KeyBanc Capital Markets Industrial Forum: Preparing For & Executing a Liquidity Event

December 2020

MIke McMahon:

Good afternoon everyone. I'm Mike McMahon, and I lead the industrial practice at KeyBanc Capital Markets. On behalf of the entire KeyBanc team, we want to thank you for joining another industrial forum. Today we have a deep panel of seasoned transaction professionals, and equally as important, a veteran CEO and business owner who successfully navigated not only through a sales process, but I think equally as important through the selection of the right partner to take an already successful business to the next level. It should be a really informative session, we're excited about it. I'll now turn it over to one of our industrial partners, John Ebert, to lead and kick off the discussion.

John Ebert:

Thanks a lot Mike, and thanks to everybody who's joining us for today's forum. Today we're joined, as Mike mentioned, by a number of professionals. I'll quickly walk through their titles and who they work for. We have Tom Welsh, he's a partner and co chair of corporate and capital markets at Caffee, Halter and Griswold. Tim Maynard, a partner in transaction services at Cohen and Company. My colleague, Chris Hogan, managing director in MNA at Key. Jeff Getty, a managing director and family wealth consulting at Key. And as Mike mentioned, lastly, our keynote panelist, Matt Aston, a founder and CEO of GPRS. Matt, it would be great to hear a little bit of background on yourself so that people can get more familiar with you as you start to walk through some of your thoughts on today's forum.

Matt Aston:

Sure. Thanks, John. My name is Matt Aston, and I'm the President of GPRS. I started the company in 2001, and we really serve the construction community and facilities directly. Our business, what we really do, is we use ground penetrating radar to identify underground piping, and we do concrete scanning to identify the location and placement of reinforcing steel in concrete slabs prior to core drilling or saw cutting. So when those openings are made inside of a concrete slab, the only thing that they're cutting is concrete, they're not taking out any infrastructure, conduits, or any critical reinforcing steel as well. Same thing applies on the underground. If there's an excavation that's being performed, we want to go ahead of the excavation to identify any targets that are going to potentially be encountered along the way to avoid those surprises and potential shutdowns.

We're based in Toledo, Ohio. This is where we started. And we have offices throughout the United States, 53 different markets. Our largest markets are kind of the largest cities. So Southern California is our number one market, but it correlates closely to population. So those are the biggest markets we serve.

John Ebert:

That's great. Well thanks a lot, Matt, and thanks to all the panelists for joining us today. I think we'll have a great conversation. The plan for today's discussion is really to walk through many of the key items that owners should consider when thinking about a liquidity event. We'll talk about a review of some of the options available to owners, some of the ways owners can prepare in advance of entering into a transaction, and walking through what a typical transaction might look like, and ultimately how to pick the right partner or new equity owner of the business. So with that, let's go ahead and jump in.

I guess today, as we look at where we stand in the market, clearly the market has evolved pretty significantly in the last nine months, as operating conditions for many businesses, particularly industrial sectors, have returned to near pre COVID levels for many. Across Key's MNA and industrial groups, as I'm sure with a number of the panelists here, they've seen the same, we've seen a boom in deal preparation and activity starting around early July, with a meaningful ramp up after labor day, despite some lower MNA deal close rates across the US, the appetite for strategic MNA has been exceptional across both private equity and corporate.

Many private equity firms have been sitting on the sidelines for over six months and have trillions of dollars of capital that they need to put to work. Corporates are looking for opportunities to gain share as their businesses return to more normalized conditions, and really are looking at MNA for some of these share gain opportunities, while also trying to remain competitive as private equity sets new bars in MNA processes.

Additionally, as we all know, political trends are influencing seller decision making as well with the growing prospect of higher taxes, including meaningfully higher capital gains rates. And lastly, several industrial trends are influencing the markets today as well. With the growing prospect of massive infrastructure spending, growing globalization, a shrinking skilled labor force, and for many owners, a lack of a succession plan as fewer children will remain with family owned businesses.

So with that, I think it makes sense, maybe Chris, if we could walk through some of the options that are available to owners today with that market backdrop.

Chris Hogan:

Yeah, sure. Thanks, John. Happy to, and good afternoon everybody. As John mentioned, it's been a very dynamic time. It's really been a tale of kind of two markets, if you look back at the beginning of the year versus activity currently. In terms of options that are available, a few different components here that we're seeing in terms of MNA activity. First one would be call it more of a minority sale. So you're not cashing out completely. A lot of times if you're looking to raise growth capital or fund a specific initiative, you'll see somebody look at selling a portion of their business, their equity ownership, so 30, 40%, but they're not giving up control.

