M&A activity remains strong, as dealmakers watch the markets closely

The deal market remains hot, but many believe we’re coming to the late innings of an economic cycle. So, as the first quarter of 2019 wraps up, local executives, investors and advisers are watching closely for the slowdown that could be on the horizon.

Thus far, prices are holding up in terms of multiples, capital is still readily available for private transactions, and the mergers and acquisition climate in Pittsburgh remains fairly strong, says Jim Altman, senior vice president and middle market regional executive leader at Huntington Bank. However, the transactions funded in the public markets are somewhat turbulent from concerns about China, interest rate uncertainty and slowing global economic growth.

“Capital for private deals should remain favorable in 2019, as there remains enough unused powder with private equity funds,” Altman says. “But the sales price multiples may be impacted by an expected slowdown in economic growth.”

That slowdown could come in 2019, but he says it’s more likely to hit in 2020 or 2021.

As Western Pennsylvania dealmakers prepare to gather in downtown Pittsburgh on March 21 for ASPIRE 2019, Smart Business spoke with some of the players who drive local M&A activity about what they saw in 2018 and what they anticipate next.

Winds of change

When dealmakers are asked if it’s better to be a buyer or seller, the answer depends on your perspective.

Altman doesn’t believe the market has shifted from a seller’s market, yet. Demand still exceeds the supply, which favors sellers.

Christian A. Farmakis, shareholder and chairman of the board at Babst Calland, agrees that sellers still have the advantage. They were able to obtain higher than expected enterprise value on sales in 2018. There also weren’t as many distressed businesses available for buyers to take advantage of bargain pricing.

However, he knows that could change.

“We are keeping our eyes on political and economic factors, which could cause a slowdown in 2019 or beyond, like slowing economies in Europe, tariff concerns and the effects of absorption of the recent federal tax cuts,” Farmakis says.

Greg Steve, senior vice president and regional sales manager at Wells Fargo, says strong valuations and market liquidity make it a great time to be a seller, but that doesn’t mean there aren’t good opportunities for buyers to create value via improved operations, expanding geographically and M&A synergies.

He expects the regional M&A market to remain solid in 2019 but understands the window for higher valuations may be closing if expectations of future earnings start to slide.

“The opportunities for distressed M&A buyers may expand later in 2019 if the economy finally slows and corporate orphans and/or underperforming companies are put on the market,” Steve says.

Ronald Donatelli, president, Pittsburgh region, at First National Bank, however, thinks the momentum is shifting to buyers, who are concerned about the potential end of a long-run/bullish economy.

“It is a better time to be a buyer today, and going forward, due mainly to the overall economy potentially slowing down,” he says. “This could lower multiples and take some groups out of the market.”

Buyers are looking to adjust purchase prices appropriately, but that depends on what sector the target company operates in, Donatelli says.

Thomas L. Bakaitus Jr., tax partner and operating officer at Herbein + Company Inc., says most of his clients want to sit tight for the next year or so.

“The tax climate, foreign relationships, uncertainty on interest rates and overall political climate have made my clients very anxious,” he says.

He’s also seeing less cash exchanging hands and more rollover equity or mergers.

PE reacts

The region’s bankers, lawyers and accountants aren’t the only ones keeping an eye out.

Stephen J. Gurgovits Jr., managing partner of Tecum Capital, says his PE firm has plenty of capital to deploy, despite a record year of investments from its funds. But he is thinking more about a global slowdown, even though it hasn’t manifested within Tecum’s portfolio.

“We are certainly more aware and keeping a closer eye on markets and monthly performance, while watching key economic indicators for more clarity. We are moving into 2019 approaching deals with a little more caution, but we are also fairly conservative in our investment philosophies anyway,” Gurgovits says, adding that perhaps a slowdown will bring rationalization to valuations.

Dan Manges shares Root Insurance’s wildly successful capital raising journey

Root Insurance joined an exclusive club last August when it was valued at $1 billion, becoming Columbus’ second unicorn 20 months after the first.

It’s been a meteoric rise for the insurance carrier, founded in 2015 on the idea that how people drive — more than demographics — predicts their likelihood of getting into a car accident.

“We built a car insurance carrier from scratch with the price of insurance entirely based on driving behavior,” says Dan Manges, co-founder and CTO. “We’ve raised $175 million in venture capital. We’ve been working relentlessly on this over the past several years.”

Because car insurance is a $230 billion industry, gaining even a 1 percent market share makes you a multimillion-dollar company, he says. An industry that large that has been stagnant in terms of technology and innovation got people excited about what Root could accomplish.

Manges discussed the company’s funding journey as a panelist at ASPIRE 2018. Here are some of his observations.

How did you convince anybody to invest in your idea?

