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Why Investors Bet on the Future of Alternative Protein

By Lou Sokolovskiy, Founder & CEO at Opus Connect
June 2021

Why Investors Bet on the Future of Alternative Protein

Alternative protein sources have become a hot topic in recent years, and the Covid-19 pandemic appears to have only pushed it to the forefront. Data suggest that the 2020 sales of plant-based meats and milk grew by 45% and 20% compared to 2019, respectively. A new report released by Research and Markets this month predicts the plant-based market to grow to $20b in a decade. It’s valued at below $7B now.

We talked to several dozen investors on whether they believe the growth of the alternative protein market is long-term or just a temporary trend. Here’s what they had to say.

“We think plant-based proteins is here to stay,” said Scott Porter, Managing Director of Food & Agribusiness at Cascadia Capital, a Seattle-based middle-market investment bank. “We don’t think it’s a fad. We think it’s a long-term trend and shift in consumer preferences in food technologies.”

Though interest in plant-based diet dates back to long before Covid-19, the pandemic appears to have served as a catalyst for the trend with the growing concern that animal-based products might be at a higher risk for spreading the disease.

A major study published this week provided further support for the argument that vegan patients may be less at risk of dying from Covid-19. The medical research, conducted by several scientists, concluded that people who followed plant-based diets developed milder symptoms of the disease than those who consumed animal-based products.

Asked if he were to invest $1 million in a sector, what it would be, Fred Kaplan with New Jersey-based Stony Hill Advisors showed no hesitation in answering.  “I definitely would invest in plant-based proteins,” he said. “I think we’re going to find more and more mainstream restaurants offering plant-based [food]. Certainly, the food service for the elderly is offering more plant-based options. I think this is only going to grow further and further,” he added.

Don’t expect meat to disappear from the American diet anytime soon, but meatless options are becoming more popular. Nowadays, alternative proteins include everything from fuels to animal feedstuff. There are even meatless alternatives for burgers, steaks, and chicken nuggets.

But one of the key reasons that make many investors bullish on alternative proteins now is the growing dedication from the public and, in turn, politicians to protect the environment and reduce global warming emissions- a primary source of livestock pollution from cows that produce methane gas, as well as feed production.

“You have a unique customer base there that is sort of evangelical, and they really believe in your mission, and I think any company that is giving away a portion of their profits or helping the environment, planting a tree for every certain number of sales or any of those trends,” said Blake Shear, the director of The Forbes M+A Group, based in Denver, CO.

Despite the growth in demand for alternative protein, it’s still small compared to the $95-billion meat industry in the U.S.

“I think the trend is we continue to eat more and more meat…I do think people are supplementing their diet to some extent,” Shear said.

Globally, Brazil was the world’s largest beef exporter in 2020, followed by Australia, the United States, and India. Those four countries exported more than 1 million metric tons of beef throughout the year.

In 2020, more than 20% of global food launches were plant-based. More than 50% of this figure was in Europe. The U.S was responsible for only 11 percent.

“I would say that the people who actually did the best were people who were in the alternative protein sector, said Adam Bergman, managing director of EcoTech Capital, an M&A advisory firm. “People were just getting concerned about the interaction between humans and animals because of where Covid came from,” he added.

According to WHO, the Covid-19 virus likely originated in bats and passed from animals to people. The first case was reported in Wuhan, China. There is no evidence to suggest that eating meat-based products makes people more susceptible to Covid-19.

Meanwhile, plant-based meat alternatives, or meat analogs (MA) as they are sometimes called, have received increased media attention. MA products can be made from various ingredients, including soybeans, wheat gluten, and pea protein isolate.

“I think that the plant protein moment has seen as high watermark,” Ivan Saval, managing director at National Securities, a New York-based brokerage firm. “And it’s going to be commoditized and that it’s going to competing with the traditional protein categories,” he added.

Tell us what you think on LinkedIn, Instagram, Facebook, or Twitter! @opusconnect.