Moving along the spectrum, next would be called a majority sale. So selling more than 50% ownership, so giving up control, but at the same time, retaining an interest in the business. So you may roll over in a tax efficient way, 30% and sell 70% of the business. Also have a full sale where you may have a strategic buyer or somebody who is looking to fully exit as a seller, and so in that instance you're selling out 100% of your ownership and really walking away. There may still be some involvement at a board level, but from an ownership perspective you're not really retaining anything.

One thing I'd say is certainly in today's market, given the level of activity, we are seeing deals getting done across that myriad of different liquidity options. So a few years ago you saw a lot of full sale or majority sale at kind of peak of market. In today's environment, people are getting a little bit creative, people do have certain capital needs or other needs that they're looking to fund, so things like minority deals have increased as well in popularity, John.

John Ebert:

That's great. Thanks a lot, Chris. I guess Matt, you've been through multiple changes of ownership for your business over the last several years, it would be great to hear a little bit more about how you came about the decision to really evaluate some of these options and how this decision really aligned with your objectives for the business.

Matt Aston:

Yeah, John, when I was first approached, actually Steve Hughes with your firm approached me about if I had thought about selling my company, and I really hadn't at the time. And he encouraged me, I think his exact words were, "You've at least got to get smarter about how this process works." So I agreed to meeting with the private equity firm that we eventually completed a deal with. I had some concerns, it was probably a three hour lunch that we talked, but they alleviated those concerns over a period of several weeks. My imagination kind of ran wild on what it might look like to partner with a private equity firm, but it was really great. Probably the best thing I could have done for our company.

I shared with our company at the time that the backdrop of this whole decision is accelerated growth, which means accelerated opportunity for people in our company. We were with that private equity firm for only two and a half years, and we saw growth, we doubled the size of our company in that two and a half years. We really didn't know how to execute buying a smaller competitor and integrating them into our operation. That was I'd say one of the most valuable pieces that they brought to the table, they just taught us how to do MNA and grow through acquisition as well as maintain a strong organic growth that we've had.

My preference was to, that partnership sale that Chris talked about, I owned 100% of the company at the time, and I retained 40% ownership after we completed the deal with CIVC.

John Ebert: That's great, and clearly picking the right partner, picking someone who shares a similar vision as you and will be supportive of your growth is really critical, so that's really helpful.

Matt Aston:

Yeah, they were great to work with.

ohn Ebert:

That's great. That's great. I guess, Jeff, you help business owners throughout your career plan for an eventual liquidity event, I guess what are some of the personal planning decisions that are important to make in advance of selling a business, ultimately?

Jeff Getty:

Yeah. So we usually like to start with clients and just try to get a flavor, what does success look like after a transaction actually occurs? So how important is it to, for example, give some assets to next generation, or what does the world look like for the owner in that context. That gives us a pretty good roadmap as to what planning options or opportunities should be on the actual table.

When we talk about tax, tax is always a big consideration, a big conversation for most business owners. They want to pay as little as possible. It's not what you make, it's what you actually keep. And there are a lot of things on the menu. In a best case scenario we would start that conversation two to three years ahead of an actual transaction occurring, so timing matters. I often tell potential clients or existing clients, "Look, our tax planning opportunity universe is pretty wide two to three years out. As time goes on that parameter gets narrow and narrower and what's on the menu, what can be accomplished, gets relatively small as we get closer to the actual transaction." So laying out what are the long term goals and objectives post business, how am I going to replace this big asset with this liquidity event, what does that mean, how do I invest that? And then how do I put as much as possible in my pocket, what tax strategies are available and how do I implement them and how long does that take?

So it takes a lot of modeling, and sometimes it does change the nature of the transaction the client will actually enter into in some extent. So there are some scenarios where if the goals and objectives of the client-

John Ebert:

Jeff? Looks like we might have lost you.

Tom Welsh:

John, I can tell you while we're waiting on him, from the legal side, stress the 18 months to 36 months of pre planning. It looks like Jeff's back, but there's so much strategy and structuring from a tax perspective that you can do before a sale if you get Jeff and the wealth advisors and your estate planning attorneys in the mix early. Once you get to that transaction, you sign on the dotted line, it's too late. So it looks like Jeff's back, so he can pick it back up, but very aligned with that comment and that strategy.

Jeff Getty:

Yeah, sorry about that. I'm not sure what's going on with my bandwidth here. But I didn't catch all that, I caught the tail end. The name of the game here is starting early. I don't know where I got cut off before, but we really try to get involved two to three years ahead of a transaction to lay out options for clients and really understand what's on the menu. There's a lot of things you can do depending on what you ultimately want to achieve, and it really depends on vetting through those options, going through it.

