Steven T. Lawrence, a business lawyer at Milligan Lawless, PC (www.milliganlawless.com), in Phoenix, Arizona, recently had the opportunity to speak with George Odden and Jordan Geotas, principals with CP Capital Advisory Services, LLC (www.commercialplus.com), to discuss the climate in the middle market M&A environment.
Steve: Describe for people reading this about the type of bid auction process you are involved in with your clients on the investment banking side.
George: Most of the processes that we see start as what you would call a typical three-step process: pre-marketing, marketing, and exclusivity periods. Rarely do they end up – particularly in the middle market and lower middle market – being that clean. And I’m sure, Steve, you’ve seen this many times before, you do the teaser, you do the confidential information memorandum, you ask for indications of interest, and then you bring a limited number of parties through due diligence and management presentations, ask for binding offers and then you narrow the field to one or two and ultimately select one to close. Having done both larger transactions and smaller, keeping the discipline of that process in the larger transactions – call it $500,000,000 or above — is actually quite simple. Occasionally, you will get someone to preempt. However on the smaller deals, the ones you are talking about, that discipline is much harder to keep. The buyers are more varied — you have wealthy individuals, corporations, private equity funds, and family offices — you need to be more flexible, ready to call an audible to either take it off the market, introduce more parties to the process, or something else. Jordan and I are working on one right now where we literally received an unsolicited offer as we were just starting to put diligence materials together, which was from probably the best buyer out there in terms of fit. Consequently, it may never go to market. You always have the intention of starting at what I call a normal process, but, in the lower end of the middle market, you just need to be ready to be flexible.
Steve: How do you find buyer interest in the middle market today? Is the market hot, cold, frosty? What are you seeing?
Jordan: We are seeing really strong activity and interest in the middle market. We see so much money still on the sidelines, so much financing still available. These minor little blips with the interest rate hikes haven’t really slowed anything down on the financing side. The leverage in transactions is quite high compared to historical leverages. So, everything is still hitting on all cylinders. It’s still a great time for people to be going to market. Transaction values are high, very high. All indicators are positive.
Steve: What is the one thing that you would recommend that clients do before engaging you as an investment banker? What is the one thing you wish if you could tell somebody, “Hey, before you come around and work on transactions with us, we wish you would have done this.” Is there such a thing?
Jordan: We are willing to work with people for a year or two, or even three years, in advance of taking them to market. We do not charge monthly payments and we do not charge retainers. We get invested with our clients. We will make sure they have the right tax advisors and legal advisors. We will make sure they have clean financials. We will make sure they have a good three to five year strategic plan. So, there is not anything we wish they did before they engaged us, because we are willing to be engaged at no cost, and well in advance to help prepare them so that they are maximizing value years ahead of when the transaction happens. That way, they get to know us and to see how much we care about them, how much we work with and for them, and all the value we can add along the way. So, when transaction time comes, the relationship is already there and we know their company so well that we can position it in the best possible light.
Steve: What do you see as the biggest deal killer in the marketplace today? What are you seeing that makes these transactions halt, or go away?
George: Usually, you can point to things like financing or the big thing coming up in due diligence. I have noticed an extreme sensitivity to having too much business with one customer. We have been engaged with a couple of businesses lately – and this happens to small companies – where there is an intense concentration with one or two customers. And we have found that individuals, PE funds, and even strategic buyers, are having a hard time getting over that mentally.
Jordan: I would agree completely. I was going to point to the traditional issues of undisclosed skeletons in the closet, misrepresentations or not achieving financial projections during the deal process. However, I would agree with George that the number one thing is customer concentration, and it’s probably because transaction values are so high and there is so much leverage being put on deals now. It could implode too easily if that one customer relationship suffered, since one or two make up 60% to 80% of the business in some companies with highly concentrated sales.
George: Jordan touched on one [deal killer] that you certainly can’t ignore, which is the business not performing through the process. When you embark on a 6 to 12 month process, and you have set expectations for what the business is going to do during that period, and you substantially underperform those expectations, there is definitely a need on the part of the buyer to lower price. And, potentially, the seller wouldn’t accept that.