Should You Sell Your Company Now?

By Lou Sokolovskiy, Founder & CEO at Opus Connect
June 2021

Should You Sell Your Company Now?

We spoke to nearly two dozen prominent investment bankers to provide you with an informed insight on whether to sell your firm or not during these uncertain times.

Should I sell my company now? As Covid-19 has subsided in recent months, many business owners have given this question a lot of thought lately. With the Democrats controlling both chambers of Congress, U.S. President Joe Biden is trying to make good on his campaign promise to raise capital gains taxes. Despite or because of that, the mergers and acquisitions (M&A) market is booming. In 2021’s first quarter, M&A activity increased by 6% compared to the first quarter of last year. There are many factors to weigh before selling a company, but we wanted to offer some insights from prominent investment bankers to allow owners to have more information as they contemplate their options.

Reasons for Selling:
There are many reasons that a business owner must consider when it comes to taking their company to the market. While some of the factors that encourage an owner to sell a firm are unique to that business’s needs, other factors may be related to the current political climate and economy.

Most of our interviewees agreed a company’s valuation is the number one factor to consider before selling. A robust valuation can happen when there are more buyers and low interest rates on debt, as is the case now.

“We’re seeing an upswing in appetite and valuation,” said Scott A. Davis, director at Provident Healthcare Partners in Boston, MA. “I think people were worried about 2021. That obviously didn’t come to pass,” he added.

For some financial advisors, the time has never been better to sell a company. “It’s kind of like the perfect time to go to market,” said John J. McDonald, general counsel and managing director at New York-based Bankers Capital International, “We’ve got valuations at all-time highs.”

While the M&A market has largely witnessed a significant boom, Reuters reports that one sector has not fared as well: the real estate. As companies increasingly embrace remote work, few people appear to be interested in buying office buildings.

A second factor to consider is the Covid-19 impact on 2020, leading the government to pump priming money into the economy through several stimulus relief checks to the public, making potential buyers less concerned with the present market.

“The government is obviously stimulating the economy, and the economy is reopening, and there’s a lot of optimism in the U.S. market,” said Emery Ellinger, an advisor and founder of Aberdeen Advisors, a Florida-based M&A firm.

Ellinger added that the retirement of the baby boomer generation is “probably the biggest factor” for the increase in M&A activity. The boomer generation refers to people born between 1946 – 1964, following World War II. Many boomers are business owners who became fatigued by the pandemic and may want to retire earlier than planned.

“Covid really shook a lot of business owners,” he said.

The final reason is related to the political climate. Democrats control both houses of Congress and the White House. President Joe Biden won on a campaign to increase capital gains tax rates from 20% to 39.60% on companies making a million-dollar profit or higher. Biden has already proposed the bill, and if approved, experts say owners will need to carefully weigh the pros and cons of selling.

“It’s inevitable that there’s going to have to be some more taxes collected across everyone, companies, individuals, and so on,” said Geoff Long, an M&A advisor with Texas-based legal firm Thompson & Knight.

“I think it’s a well-founded fear that especially with the capital gains rates being very low at the moment, people are that certainly motivated to sell sooner rather than later in 2021,” he added.


Reasons for Waiting
The investment bankers and advisors we interviewed provided several other reasons for business owners to not sell their company this year. For instance, if a company is suffering financial difficulties or poor management, selling may be wrong for both investors and employees.

“If there’s a company that hasn’t had about a 75-80% recovery from the Covid experience, then they might want to wait a little bit longer until things stabilize,” said Rebecca Leiba, senior managing director at Provident Healthcare Partners in Boston, MA.

While the Covid-19 pandemic caused some companies to lose money, it was a blessing for others. But regardless of the impact, M&A brokers look at a broader period to assess a company’s financial health.