It was about finding investors who simply believed that we could actually do what we said we could do. We could price insurance based on driving behavior gathered via a mobile app. That was all we had at that point. We didn’t have a fully built product. We didn’t have product market fit. We weren’t even a licensed insurance carrier.

How much did you raise the first time?

Five million dollars. We raised our initial round of capital from Drive Capital, a VC firm based in Columbus. They don’t give you the entire $5 million all once. They committed to putting that much capital in if we were to hit milestones along the way. I think they recognized the type of disruption that can be possible in the insurance industry. They were excited about the team that we had together, and they were willing to take a chance on us.

When did the second round come about? What were the early days like?

Our second round was almost two years into the company. We spent a little over a year building the foundational infrastructure that we needed to launch. We sold our first policy in June 2016, which was a year and three months after the company got started. In some ways that’s remarkably fast. In other ways, it’s a long time to go before you have your first paying customer. That first paying customer is when our CEO bought his insurance policy. I bought mine 10 days later — I was the second one. We finished 2016 with very few policies in force.

Our second round we raised from Ribbit Capital, a VC firm on the West Coast (that focuses on financial innovation). Ribbit has invested in other insurance companies, favoring what they thought the future of insurance was.

It was a perfect description of what we were building at Root, which meant that we had very strong alignment. But, of course, that alignment in itself isn’t enough. You also have to have the business results. You have to have the customers. You have to have a product that is working. Ribbit was excited about what we were doing, and we ended up completing a $21.5 million Series B.

Describe your most recent rounds from 2018. When did they come about?

We raised a round of capital in March (2018). We raised $51 million. At the time, I think it was one of the largest venture capital rounds ever for an Ohio technology company. Then five months later, we raised another round of $100 million at the $1 billion valuation. That was purely due to the insane growth trajectory behind the company — especially realizing that Root was still only available in 20 states, which reached just under 40 percent of the population of the country.

How was your Series D investment different from your other rounds?

When we did one of our rounds, our CEO had to go and spend a month in California meeting with various firms, going to their pitch meetings, talking to the partners and trying to share what we were doing. Tiger Global Management was so incredibly excited about the progress we were making that they just came out to see us.

Our initial response was, ‘We’re not raising capital right now. Love what you guys are all about, but we don’t have a lot of time to meet. We’re focused on trying to build an exceptional company here.’ And they said, ‘We’re coming out to see you. We are coming to Columbus. We’re bringing our team to you because we want to talk. We think this is just an insane opportunity and we want to be involved.’

Did you give board seats to your investors?

Our VC firms in the first three rounds each have a board seat, but Tiger doesn’t take board seats. They invest capital and leave the management team to operate and run the business. They are not concerned with getting involved in the actual operations of the company.

Something we look for in each round we raised is the expertise they have. A lot of VC firms have a broad perspective on industries as a whole. For them to be able to share their lessons with us in terms of what’s worked well with other companies, what hasn’t worked well, what they’ve seen happen and what they’re seeing happening in the space across all their investments is a large contributing factor to us.

We have seven seats on the board. Investors have three of them.

If Drive Capital hadn’t made the initial investment, what do you think would’ve happened?

It’s quite possible that without Drive Capital being here in Columbus, Root wouldn’t exist at all. Maybe there would be some other startup somewhere else pursuing this idea because the idea itself is sound, but I think trying to set up shop initially here in Columbus, the amount of capital we needed initially to create Root was really only made possible by Drive Capital and their belief in what we could achieve.


Dan Manges is co-founder and CTO of Root Insurance. At ASPIRE 2018, he spoke on the panel “Picking Winners: How Companies Attract Capital,” sponsored by U.S. Bank and Clark Schaefer Hackett. Manges and co-founder and CEO Alex Tim were named one of the 2018 Dealmaker of the Year award winners.

The rise of corporate venture funding

Corporations are waking up to the possibilities

Pittsburgh’s old industrial companies are paying attention to startups and Mike Matesic thinks the surge in corporate venture funding bodes well for local M&A activity.

“If you’ve got a major Fortune 500 company that’s now a customer and investor in you, other investors take notice of that,” says Matesic, who led and invested in multiple startups before creating Idea Foundry to foster and invest in innovative startups.

As president and CEO, Matesic has assisted more than 200 regional startups with funding and growth. Now, he’s excited to see more established Pittsburgh corporations investing in startups and seeing their potential.

“Instead of pure, ‘Let’s buy it when it is something,’ it’s ‘Let’s start investing in it before it is something,’” he says.

In this week’s Dealmakers, we spoke with Matesic about how corporations and startups are working together to grow Pittsburgh’s economy.

Launching new products

Corporations are waking up to the fact that startups can launch a product just as easily as incumbent established entities — and sometimes even more easily.