Having said that, a lot of deals we get involved with are 11th hour. It's the unsolicited offer. So that's a little tougher, but there are still things you can do up through the 11th hour, and we do stuff at the very last minute for some of these clients. So the menu is pretty wide early, and that's the key here is starting early, navigating through it, figuring out what good looks like, very successful looks like, and then backing into ideas and strategies that would be most appropriate to fit the short term, medium term, and long term goals and objectives of the owner.

John Ebert:

Yeah, that's really helpful. I guess we've touched on kind of the personal decision making and some of that planning I guess. Once you're really ready to start preparing for a sale, all the diligence and things that you need to do, it's clear that hiring the right advisors to help support you is also very important and Matt, I'm curious, you spoke about Steve Hughes, our colleague here at Key, I'm curious how did you choose your team to really help you through the sale process?

Matt Aston:

So I was thrilled with our team. Really I think it's like when you're interviewing a key member of your leadership team within your business. Who's going to be aligned with you? Who are you comfortable with? And really who do you want representing you and your business as they go to market? As far as my legal team, I was comfortable with them. They've been through many transactions before. I did have some frustration with my CPA at the time, and the way they handled the, they seemed to be a little overwhelmed and we wound up leaving that firm and going to a larger firm that probably had a little more depth in terms of experience in these types of transactions for the second time around.

I view it like I view almost any other key relationship is who am I most comfortable with, who do I align with from a values perspective, and vision perspective, and go from there.

John Ebert:

Sure. That makes a lot of sense, and what we find is having that personal relationship but also a key and across all the different professionals here on the phone, we really try to work collectively as a team and I think that's important with communication, it's a team effort to get a transaction done, and that's ultimately the goal is full transparency across the team. I guess transitioning a bit, Tom, I'm curious how does your team really get involved in some of these processes? It's be great to hear on how your teams really, to my point earlier, collaborate through a process?

Tom Welsh:

Sure. So when we get involved is going to depend on the nature of the clients. If it is one of our historical clients, institutional clients, we're going to be there on the front end and we're going to be helping that founder, that client who's looking to potentially sell their business if there are other advisors. And obviously sit through, talk it through with them, and then once those selections are made, collaborate with those other advisors throughout the process, and certainly find you look around the screen and have a lot of friendly faces of people I've worked with a number of times, and it's always great when you're working with advisors that you've worked with before and you have a great relationships with. It just helps with the process, you know what each other does, you know what your role is, because you've been there before with everyone.

So if it's a newer client and we are being introduced to the client, then our role might change a little bit in terms of both a timing perspective and also whether we're a leader in the role, or whether we're responding to the other advisors. So it's going to depend a little bit on the historical context of the client. But typically speaking what then we will also do in particular on the legal side is once the financial advisors, Ron and Mike and Chris and Tim and everyone is in the loop, at that point we also worked with a lot of other third party advisors throughout the transaction process whether it be environmental consultants and helping get those retained, whether it being real estate consultants that are needed, these days insurance providers for whether you rep a warranty insurance or other things, and tend to drive those processes more on the legal end as well while we're collaborating with the financial advisors on the data site work and getting due diligence.

I know we'll probably talk about a level of sell side due diligence probably later on in this discussion. So it works both ways, kind of leading the process, also being a partner that is brought in on a process as well, and again, comfort and familiarity with the other team members as well is usually helpful in the process.

MIke McMahon:

Hey Tom-

John Ebert:

Go ahead, Mike.

MIke McMahon:

Tom or Tim, look, a lot of the folks on the line today, private owners, they've had, as Matt talked about too, either longtime accounting firms or longtime legal advisors that are trusted advisors, but that may not have the capabilities within their firms to handle a transaction, to execute appropriately in either of your fields or functional areas. How do you work with those folks, because it's obviously a sensitive area given the tenure they've had with the clients, they obviously have a lot they bring to the table because they know where everything is, they have a good working knowledge. How do you guys delicately balance that while still moving very quickly to get up to speed?

Tim Maynard:

Yeah, I think from our perspective I think we've used the word team quite a bit here throughout the conversation and we view them as a vital part of that team. Oftentimes when we work with some of our privately held companies, financial reporting isn't priority number one. Sometimes it kind of falls below the chain in terms of just operating the business and folks use a lot of outside support to help them [inaudible 00:20:31] numbers together, get numbers reviewed or audited at year end, and there is a key role that those outside folks help throughout our process.

