Steven T. Lawrence, a business lawyer at Milligan Lawless, recently had the opportunity to speak with John Waldock, Director of Transaction Services with Eide Bailly, to discuss the climate in the middle market M&A environment for 2018.
Steve: Could you describe the transaction advisory services your team provides?
John: At Eide Bailly we provide primarily sell-side M&A advisory to middle market entrepreneurs. We define the middle market as businesses with enterprise value between roughly $15 million on the low end until about $500 million on the high end. Our client base tends to be split with approximately 60% being existing Eide Bailly clients and 40% are referrals of third-party clients. Beyond sell-side M&A services, we also provide buy-side due diligence and quality of earnings reviews. Whether that be an entrepreneur looking to buy a business and conduct due diligence or a private equity group during their acquisition process, we offer expertise by conducting a thorough review of the target company’s earnings, working capital, etc. Lastly, on a case-by-case basis, we will provide buy-side advisory services where a client has a specific target acquisition in mind and is looking for assistance in terms of negotiating valuation and a Letter of Intent, as well as structuring the transaction. That said, the majority of our practice is focused on sell-side M&A and buy-side quality of earnings review.
Steve: How do you find buyer interest in the middle market today? From your perspective, is the market hot, cold?
John: Certainly right now the M&A market in general is very strong. In the middle market, specifically, I’d say, it’s near record levels. In our processes, we are seeing very impressive levels of competition for quality assets and not only from strategic or industry buyers, who have seen a number of years of growth and impressive cash flow, but also from private equity firms. Regarding private equity, there are more groups than ever with more capital than ever. If a client or an entrepreneur has a strong business, there will be a very healthy appetite and a lot of competition. So, overall the M&A market continues to be very strong and shows no signs of slowing.
Steve: What’s the one thing you would recommend that clients do before engaging you as an advisor? Is there something they can do from a process standpoint or from an internal assessment standpoint, or maybe it’s an action internally?
John: I would say that the most important planning effort is really conducting honest, self-due diligence for lack of a better term and really trying to step back from the business and view it from the perspective of the buyer. Many of our clients tend to be at the 1,000 foot level, but I advise them to step back to the 30,000 foot level and put themselves into the shoes of the buyer and try to understand what the buyer is going to be looking at and trying to make certain that there won’t be any surprises, as any serious buyer will perform extensive due diligence prior to a transaction closing. Any surprises in the due diligence phase can have adverse impacts to a deal, but by stepping back and conducting your own due diligence you can really identify any potential issues that could be perceived as a negative. Also, apart from just trying to identify negatives, you want to make sure that the business is well positioned for the next buyer. By that, I mean if a client is hoping to sell the business and retire, you need to have a strong successor plan in place that you will also have plans for continued growth. Ultimately, the buyer is buying the future and the key assets of the business, with one of the most key assets being the employee base. So making certain that you are thinking about what it is the buyer will actually be buying and making sure that you are in a position to deliver the best package or opportunity, if you will, is very important work and strategy to consider in advance of the process.
Steve: Yes, that makes sense. That is great advice. What do you see is the biggest deal killer in the marketplace today?
John: We are not seeing a lot of deals get killed. Where we do see them run into issues, however, is mostly not doing the things that we just talked about. In particular, on the financial side. Where we often see the largest issues – whether they result in a deal being killed or simply a deal being significantly renegotiated—it is throughout the diligence process where the seller’s financials aren’t in order. Oftentimes clients don’t have strong internal controls in place. I’m not suggesting that you necessarily need an audit, but some level of third party review of the financials is very helpful because in due diligence, that could become a key issue. Similarly, making sure that there aren’t any issues with the employee base as we talked about because, again, that is the most important asset that a buyer is getting as part of the deal are talented individuals and making sure that throughout the diligence and moving into the transition phase of a transaction they continue with the business.
Steve: What do you think about the outlook for 2018? Do you think it is positive? Do you think there are factors such as interest rate increases that will impact the middle market for M&A transactions?
John: So for 2018, everything that we are seeing at the moment points to continued strength in the M&A market. Certainly, I think there is a belief that interest rates will trend higher, however, they are still at historic lows or relative historic lows. As a result, I really don’t expect that to have an impact on deal volume or deal appetite. Where it could start to have an impact is on deal valuations. But again, there continues to be so much cash on the sidelines for both strategic buyers and private equity groups. All of that capital needs to be put to work. I expect the market will continue to remain strong.
John Waldock provides mergers, acquisitions, divestitures and other strategic transactions services with private company clients including manufacturing, distribution, consumer product, transportation and logistics, energy, oil and gas, and industrial industries. He has over 20 years’ experience advising middle market entrepreneurs and private equity clients on mergers and acquisitions, and on public equity offerings. Clients can expect that John will be available whenever needed during an engagement to make certain that together, he and the client achieve a tremendous result and do everything possible to exceed expectations. Outside of work, John enjoys spending time with his family traveling, downhill skiing and golfing.
John can be contacted at 612-253-6523.
Steven T. Lawrence is a Shareholder with Milligan Lawless. Steven is a business lawyer. Steve’s practice focuses 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, a 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.