“If they can launch products, why not invest to gain access to that innovation, gain access to that product, and then, maybe access to the company?” Matesic says.

Larger, established corporations are naturally risk adverse. Their structure, and responsibility with regard to profit and loss, budgets and capital expenditure planning, limits their ability to be nimble and disruptive, especially when failure is such a real possibility, he says.

Pitchbook reports that while M&A activity remains high overall, corporate venture capital is investing larger amounts. In a December blog post, the private equity data company stated that “for 2018, the median pre-valuation of early-stage startups with corporate backing sits at $32.3 million, a 29 percent increase from 2017 valuations and 30 percent valuation premium over startups that received financing without CVC involvement.”

Increase the capital base

Corporate venture capital spending is good news for the region because it’s another way to attract more capital and buyers, which has been an ongoing struggle.

When Idea Foundry started in 2002, startups were told they had to move out of the region to get capital, Matesic says. “That, fortunately, is long gone because we have investors investing that don’t have any operations here.”

When outside companies buy startups, it can lead to them opening an office. For example, Amazon bought a small Pittsburgh startup and now has more than 100 employees in the region. Autodesk bought two Pittsburgh companies and had a sizeable team in the area before it pulled back in 2017, Matesic says.

“That’s how we’ve gotten some of our best brands to move into the region, is through acquisitions,” he says.

Entrepreneurs should remember that every time one of their peers gets funded by a new investor, whether it’s an outside company or corporate venture capital, that opens opportunities. Those investors will come for board meetings, and they’ll attend events and look around while they’re in town.

Of course, it can be a double-edged sword, Matesic says. When the startups don’t perform well, those investors aren’t going to be happy with Pittsburgh.

That’s why organizations like Idea Foundry try to make things as easy as possible. And while it hasn’t always been easy to interest industrial-era businesses — and the investments haven’t always come as fast as Matesic would like them — the signs are encouraging.

For Alan Homewood, saying no was more important than saying yes

Over the course of 14 years, Alan Homewood’s weekend project grew into to a multimillion-dollar enterprise, 2Checkout.com. In 2017, a private equity firm acquired majority ownership to combine the e-commerce solution with another company.

“It started out in my garage; I just saw a need and I followed it. I knew that if I didn’t follow it, I would regret it the rest of my life,” Homewood says. “But from there, things started to take off, and I didn’t know what I was doing. I made pretty much every mistake it’s possible to make. If there’s a checklist of the mistakes an entrepreneur can make, I made about all of them.”

Although 2Checkout was a technology company, focusing on online payment processing, the founder and former CEO learned that the key — and what drove the acquisition value — was the company’s leadership.

Over time, Homewood brought in other people. He went outside the company as often as possible. He networked, joined organizations like Entrepreneurs’ Organization and read as much as he could.

Homewood discussed the growth and sale of 2Checkout as a panelist at ASPIRE 2018. Here are some of his observations.

What stands out from the sale?

An entity came to us and wanted to buy us and offered a larger number than, honestly, I had ever thought or dreamed the company might sell for. We went through a process and evaluated what the company seemed to be worth, and it seemed to be a fair offer.

As we went along, I started asking, ‘What are they going to do that we can’t do?’ The answer I got back, in general, was, ‘Well, there was nothing they were going to do that we couldn’t do.’ So, I said, ‘Why don’t we just do it? Why don’t we be them?’

My management group was like, ‘Whoa, I can’t believe you’re doing this.’ But then we buckled up and said, ‘Yeah, that’s right. Let’s do this.’

A year later, that entity came back and offered us three times as much for the company. At that point, it was hard to say no. But I learned that sometimes it’s more important what you say no to than what you say yes to.

In hindsight, what would you do differently?

I would understand who I was getting in business with, what was driving them, what their motivations were. In the subsequent months, the entity that purchased us had an individual with a huge ego who believed they could swoop in and run a company from afar and then swoop off again. Over the course of time, we lost every good upper management person that we had, replaced with somebody who was a hired gun — and subsequently the company struggled.

I had two entities competing on the company. I would’ve looked at where they were in their process and who we’re going to be in business with. If you’re being purchased by a private equity interest, it’s very important to understand where they might be in their cycle. We were at the end of their fund, and even worse, that PE fund was on its way to renaming itself and becoming something else.

Where did you get your capital to grow 2Checkout?

I bootstrapped my business. I don’t think anyone would have given me money, honestly.

What’s your advice for other entrepreneurs?

Columbus is very open. As time went on, I started to realize how easy it was to reach out to people who have been there, done that before. It is unbelievably humbling to think how gracious so many people are. They’ll help steer you, guide you and turn you over to resources as if they had known you their whole life. So take advantage of that in Columbus.