I think a lot of accounting firms, our group focuses exclusively on doing diligence, buy side and sell side due diligence. That's all my team does. And sometimes our counterpart, the smaller firms, they may do that two to three times a year, and spend the rest of their time on compliance work. When you go through that diligence process, sometimes it gets a little bit overwhelming for those folks to manage their full book of business while also trying to go through the complexity of a deal. So again, we leverage them quite a bit, we work with the outside accountants, and we value their input. Like you said, Mike, sometimes they're going to know more about the numbers than anybody, so it'd be silly for us not to trust them and roll with them as part of our effort as well.

Tom Welsh:

And I would add on [crosstalk 00:21:27]-

John Ebert:

Oh, go ahead.

Tom Welsh:

I was just saying on the legal end, very similar story, but a lot of middle market companies do not have internal counsel, right? Usually you're getting into a larger company when you have internal counsel. That's not always the case, there are obviously exceptions. But a lot of times those historical counsel that has been with the founder and the business for a long time serves in that role as their outside internal counsel. And they know, us getting up to speed, we're never going to know the history of that company as well as that person does. So it's extremely important to make them feel a part of the team as well, and bring to the benefit of both sides of their historical counsel and their transaction counsel [inaudible 00:22:15].

John Ebert:

Yeah. That makes a ton of sense. I guess, Tim, I'm curious, you were talking about how you help prepare and you've probably seen what works and what is more challenging at businesses, I guess what are some of the maybe top pointers that you would really give businesses to think about with their financials, understanding that it's not always front of mind as they're operating a business?

Tim Maynard:

Yeah. I think the first thing is for the most part on every transaction there's going to be someone like me on the buy side, that's going to ask you as the seller, a lot of questions about your historical financial statements and we're going to dig into a level of detail that perhaps you have never had to before or thought about before. There's an investment thesis that a buyer's going to make to invest in your business and there's an investment thesis that you're going to make and the folks at Key are going to make to help sell your business, our goal is to make sure that the numbers behind that make sense, that they can speak to what that thesis is on both sides of the equation.

At the end of the day, investors they're selective about the deals that they're going to invest in, everybody's going to come in with an initial skepticism about the numbers, and our goal is to help kind of get you prepared for that process, and I think as a seller, to kind of understand maybe even before you kind of go down the path of trying to sell your business, take a realistic view as to what you think your earnings are.

Oftentimes, and Jeff can probably speak to this as well, sometimes folks might have an inflated view of what their earnings are, and maybe what their [inaudible 00:24:14] is. Our goal is to help you think through that and make sure that by the time you get to market, it's a realistic view of what those numbers are. It's a set of financial statements that are going to hold up to diligence and hold up to that buyer skepticism that's going to come through their process. And I think as business owners to start thinking about that process sooner than later and really take a realistic view at your numbers and get prepared for someone like us to come in and ask a lot of questions, I think would be a key thing in making the process that much more efficient and successful.

John Ebert:

Sure. Sure. That totally makes sense. I guess on the more operational side of things and more on the marketing side of things, Chris, I guess it'd be helpful to get a better sense of some of the work that we help with and some of the more nuances to packaging the opportunity properly to potential set of investors.

Chris Hogan:

Sure. I think the best way to think about it, we're taking a lot of the information that was just discussed by Tim and others and helping frame that into a story. So it's not just what is the earning space, but it's really why is that earning space sustainable and where is that earning space going and where are the initiatives that if you're a new buyer and you're coming into this situation, you can look forward to in terms of growth and prospects around the business. So a lot of our time and effort is spent really helping develop and craft that storyline.

One thing I'd be curious to hear, Matt, maybe this is a good segue to you, how did you find the preparation process as you guys were starting to think about engagement with potential buyers, any kind of tips or lessons learned around that preparation strategy, as you guys thought through how best to tell your story, your businesses story?

Matt Aston:

Yeah. I think one of the things, if I could do it over again, especially the first time around, the biggest change that we felt after the deal was complete was really on the accounting side and on the reporting side. We didn't spend a lot of time with flash reporting or really detailed financial reporting prior to the sale, and I think that would have assisted tremendously through the diligence period, had we been able to produce some of those reports, right off the bat.

The other thing I would say relative to being prepared, if there's a new initiative or anything that you're thinking about launching, have some proof of concept before you're talking about it in the initial meetings phase, or even in the diligence phase because once that idea is shared, it's going to get drilled down on and if you don't really have anything to back it up, you're not going to get any credit for what the value can bring. So it's a poor time to roll out a new idea or a new service as you're starting the sale process. That should have been done months or even longer in advance so you have some data to back up what you think this is going to be.

John Ebert:

Sure. And I guess, Matt, clearly having some employees on your team as well is critical. I guess how did you go about some of the communication internally? Clearly people approach this differently. Most want to keep this very quiet, the evaluation of this process and walking through it. I'm curious kind of how you approach that in both transactions.