Steve: How do you see the middle market for Arizona businesses for 2017 and beyond given the new federal administration, given the interest rate climate, given the lending climate today? It certainly seems like we are in a good spot. How do you see that into the future?
Jordan: Actually, I think we are very optimistic – of course, cautiously optimistic – because we have been through a couple of cycles. But, cautious optimism says it stays strong, especially when you look at things like job growth in Arizona and how Arizona is predicted to be one of the best job markets over the next 3 to 5 years.
George: There are a lot of things we have going for us, right? Between the climate, relatively low state income taxes, this relatively business friendly environment, relatively low real estate costs, and relatively low property taxes, when you stack us up against other states nearby, there are a lot of reasons to be optimistic on a local level. There is clearly some uncertainty on a national level, but it feels like we are – as much as we can be – insulated from some of that within Arizona, and within Phoenix. This is a good place to do business, and it’s not over-crowded.
Jordan Geotas is a mergers and acquisitions advisor, licensed attorney, commercial real estate broker, and commercial mortgage broker. Jordan has been a licensed attorney since 1993. His practice focused on business formation issues, business and real estate transactions, and estate and tax planning. For the past ten years, Jordan has committed the majority of his time to advising business owners during the divestiture process. Jordan has also spent a considerable amount of time advising commercial real estate and commercial mortgage brokerage clients while at Commercial Plus Group. Jordan has a BA in Political Science and Philosophy from Rutgers College and a Juris Doctorate from Arizona State University. Jordan lives in Scottsdale, Arizona with his wife of over twenty years, Christyann, and their two teenage daughters, Anastasia and Constantina.
Jordan can be contacted at email@example.com or 480-391-8800.
George Odden is a Principal with CP Capital Advisory Services, LLC. He has over twenty years of experience advising clients on transactions including mergers and acquisitions and capital raises. He has closed dozens of transactions, including sales of private companies, corporate divestitures, sales for and to private equity firms, as well as buyside advisory and debt and equity financings. George has focused almost exclusively on the aerospace and defense sectors through his career, establishing deep relationships among a diverse group of industry players from the largest multinational corporations to private equity firms, to small, privately held companies. Prior to joining CP Capital Advisory Services, George was a Managing Director with KPMG Corporate Finance based in Phoenix and also with Houlihan Lokey based in Los Angeles. George has worked for UBS and Dillon Read as an investment banker, and with Rockwell Collins and Honeywell in strategy and M&A roles. George started his career in the U.S. Navy, where he served on the USS Tripoli in support of Operation Desert Storm. George holds a BA from Cornell University and an MBA from Columbia Business School, and resides in Scottsdale with his wife and two children.
George can be contacted at firstname.lastname@example.org or 480-391-8800.
Steven T. Lawrence is a Shareholder with Milligan Lawless. Steve is a business lawyer with a practice focused on the legal and business needs of companies and individuals. Steve handles every aspect in the life of a company from start-up and formation to operations matters and agreements to company acquisitions. Steve has extensive experience in a wide range of corporate and transactional matters, including mergers and acquisitions, licensing, securities offerings, entity formation and business structuring. Prior to joining Milligan Lawless, Steve was a shareholder at a large Phoenix-based firm, served as Corporate Counsel to SkyMall, Inc., and was Associate General Counsel to JDA Software Group, Inc. He began his legal career as a Judicial Clerk to then Chief Judge Thomas C Kleinschmidt of the Arizona Court of Appeals. Steve is listed in Best Lawyers in America for Corporate Law and Chambers USA for Corporate/M&A Law. Steve holds a J.D. With Distinction from the University of the Pacific McGeorge School of Law, Master of Laws (LL.M.) in Health Law from Loyola University Chicago, an M.B.A. from the W.P. Carey School of Business at Arizona State University and a B.S. in Business Administration from California State University, Sacramento.
Steve can be contacted at steve@milliganlawless or 602-792-3536.