Alan Homewood, founder and former CEO of 2Checkout.com, was an honorary chair at ASPIRE 2018. He spoke on the panel, “The Good, the Bad & the Ugly: Entrepreneurs’ M&A Roundtable,” moderated by Smart Business publisher Dustin S. Klein.

It’s never too early to think about selling your business

When 24-year-old Tim Eippert bought MC Sign Co. in 1994, it was an $80,000 business that he financed for $4,000 a month. He started down the dealmaking path in his mid-30s and was the youngest business owner in his CEO peer-to-peer group. But he realized if you start thinking about selling at 55 or 60, you’re 10 or 15 years behind.

Today, MC Sign has annual revenue of over $100 million and employs about 280 people. Eippert has sold the company to private equity three times in the past 10 years; his first sale was at age 38.

“We talked with both strategic and financial buyers, and they kept coming back with questions. ‘Why is this guy selling? Look how young he is.’ That was one of the bigger obstacles; why would somebody that age do that?” says John F. Herubin, managing director at EdgePoint Capital.

In a discussion moderated by Herubin, Eippert’s case study was dissected at ASPIRE 2018 by Eippert, Jeffrey J. Conn, member in charge, Pittsburgh office, Clark Hill PLC, Christopher Hepler, director of corporate development, Wabtec Corp. and Dennis G. Prado, managing partner, Main Street Capital Holdings LLC.

Here are their thoughts.

Understand the rise of reps and warranties insurance

“It’s purchased more frequently on the buy side. It’s easier to underwrite on the buy side because the buyer typically will have reports done — the quality of earnings report, a due diligence memo, etc. On the seller side, that’s not available. Eighteen percent of buy side insurance has claims brought against it over the last couple years, 29 percent on the sales side.

I don’t think will be surprising to anybody that the most breached rep that caused claims is the financial statement rep. The second most breached rep was the compliance of laws rep.”

—Jeffrey J. Conn


Make a long-term commitment

“If you are an entrepreneur and you do go down the PE route, you’ve got to be ready. Once you sell to PE, you’re probably in the PE game for the rest of your life.”

—Tim Eippert


Move fast

“One thing that’s changing in the last two, three years is the due diligence phase, the documentation phase. When you get done with the management presentation, you select the buyer. It used to be a 90-day period to close, and now it’s 30 to 45 days. That’s the market right now, so you have to move very fast.”

—Dennis G. Prado


You can’t overprepare

“All three times I’ve done it, it really is a second job. If you work 40 hours now, you’re going to work 80.”

—Tim Eippert

“Make sure you avoid spooking the buyer. If you’re prepared, obviously it will create credibility for you with the buyer. And it’s nice to know that you know what those issues are that will arise during the process.”

—Jeffrey J. Conn

“You just don’t want surprises as a buyer, and the only way to do that is to prepare. So surround yourself with good people.”

—Christopher Hepler


Seek out those who have been there, done that

“You have to find those two, three or four people that you trust, that have done it, that have great experience that you can lean on. It’s an emotional ride when you’re selling a business that you own 100 percent of, and you’re trying to pick a partner from one management meeting and three dinners and maybe four times at your office.”

—Tim Eippert

“You shouldn’t be focusing on just maximizing value. Talk to former CEOs/owners who have sold to that private equity firm and strategic buyer and ask them what life is like post sale. For an extra 10 or 15 percent of the proceeds at close, it’s not going to be worth it if your life’s going to be miserable for the next five or six years.”

—Dennis G. Prado


Look beyond the money

“From the strategic side, alignment of vision is key. Where do we think about taking the business? Where does the owner think about taking the business? Get alignment around that in the process, because if you don’t have that, it’s going to be an ugly marriage.”

—Christopher Hepler

“The financial piece is really important, but you can’t turn the business off. I’m still the president and CEO the next day, and I have to live up to what I just told (the PE firm). They have a huge investment in me and my team, and I have a duty and obligation to them — and we’re all alike because we’re all investors in the business.”

—Tim Eippert

Lazear Capital’s Ted Lape on transparency, creativity and the rise of ESOPs


Lazear Capital Partners isn’t afraid to deliver bad news to business owners who want to sell.

“We do a ton of education for sellers for free because we don’t want to take money from someone who doesn’t understand what they want to do,” Partner Ted Lape says. “Sometimes we do an enormous amount of work upfront, just to tell people they shouldn’t do a deal.”

People appreciate the firm’s honesty and groundwork, and the effort often turns into referrals.

But the education hasn’t been limited to sellers. Lape, who started in banking, considers his two partners, Bruce Lazear and Michael Morosky, to be mentors.