Matt Aston:

Yeah, so my leadership team would laugh, I have a tendency to overshare. We have kind of a culture of transparency, so before I had any meetings with the private equity firms my senior leadership team already knew that I was going to be having these meetings, so it was no surprise to them when I said hey we're going to pursue this. Against the advice of the firm that we signed the LOI with, I shared with the company probably within a week or so of doing that. I put myself in the shoes of the employees, there's going to be some, the risk that I took in doing so, their imagination can run wild as well, okay my company is going to be owned by a private equity firm, what's this going to mean for me? That's where that anxiety comes from on the part of the employees, how does this affect them?

So that's when I shared the whole backdrop of this is opportunity, but a lot of what we've seen from the companies we've acquired, they wait until we're down to a week or even a few days before closing and I think there's a bit of a spirit of resentment on the part of the employees when it does come down to the wire like that. So we've always been a little more transparent than most companies probably with the people that work here. But I think that's served us well, we've had two ownership changes, so.

John Ebert:

Sure. That makes a lot of sense. I guess one thing I forgot to bring up at the beginning of this, and I guess we're halfway through the hour already, if any of the participants have any questions they want to ask any of the panelists here, feel free to use the Q and A function down below and we'll try to address those at the end.

So I guess, Chris, we've talked about some of the preparation side of things, could you walk through what does a transaction really look like, and obviously this is going to depend on what type of transaction you ultimately go down, but I'm curious of all the different elements from your side of things. Chris Hogan:

Sure. That's a great question. So it can take, as you mention, John, a variety of different forms. If you think about it broadly, what we're brought in to do as the investment bank is to create tension. Ideally leveraging multiple parties off one another to drive value, to drive optimal terms in a transaction, and the way that's accomplished, it can be broader, meaning you go out to a lot of people and you start with a pretty big funnel, or it can be more targeted, 10 parties, seven parties, a handful of parties, but the goal is still the same, to make sure that you're using a staged process where you're starting off a little bit more broadly in terms of the number of folks that are engaged, a little bit higher level information and seeking to understand where folks are.

Folks can come in based on some initial information, put in an initial offer, and from there you're then down selecting to a smaller group, providing more information to make sure that you're validating and really substantiating those offers, and then continuing through that process. So depending on the business, depending on how big it is, you may have multiple parties that are competing actively for a specific asset right up until the end. You may ultimately choose a winning party and still have some element of work to go, or a little bit of stuff to do at the final stages, but really again, our job as the investment bankers is to try and create that tension. Yeah, obviously we want to find the right party as well, but to make sure that you're clearing the market and really driving an optimal not only evaluation but terms for a given transaction.

One big part of that obviously does come down the financials. Tim, you talked about this earlier, earnings base is critical and you talked about the work you do upfront in terms of preparation, maybe you get hit for a minute on, as you're going through the process and buyers are doing diligence, how are you guys involved at that stage of the process in helping to substantiate that earnings base that you guys may have done work around earlier in the process that is being provided to people?

Tim Maynard: Yeah, absolutely. Like you said, our first phase or our first goal is to get numbers that are credible and accurate that you as a seller and the folks at Key are comfortable putting in marketing documents and sharing with prospective buyers. From that point forward, usually where we get reengaged is once you're either close to having an LOI, or having an LOI signed with a perspective buyer, and at that stage, our materials are going to be shared with either one of two parties as part of their diligence process.

What we deliver is usually one or two items. It's usually it's a data book, so it's a big, Excel based analysis with historical financials, support for different adjustments, and other things that we deem kind of important for the deal, for the company, and for prospective buyers. And often times we share a diligence report as well that goes alongside that data book that kind of puts more words and verbiage to historical adjustments, trends around the numbers, discussion around customers and product level profitability, things like that.

Our documents are shared with buyers, and then we're part of that process going forward. So they're going to engage a diligence team usually, they're going to want to have access to us, they're going to have questions, understand what we did, the basis of our work, the scope of our work, and eventually there's going to be a time lapse from the time we initially did our work to the time an LOI is signed, to the time buyers are doing their diligence. So typically we're going to do one or two roll forwards of our analysis as well just to keep the numbers fresh. And eventually, when it gets closer to a purchase agreement, we're going to work closely with the seller and the folks at Key to kind of think through the financial implications of that agreement, whether it's the working capital mechanism, whether it's a working capital target, whether it's how we think about financial statement reps in terms of how the historical financial statements were prepared, and essentially be a part of that team up until really the date of signing, and even after the fact, post signing there's usually a period of time where certain elements of a purchase price get trued up.

