade. You know, we pride ourselves on. We’re we’re former business owners. We’ve been CEOs, we’ve been in corporate development roles.

00:34:49:17 – 00:35:14:19
Jon Doehr – Managing Director, Cascade Partners
And so it’s it’s you know, it’s not just so much about, hey, let’s ram our client through the process and get to the other side. It’s really thinking creatively and outside of the box about what are your strategic objectives, what are your financial objectives and how can we help you get there? And technology has allowed us to spend more time on that and less time on who are the buyers where the buyers research is.

00:35:14:19 – 00:35:43:28
Jon Doehr – Managing Director, Cascade Partners
Another great area where we have that’s it’s leveled the playing field, right? Whereas whereas 530 years ago, Wall Street had access to research that other M&A advisors throughout the country didn’t have to. That’s just for the most part, that’s just not the case. I mean, there’s there’s so much information out there on the Internet that and through these through these databases that you can get the research you need to support your company’s sell process or acquisition process if you’re if you’re on the buy side.

00:35:43:28 – 00:36:07:25
Jon Doehr – Managing Director, Cascade Partners
So it’s really technology to streamline the process really made it a commodity. And in allowed at least cascade to spend more time thinking outside of the box and creatively about how can we help our clients get where they want to go and and maybe that’s selling today and maybe that’s making an acquisition or two and selling two years down the road when your valuation has has increased dramatically.

00:36:07:28 – 00:36:25:22
Christal Contini – M&A Group Chair, McDonald Hopkins
And are you also able to track because I know you do a lot of deals, not just yourself, but across your entire group, You’re not just tracking current assets, you don’t just have information about the buyers that are publicly available. You’re also able to track your experiences to right to help this album.

00:36:25:25 – 00:36:56:08
Jon Doehr – Managing Director, Cascade Partners
Yeah, that’s a great, great question. So one of the advantages of having our own proprietary database is we’ve got the history going back, you know, 20, 25 years of our experience working with buyers and how they’ve behaved in processes and how they behaved post-closing and have they done what they said they’re going to do? And so that helps immensely when you’re getting down to the end and you’ve got four or five buyers in the client want to understand, okay, can I trust this buyer?

00:36:56:08 – 00:37:10:29
Jon Doehr – Managing Director, Cascade Partners
Can I trust that buyer? What is your experience with this with this investor? So that’s important. Again, like I said earlier, the money is green. So what what are the some of the key differences when it comes to selecting a partner? And our experience helps provide the answer to that.

00:37:11:05 – 00:37:41:00
Christal Contini – M&A Group Chair, McDonald Hopkins
I can see that being very powerful because I think sometimes people think, Oh, you know, it’s hard to differentiate. You meet these prospective buyers as part of management meetings. Maybe you go out to dinner, but sometimes it’s hard to say, okay, what’s going to happen potentially post housing? And if you have experience with the buyer, not only do you have the experience, but you’ve actually spent the time to remember it so that all of your colleagues can have the same information, can see that being very powerful and a differentiator.

00:37:41:02 – 00:38:16:07
Jon Doehr – Managing Director, Cascade Partners
Even in a process where we’re reaching out to, you know, 100 plus buyers, we’re documenting each the reaction we get from each prospective buyer, right? So what you don’t want to have happening is a big part of our job is the investment banker is, hey, have a buyer lobbying in a bid that is at the top of the range and come back and just start back trading and back trading once they’ve signed a letter of intent and we have experience and we generally can tell who is real, who, who can back that offer up and who can.

00:38:16:12 – 00:38:39:13
Jon Doehr – Managing Director, Cascade Partners
And even in in our database, tracking our notes, going back many, many years, we can say, hey, wait a minute, they put that bid in on that business and really didn’t follow up on what they said they were going to do. And so you’re right that that history that we are recording of information is critical. And unfortunately, you know, we’ve got the history to to bear that out.

00:38:39:15 – 00:38:41:03
Christal Contini – M&A Group Chair, McDonald Hopkins
I can see that mattering definitely.

00:38:41:04 – 00:38:57:27
Jon Doehr – Managing Director, Cascade Partners
Right. Right. So well, thank you very much, Christal. This has been a great conversation. I think, you know, we both agree that it’s been an interesting time over the last couple of years, but but it’s been busy and we expect to continue. Are there any other concluding thoughts that you have?

00:38:57:29 – 00:39:05:04
Christal Contini – M&A Group Chair, McDonald Hopkins
No, I agree. I think it’s going to be a busy next couple of months and hopefully it continues right.

00:39:05:06 – 00:39:19:00
Jon Doehr – Managing Director, Cascade Partners
So thank you very much for joining us. If you have any questions on today’s Cascade conversation, please feel free to reach out to either myself or Christal at McDonald Hopkins, and we’d be happy to answer those questions.

00:39:19:02 – 00:39:19:15
Christal Contini – M&A Group Chair, McDonald Hopkins
Thank you.