“It’s funny, even though we’re all partners — I think I’ve learned more from those two than I have from anyone else,” says Lape, who’s been with the consulting firm for about a decade.

In this month’s Dealmaker Q&A, we spoke with Lape about transparency in dealmaking, the rise of ESOPs and his most memorable deals.

What are some qualities shared by successful dealmakers?

The best dealmakers ask a lot of questions up front. Seminars and trainings tell you to do that, but a lot of people don’t do it very well. They don’t really ask the questions to understand what the client really wants. And then, obviously, listening to those answers is key.

Sometimes people want to do the same deal over and over again because they did it once and it worked. Investment bankers or buyers have a structure that works. They know it. It’s easy to replicate. So, sometimes they try to take the seller and cram it into that structure — and that doesn’t work well.

For example, we do M&A, but we do a lot of ESOPs. In the ESOP world, people tend to do the same deal over and over again. Every one of ours is different. We try to be creative when we’re doing a deal.

You mentioned ESOPs. Are they a trend?

We go through M&A and ESOPs as options, as well as recapitalization, and we actually make more money per deal if we do an M&A transaction. But when they really understand both options, more people are picking ESOPs.

What are some of the advantages of ESOPs?

Selling to your competitor that you’ve been competing with for 10 years is harder because the seller is probably going to be out of a job or things are going to change dramatically. A lot of their people may be out of jobs. The legacy may be gone. So, there are all those problems. But then, doing the deal itself is a lot harder.

In an ESOP, it’s very collegial. It’s hard to explain, but everyone is working together. In an M&A transaction, by its nature, it’s adversarial. Everyone is trying to be the winner, not the loser. So, it’s very confrontational. I think we do a good job of protecting the owner from a lot of that, but it’s the nature of the deal.

Then there’s also a lot of concerns about confidentiality. Word gets out and all their competitors learn that they’re for sale. Their clients learn they’re for sale. Their employees learn they’re for sale, and it creates a lot of problems. You don’t have that in an ESOP.

So, there are some advantages in the way they’re done, and in the outcomes that people seem to like a lot. Not to mention all the tax advantages.

What are a few memorable deals Lazear has worked on?

There are two. One, we helped Lyon Video decide what they wanted to do. We looked at both selling to competitors and an ESOP. We went down both paths. Ultimately, Bob Lyon, the seller, decided that an ESOP was right for him for a whole bunch of reasons.

That was the first ESOP we did at Lazear Capital — I had done a number before that — and it really propelled our business because we went on to do more and more.

The second one is we sold Progressive Medical to a big hedge fund. Progressive Medical is a fairly large local company, and the buyers were basically Wall Street people. They were very aggressive on the buy side. They wanted to do a lot of things that weren’t good for the seller, and we did a great job helping the seller to get a great deal.

What’s your approach when a deal starts going off track?

First of all, we’ve been very fortunate. Almost every one of our deals has closed, and a lot of that has to do with the fact that, on the M&A side, we’re very careful who we take on and they’re serious about selling. On the ESOP side, we do a lot of work up front to tell them what they’re going to get.

But unforeseen things do happen. For example, we’re in the middle of a deal now where the seller had a big dip in earnings. So, what do you do then? Well, we’re sticking with the client and we’re learning about what they’re doing to fix that, so once they fix it, we understand the story and how we can tell that story to the prospective buyer.

Rivers of Steel’s August Carlino on risk, negotiating and preserving a legacy


August Carlino would argue that nonprofit acquisitions are riskier than their for-profit counterparts.

“That’s how we get funded. We take risks that a for-profit corporation a lot of times won’t do,” says the president and CEO of Rivers of Steel, which preserves and manages historic, cultural and natural resources related to steel and its associated industries.

There’s no long-term financing backing the deal. The nonprofit has to keep proving its case.

Carlino experienced this firsthand when Rivers of Steel acquired RiverQuest, and the nonprofit’s 94-foot ship, which was later rechristened Explorer, in 2016.

“Every year, I’ve got to go back and prove to the foundations that we’re ‘righting the ship,’” he says. “After the first year, they asked, ‘Well, what happened?’ And I said, ‘Look, we said give us three years. Here’s what we encountered in the first year.’ If we fail, that asset fails back on the foundations’ plates, and they don’t want to have to deal with a boat.”

Rivers of Steel expanded RiverQuest’s too-insular model by making Explorer available for public tours and private rentals, and in just two years, the floating STEM classroom was in the black— a year earlier than planned.

In this month’s Dealmaker Q&A, we spoke with Carlino about what gets his blood pumping, the RiverQuest deal and his advice for other dealmakers.

Although RiverQuest was your first acquisition, you’re experienced with buying property and negotiating. What do you enjoy about dealmaking?