So we'll have a role in that as well just to make sure that some of the adjustments that might impact a purchase price were consistent with how we viewed the numbers as part of our diligence process.

Chris Hogan:

Yeah. That's great. Obviously look, as you go through a transaction, Matt this is really a question for you, the owner is going to be core and central to that process, but obviously can't do it all by yourself, and there's people that get pulled into the diligence process, can you talk a little bit, Matt, about who is brought in as you guys went through diligence, who are those team members that were kind of critical to the process and how did you guys manage through that?

Matt Aston:

Yeah. I think we managed well because we had a great team, and we had a big team. We weren't trying to keep it secretive, so it was the senior leadership team, each had different areas of responsibility through the diligence process. I'd say most of it probably fell onto our CFO, our controller, and our human resources director. But other people on the senior leadership team all had various roles throughout the diligence process and when we presented before the investment committee with the private equity firm, that was kind of the last step leading up to closing was we went to their office and had to present to their entire executive committee.

I took the entire senior leadership team with me, and we had a book that we were presenting. But there were five of us, and it was very even. I don't think any of us did more than a quarter of it, and nobody did less than 10 to 15% of it. So each with our own areas of responsibility. John Ebert:

Sure. And clearly, these types of transactions, they take a ton of time. I guess when looping in your team, how did you really kind of set expectations for balancing their own daily job with executing this deal, and kind of what did you do as well? Because clearly you've done it a number of times and I consider you an expert at this point, so I'm curious.

Matt Aston: I don't know if I'd claim expert status yet, but ... it's the hand that you're dealt in that time period. So you've got to play it. It's short term, and everyone on my team, we talked about some sale bonus, so there was some incentive on their side to perform well and help with the diligence process and see to it that it was done well. But yeah, I would encourage owners as they think about a sale, certainly there's key people as part of that company that the company would not be where it is today were it not for those people. So I would strongly encourage you to be generous with the sale bonus, and that will get people on the team for sure on helping with the process.

John Ebert:

Sure. I guess kind of transitioning now, thinking about picking the right partner, I guess Chris, the market for potential new owners or investors continues to grow. The profile of those investors really has changed in the last several years. I guess what are some of the options in your perspective for new partners?

Chris Hogan:

Yeah. That's interesting. I think you mentioned at the beginning of this discussion, John, from a capital perspective, I don't know that we've ever seen this much capital raised amongst private equity firms, family offices, and the like, to pursue privately owned businesses. I think there's something north of 2 trillion dollars just within the private equity community of dry powder out there to invest or be invested here in the coming next couple years.

So in terms of who are those different buyer types or categories that are active in buying businesses, you've got a couple different ones. You've got the traditional private equity groups, so these are folks that go out and raise money from limited partners, have a period of time to deploy that money, will typically own an asset for five, six years, could be slightly less or slightly more, but then will look to exit that investment and return that money to those limited partners. So that would be one group.

You have that I'd call it a more patient set of capital or group of capital out there, be it family offices or long term investors, call that group number two, and the difference here is this is money that's being invested in many cases on behalf of maybe one wealthy family, so it's not going out and raising capital from LPs, but it's capital that has more discretion in terms of needing to be returned, and so you're certainly seeing a lot of family offices start to move away from putting money into private equity firms and instead looking to create their own investment team and invest that money directly themselves.

So that would be group number two and you've got another group more on the strategic side, call it corporates or strategics, could be public companies, could be large privately owned strategic buyers, certainly a very active group as well. The group that out of these categories is the most likely to maybe have synergies in certain instances, so they already have an existing asset that they're bringing to bear and if they're looking at an acquisition opportunity, it's alongside that existing asset that they have. So always helpful within a process to have that element of a buyer universe because again they bring a synergy potential that may not exist from a traditional private equity firm or the family office dynamic.

So those would be some of the groups in broad strokes and obviously this is a critical element as you think of it as a private business owner for folks here on the meeting and on the phone, choosing that right partner, so Matt, having gone through this a few times, I'd be curious to hear how you thought through that very important decision, what were some of the factors that you weighed and ultimately what swayed you in one direction versus another as you thought about the change of control for your business and who the right partner was at that point in time?

Matt Aston:

Yeah, my biggest concern with the whole sale in general was really three things. I wanted my team to stay in place, I wanted their salaries and their compensation package basically to stay in place, and I didn't want there to be an adverse effect on the company culture overall. So for us to do that, we really, I needed to just stay in charge of the culture of the business, that really for me ruled out a strategic buyer. I didn't want to be a bolt on to an existing business. I wanted to be what I'd call a platform investment, so private equity was very appealing to me in that sense where they'd buy our company and then we can go buy smaller competitors and bolt them onto our business as it existed at the time.

So that was really the key for me in thinking about it. Beyond that, I think it's kind of like I said earlier, almost when picking your advisors, it's likely you're going to get some exposure as you go through a process to a number of private equity firms, and you're going to get a sense, the more time you spend with people on the other side of the table, who they are and how they think, how they operate, and really what's your comfort level, because if you have trouble talking a difference of a couple percent on deal value, you're going to be working with these people for several years. It would make far more sense to work with a group that you're aligned with as opposed to just try to bleed every last dollar out of the deal. That was my approach going through it.

John Ebert: I guess we've received a few questions around this so far and we've hit on, but one question that came up is private equity in some instances, especially probably five years ago or a couple years ago have a reputation for not being able to get to that real synergistic value that a strategic could deliver. I guess Chris, could you walk through kind of how your perspectives on private equity as a buyer and their ability to pay top price has potentially changed the last couple years?

Chris Hogan:

Yeah. It has definitely changed. There's always going to be a situation where maybe it's a very specific asset and there's a tremendous amount of synergies with one or two specific strategic buyers, in that case those are always going to be the most likely candidates assuming they have the appetite to pay, but generally speaking, what we've seen in processes for our deals, even when you have a strategic buyer that may have a bit of an angle, private equity has been able to step up to similar valuation levels. Some of that admittedly, you've have a very healthy leverage finance market that's been out there that has helped. You think about private equity, they are using leverage to finance a portion of the purchase price, and so that ability to have a healthy leveraged lending market helps.

But at the end of the day, I think what we've seen honestly is less about maximum leverage, it's just more about the fact you have so many private equity firms out there that are chasing good businesses, good deals, and so return in some ways have come down a bit. People are underwriting a bit of a lower return than they were probably five, six, seven years ago, and as you lower that return, your ability to pay as a private equity sponsor increases. And so in many of our deals, when we go into it today, even if you've got strategic buyers that you know will be interested, it's hard for us to handicap it at the beginning and say oh yeah just because they're strategic buyers it means it's going to be a strategic deal. In many instances we have seen private equity step up to a strategic level and exceed that in other instances. So I do think it has changed meaningfully, John.

John Ebert:

Sure. That's great. I guess now the transaction is complete, time to celebrate, but I guess it'd be great to better understand, Chris, your perspectives on kind of some of the post deal dynamics that owners should be thinking about.

Chris Hogan:

Yeah. The big ones are always going to be what's the go forward role. Sometimes it's easy. Sometimes it's hey I'm doing a majority recapitalization, selling 70% of my business, but I'm still going to be the CEO and that's the role going forward. Sometimes it's a little more complex where you may have a business owner who's been in the business for a very long time and would like to step away from the day to day and it becomes more of a board level role. So that's going to be one of the key things, just determining for key management, key folks, what does that look like post close. That's something ideally you're figuring out well in advance of the closing, not something that you're figuring out as the deal is closed.

There are also elements, I'd be curious to hear, maybe a question for Tom, or for Jeff, just from an ongoing service provider perspective, once the deal has closed. Tom I know sometimes you guys get involved in post closing true ups and other things, any color you want to share from the legal side of what you guys are doing post closing?

Tom Welsh:

Well the hope is on the front end we've done such a good job limiting your risk going forward, that you don't have to call us a lot with any kind of indemnity claims or anything like that that have been asserted against you. But yeah, certainly when there's purchase price adjustments, post closing working with the financial advisors on that, getting that documented, monitoring survival periods to the extent that there are any and indemnification terms, and then kind of piggybacking on what we started this about in terms of planning on the front end, also any post transaction planning that you might be doing, again, with the wealth advisors and with our state planning folks, if there's any gifts that are planned or charitable contributions that are planned as well, and then to the extent that, depending on the exit and whether it's a full exit or whether like Matt's continuing on and being a really material partner going forward, to the extent you're stepping into new things, helping fund your new ventures and helping set up investment vehicles and things like that.

So plenty to do afterwards but again I stress hopefully we've done a pretty good job limiting your risk going forward and hopefully it's all positive.

John Ebert:

I guess Jeff, anything to add there that your team helps support the owner or the seller post transaction would be great.

Jeff Getty:

Yeah, sure. One of the first major issues or psychological points owners have to get to is they're more likely than not replacing an asset, an income generator that they've known and grown for a number of years, and they have to replace that with something else. Now there's this liquidity, so getting their heads around hey this is how you generate the cashflow to support your lifestyle, to support your family, your goals and objectives and things like that. So taking this income producing machine, your business, and changing it over. So that is definitely an investment management, wealth management issue, and that's probably the largest single thing we do as an organization in the private bank, helping clients navigate that process and that exchange.