Part of my job involves public policy, and there’s dealmaking in that as well. I get down to Washington or out to Harrisburg a lot. I have to work with legislators on both sides of the aisle, trying to craft things that would make people lose their hair.

As much as I like and I’ve learned about real estate transactions and corporate mergers and takeovers, the thing that still gets my blood going — because this is where my background and training is, I came off of Capitol Hill in Washington and I was a lobbyist for a number of years — is when I’m going to D.C. or Harrisburg.

It’s a world that’s different than what most business people are involved in, especially nonprofits.

What do you dislike?

When you deal with people who lack sincerity or are misrepresenting themselves; when you can’t trust, and you find out they’re double-dealing on the side. I don’t have time for that.

You and I might not ever agree, but I’m going to tell you upfront every time, this is where I have to be, and this is why I disagree with you. At the end of the day, we can shake hands, or we can walk away, but you’ll know my sincerity.

You just don’t get that from people. Sometimes people are deliberately underhanded. Sometimes people are just afraid to tell you the bad news. We’re all adults in this. Don’t string me along — just tell me.

How did the RiverQuest deal come about?

I read one day in the newspaper in 2014 that they were looking for a merger partner or they were going out of business.

So, I called and left a message for the executive director whom I didn’t know. (They had co-executive directors.) I said, ‘We’ve partnered with you in the past. I read this article. I don’t know if we’re your merger partner, but I would love to talk to you about how to help.’

That led to a series of conversations that ultimately led to us and RiverQuest approaching the Pittsburgh-based foundations to do a strategic plan — basically a business plan that, if we took them over, explained how we were going to make their operations sustainable.

How did buying the boat preserve RiverQuest’s legacy and help your organization?

RiverQuest was far too important for this region. That was my motivation as much as what we could get out of it as an organization. The loss to the school kids would have been devastating. Over their 20-year history, they have put maybe 100,000 kids on that boat.

We could build our organization by adding a component that we didn’t have, which was river-based tours. We always wanted to have that. We’d done some [tours] with RiverQuest, but when you don’t own the boat, you don’t dictate when the boat goes. We were also trying to build more outreach into schools, and they had an incredible school base.

What’s a key principle you follow in dealmaking?

I’ve tried always to figure out where are the win points for me and my organization, and where are the other party’s win points. And, where are things that I just can’t move on — and everybody has those.

My goal isn’t necessarily to take everything they have and move it over to my side of the table. My goal is, ‘Let’s get this done. For us, let’s make the communities better in the work that we do and the investments that we’re going to provide.’ And then, wherever the deal is for the people sitting across the table, make them come out of it so that they’re happy with what the end result is, too.

In the end, we get a big public relations statement. Public officials and foundations are happy. The last thing I need is to have somebody angry at me — and you never know who they’re connected to. So, a year or two down the line, I could be sitting in front of a foundation whose board member knows this person and says, ‘Auggie was a S.O.B. in this whole thing.’ I don’t need that. That doesn’t mean I’m a pushover. We’re here to do business, but finding win points for both parties is important.

ChromoCare’s Hugh Cathey learns from success — and failure


Making money from a deal is great, but that’s not what drives Hugh Cathey.

“It’s easy to say that you enjoy making money,” says Cathey, a serial entrepreneur and venture capitalist who’s invested in nine early-stage companies over the past 15 years. “That’s not special. Everybody enjoys doing well financially.”

Seeing employees benefit from that success is the real incentive, says Cathey, who has taken an advisory or operating role in all of his businesses, leading five to exits with a positive ROI. For example, there was the day his executive assistant sold her stock options after the company’s IPO. She used the money to pay off her house, fund her daughter’s college and buy a new car with cash.

“I never preached that everybody had to share the wealth; I just did it because that’s the way I was raised,” Cathey says.

In this month’s Master Dealmakers, we spoke with Cathey, currently CEO of the startup ChromoCare, about what’s changed in M&A, one of his biggest deals and the importance of learning from career wins and losses.

Dealmaking, then and now

Capital was easier to come by. People — high net worth investors, angel funds and so forth — were willing to take more risk in their investments. Today, investors are more thoughtful about the companies they invest in. They look harder at the management team and their track records. They look harder at the uniqueness of the product or service. Raising capital is a more deliberative process than it was 15 years ago.

There are more nuances to it now. We need to be building a company to be a good company. Then, if you do that well, a good exit will come. I don’t think it’s right to say, ‘We’re starting this company. We’re going to build it and sell it, and that’s our plan.’

Today, it’s easier to find the company that will acquire your entity. There are more large companies out there that are willing to go in and buy a $10 million annual revenue company with the belief that they can expand upon it to fit into their portfolio of products or services.