A couple other points that come up that are pretty important, even though we talk a lot about presale tax planning, there are post sale tax planning strategies, and we usually spend a lot of time in the first six months or so after a sale kind of navigating through what's still on the table, what's still clean up that couldn't get done before, just didn't have time to do, can be done. And then we hit a bit of a divergent point for almost any client they probably set up some sort of new structures whether they be trust, partnerships, things like that. They're going to need help navigating through how those things are actually managed because these are new to them for the most part. They don't really know how these things intersect with their goals and objectives, there could be some charitable planning that goes on and some help with that.

And then for those clients who really want to stay active and do something else, we do a fair amount of work with helping clients develop and administer and manage and continue to grow in what we call a single family office environment. So there's a number of long term tax opportunities and investment opportunity plays that come into existence if a family has the financial wherewithal after a transaction to set up a single family office. Whether they're going to become their own PE firm which is kind of how some of them look after a while, or they're just going to be more managing a bunch of buckets of liquidity, there are some very specific legal and tax issues that revolve around those decision points, and that's a particular area of expertise we've grown internally over the past several years as we've helped a number of very significant families post transaction get the full benefit on a longterm basis by setting up those structures appropriately. J

ohn Ebert:

Yeah. That's great, Jeff. I appreciate that.

MIke McMahon:

Hey, John? J

ohn Ebert:

Yeah, go ahead, Mike.

MIke McMahon:

I just had a question for Matt. Matt, you spoke very eloquently around criteria for partners, what was going through your mind, the prioritization of objectives around a good partner. What did, you've had a couple equity partners now, and I'm not asking you to compare and contrast, I wouldn't do that, but what did they bring, what did they deliver for you to really bring value to your business outside of capital?

Matt Aston:

Yeah. So I'll say that we are absolutely a better business today than we were back in 2017 before we completed the first private equity deal, and I think that we've been pushed on strategy, pushed on our forecasting and financial modeling, and there comes a point, I looked myself in the mirror one day, we've got over 300 employees in the business at the time, and jeez, the decisions that I make effect 300 people directly, and their families, we're talking close to 1000 people. For me it was a comfort to know, the people that I've worked with to this point in private equity are some of the smartest people I've ever met, to have them as an advocate for you and an ally on your side from the strategic standpoint, this year, the whole COVID environment, what we were going to do, we were without any foresight, I've never been more frustrated with our government than I was back in March or April when we started getting shut down and there was just no timing, there was nothing that was given to us as to any indication as to how long this was going to be or how we should plan for this.

Just being able to call up the people that I worked with closely at the private equity firms and bounce ideas off of them, at that point it's like a free consultant. That really, we navigated it I think as well as we possibly could have, especially facing the construction industry. I think that's the benefit there that maybe comes outside the liquidity, is just the deeper level of strategy, foresight, planning, that maybe isn't there, wasn't there pre private equity involvement.

John Ebert:

That's great. Well Matt, really appreciate you joining this today. We have one last question that I'll read out for you. If the team up north opts out of their game against the Buckeyes, will you commit to pulling out of Michigan all together?

Matt Aston:

So I live in Toledo, huge Buckeye fan, but the Detroit and Ann Arbor area is actually kind of some of the foundation for building the GPRS business, and we've got six great people in the Detroit area, though they're all either the team up north or Sparty loyalists. We're going to keep them employed and running operations up there. We'll take that state up north's money for sure.

John Ebert:

Awesome. Awesome. Well everybody, all the participants today, we appreciate you guys joining. Hopefully you found this helpful. Again, we'll be following up with a recording of this should you want to watch this again, should you have any more questions, feel free to reach out to myself, Tom, Tim, Chris, or Jeff, and obviously Mike as well. So thank you everyone for joining. We really appreciate your time. Hopefully you found this helpful, and hope everyone has a good rest of their year.

KeyBanc Capital Markets invites you to to listen to our Industrial Forum discussion, Preparing for & Executing a Liquidity Event. In today's market, many private business owners are contemplating growth capital to inject into their business and/or the opportunity to monetize the significant value they and their employees have created. In this live conversation, we discuss key considerations of a potential equity partnership (ranging from a minority investment to an outright sale, and everything in-between).

KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp® and its subsidiaries, KeyBanc Capital Markets Inc., Member FINRA/SIPC, and KeyBank National Association (“KeyBank N.A.”), are marketed. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives, who may also be employees of KeyBank N.A. Banking products and services are offered by KeyBank N.A.

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