Hitting a winner

I joined up with a Columbus-based e-commerce software company, Znode, in 2007. I joined them right after they started. It was two software engineers — very bright guys. They had a great idea for building an e-commerce platform that companies wanting to sell online could implement. It would speed their path to selling online. Remember, this is 2007, e-commerce was new.

We bootstrapped from 2007 to 2010. I spent a lot of time on product development. Then, we raised about $1.5 million from individuals and the Ohio Tech Angel Fund. So, I found the capital and the bulk of the customers. In 2012, we’d generated about $2 million in annual revenue the prior year. We found a buyer, through an introduction of a friend of a friend of a friend, who needed an e-commerce platform to incorporate into a $6 billion company.

Their initial offer was to pay $18 million for the company and its debt. We had about $2 in debt. So, they paid $20 million for a company generating just under $2 million in annual revenue. In two years, we returned a 5x return to the investors — and that’s a grand slam. It’s still one of the highest IRRs achieved by a Columbus company.


A learning process

I was involved with a local telemedicine company called HealthSpot. We’d raised about $45 million in Columbus-area capital. That’s a major accomplishment, to raise that much money in one sitting. The company ended up going into bankruptcy amid litigation.

We developed our product to be a Cadillac product. If we had it to do over again, we would have built an economy car, gotten it in the market, gotten early customer feedback, and then started building out the Cadillac version after we had more customer data.

At one point, we had no revenue and 100 employees. If you are a $100 billion company that’s no big deal, 100 employees is nothing. If we had that to do again, we probably wouldn’t have hired half of that. I mean, we had a five- or six-person marketing organization. You just don’t do that in a startup. It was all well-intentioned. We did the absolute best job we could, but we learned some valuable lessons en route to our failure.

All I have is my reputation. After we put the company into bankruptcy and the bankruptcy closed, I went back to the investors to talk to them and see how they felt about me. I needed to know whether or not that they felt I was still an investible person, and I got positive feedback from all of them.


The last word

Investors are looking for people who can say, ‘Yeah, I had a major failure in this situation and here’s what I learned from it.’ Investors are willing to recognize today, more than they would 15 years ago, that having a failure or two — and I’ve certainly had mine — makes you a more seasoned manager.

Tough to say whether past performance can predict next M&A downturn

The Columbus economy is stronger than ever, with new jobs added month after month. However, that begs several questions: What’s next? Are conditions similar to 2008? Could a downturn be on the horizon?

Matthew Leahy, director of corporate development at Greif Inc., has noticed a disconnect between public and private market valuations. Public markets value businesses based on forward earnings, whereas private transactions are generally trailing.

“To some degree there’s a disconnect there — someone is right, someone is wrong. Public market investors could be too bearish, but at the same time, it creates an interesting nuance,” he says.

Leahy, who spent a decade on Wall Street working at several large hedge funds, discussed the M&A market as a panelist at ASPIRE 2018. Here are some of his observations.

What are the similarities between now and 2008?

In the public markets, you’re back to close to premium multiples — S&Ps trading by 18 times next year. In the private markets, you have your classic late-cycle acceleration of both number of deals and multiples. You have companies reaching slightly beyond their core, a record number of transformational deals being announced, people looking for that proverbial third leg to their business. The debt markets are highly supportive, and CEOs’ confidence is really high right now.

Do you think dealmakers are better prepared today?

It depends on which person within the deal we’re talking about. I think the bankers are very prepared to execute deals to whoever wants to sell or buy. … I think private buyers are still cautious because they’re looking at where multiples are right now and they’re wondering how they got here, versus two or three years ago. I think private equity firms are feeling pressure to execute deals, which is a new phenomenon given the amount of capital that they’re sitting on. And I think the public markets are cautious around deals; they’re punishing companies for doing bad deals.

So, you have this strange mix of excess capital, private buyers who need to actually deploy that capital and multiples near peak numbers. But the economy is really strong, margins are good and companies are doing well. …

I don’t know if anyone’s better prepared or worse prepared. It’s just different.

How is this late-cycle investing situation different?

In the ’90s and early 2000s, guys would wake up on Jan. 1 and figure out: Am I making 20 or 25 percent this year? And now it’s like if I can get high single digits, I win. The whole investing environment has changed so much.
Now, you have so much more influence of passive funds, quantitative funds. These massive platforms, SAC Capital (Advisors), Millennium (Management), Citadel — these guys are dominating market volumes right now. They’re driven by risk constraints that don’t allow them to lose more than 3 or 4 percent in any given year, and so, they’re naturally more risk averse.

In this market, how can buyers find value?

You’ve got to traffic in areas where people are afraid to go. So, a year or two ago, it was energy assets, right? We wouldn’t even lend to energy companies. You basically could buy energy assets at four or five times EBITDA a year and half ago, and now look where they’re trading. Oil has gone up and done better, but at the time everyone was afraid.

What could be a sign of trouble ahead?

A deterioration in credit quality and credit metrics. I think generally a lot of the boom-bust cycles have been driven by credit supply and changes in credit supply, and it’s one thing to watch closely.


Matthew Leahy is the director of corporate development at Greif Inc., where he leads the global packaging firm’s M&A efforts. He spoke on the panel, On the Front Lines: An Investors’ M&A Roundtable, which was sponsored by Ice Miller and moderated by firm partner Rob Ouellette, at ASPIRE 2018.

Best practices to follow and pitfalls to avoid with your next acquisition

So, you think you know what it takes to buy a business? With the range of available financing options and a red-hot M&A market, there’s a lot to consider.

Finance-minded experts and entrepreneurs shared their experiences at ASPIRE last year. The discussion, moderated by Brian Dobis, senior vice president of commercial banking and C&I team manager at S&T Bank, featured:

Douglas P. Brosius, Partner, PNC Mezzanine Capital

Jeffrey A. Ford, Partner, Grossman Yanak & Ford LLP

Matt Harnett, Partner, Tecum Capital

Bob Petrini, President, Chick Machine Co. LLC


Strategies for buying

As long as the basket looked good, I was OK with putting all of my eggs in one basket.

—Bob Petrini

In this type of competitive market, you have to be able to turn over every rock that you find and see if there is a deal there.

—Doug Brosius

If you are already so invested that you can’t walk away, you’re probably losing objectivity. Maybe you’ve decided emotionally you need to do the deal from either the buy side or the sell side, maybe you’ve invested so much the breakage fees are too high, financially. But if you lose objectivity, you miss too many other things.

—Jeffrey A. Ford


Your adviser’s role

We know they just put a little lipstick on this pig, and our job now is to wipe off the lipstick a little bit and see what the creature looks like underneath — allow our client to see what this creature really is going to look like, how will it behave, how much will the cost be to assimilate it into my herd, and what other baggage will it bring with that.

—Jeffrey A. Ford


Make a note

Everybody thinks of customer concentrations, but that is so obvious. Nobody needs us to find a customer concentration. We have found more fascinating things in other concentrations: over 70 percent of sales represented by one salesperson who happened to be over 75 years old. So, be aware of your concentrations and your ability to hang onto them and transfer those.

—Jeffrey A. Ford

You start out as a seller, always, as a buyer. You have to sell yourself and establish trust, and then get to where you can flip the switch and become the buyer.

—Bob Petrini

Entrepreneurs are very proud, ‘Hey, I built this company with everything I did here.’ Just bottle all of that up when the investor comes and make sure, if anything, you downplay your role.

—Matt Harnett


Timing matters

During due diligence, mostly all that can happen is bad things. The company can fall off in performance, you can find terrible issues. So not that you want to rush to get a deal done or you want to see these issues fall out, but you have a finite period where you can go in and evaluate these things.

—Doug Brosius

The one thing that I would have done differently would be sense where the seller was and make direct contact there more and push the process to the extent I could.

—Bob Petrini


They’re professionals for a reason

If you’re really trying to grow it, grow value into a larger enterprise, I think you’re smart to have an institutional investor. And if things get rocky, you’d like to know you’re dealing with an institutional investor that’s used to working through covenant issues, used to managing investments in good and bad times, is a good partner. Whereas, if you have a personality who is really emotionally attached to a business, things can get really sour really quick if he doesn’t get his interest payment.

—Matt Harnett


Red flags

At the end of the day, we are in business to put money to work. So, we don’t want to lose it, we want to get good returns. But don’t blow up a deal with 10 people on the phone if it’s really not an issue.

—Matt Harnett

Letting the process happen is probably the wrong approach. It’s like, if you’ve ever fly fished, it’s catching that trout. Don’t let too much line out. Don’t pull it too tight. Either way, you’re going to lose the seller.

—Bob Petrini

We have observed, over the years, that no matter what the contract says, no matter what the indemnifications say, too many of the employer-related items or customer-related items end up being borne by the buyer. Even if the agreement says the seller was responsible, you’re still going to pay the PTO costs or the sales tax that wasn’t collected from the customers.

—Jeffrey A. Ford


Seller financing in moderation

A lot of these transactions where the seller is willing to take seller financing, either doesn’t want to let go of the business or can’t quite get the value anywhere else or there’s just some dynamic going on that says, ‘Hey, maybe this isn’t the right situation or maybe we are approaching this situation the wrong way.’ So again, our bias is always seller financing is good, it’s cheaper, but it has to be manageable.

—Doug Brosius