“We’re trying to normalize that,” said Bruce Vanderlaan, a senior advisor at Mertz Taggart, a Florida-based M&A firm, “and take a look at 2020, especially the 2nd quarter, and to say this is a blip on a radar. It’s a one-time event. We don’t expect to see it again, and so we’re either going to ignore or normalize that.”

Leiba agrees: “You never want to look at a short moment in time in analyzing a company. You really want to look at that historical perspective.”

The final reason for waiting is that your company may not be ready for sale because of inherent reasons such as low EBITDA, poor management, or other issues which will hinder the sale process.

“You have some companies that just can’t be sold,” said Roy Johnson, an M&A Advisor at Connecticut-based Touchstone Advisors.

“They may have poor management. They may have suffered financially. They might have margin erosion, that sort of thing you may have.”

Should you sell your company now? It’s a decision that only the owner can make, but we hope this article has helped educate them about their options. If you are considering selling your company, it might be wise to speak with an expert first so you can make the most informed decision possible about this critical life change for yourself and your family. Tell us what you think on LinkedIn, Instagram, Facebook, or Twitter! @opusconnect.

Adapting to Our Post-Pandemic Landscape: Insights from the Opus Connect Community On Seven Key Challenges Facing the Middle Market M&A Healthcare Sector

By Lou Sokolovskiy, Founder & CEO at Opus Connect
April 2021

Adapting to Our Post-Pandemic Landscape: Insights from the Opus Connect Community On Seven Key Challenges Facing the Middle Market M&A Healthcare Sector

This month, Opus Connect is taking a look at the healthcare sector, especially since it has been closely watched and played an essential global role as we recover from the COVID-19 pandemic. Through our discussions with active middle-market deal makers, we’ve gathered their insights into one place to promote awareness of current practices as well as the speed and growth potential for deals going forward.

In a direct response to the COVID-19 pandemic, the healthcare sector is changing and growing, seeing greater utilization of digital resources and new technologies as some – but not all – parts of the deal process transition to virtual interactions and events. As the global scenario changes, business processes are adapting and growing in a variety of ways – here are seven challenges facing healthcare and how we can use these insights to make informed decisions during every step of the deal process.

1. Create an in-person and virtual hybrid model

In a sharp upward trend since the fall of 2020, deal professionals are once again traveling to meet prospective buyers, sellers, and capital providers. The majority of respondents are once again conducting in-person meetings, with greater virtual meetings augmenting the previous in-person processes. James Olsen, Founder & Managing Partner at Concord Health Partners, provides insight into this new hybrid process by noting that for a time, “there were a couple deals where we did everything virtually,” and, ultimately, during the late summer and fall we were able to meet in person. I think we’ve become comfortable operating virtually and doing our diligence and having lots of engagement through video. It’s been efficient.” As the pandemic levels grew throughout the winter and are presently showing signs of decreasing with the rollout of multiple vaccines, this hybrid process of both virtual and in-person meetings is likely to be more prevalent going forward.

2. Adjust expectations to a longer deal flow timeline

Quite a few of the deal pros that we interviewed told us that the entire deal process timeline is now longer, with in-person meetings being spaced further apart. This, in turn, necessitates more meetings and conversations that act as check-ins during certain points of the due diligence process. Understandably, less time in person means a decrease in quality interactions, which can create “more delays at every step of the process than before,” especially as valuations are being done remotely with digital tools.

Opus Connect member Andrew Polsky, Principal at Alter Recovery, mentioned some challenges faced regarding the reimbursement side of the business. He notes that “as more people are seeking treatment, the insurance companies are gathering more data, and this increase in information is leading to them clapping down on payment and compressing the reimbursement structure.” Polsky’s insight here provides a window into how and why this veritable avalanche of data is creating longer timelines.

Joseph Ibrahim, Managing Partner at MBF Healthcare Partners, contributed his thoughts, stating that “as we evaluate due diligence, the usual complexities in understanding and developing integration plans presents the challenge of understanding performance” in a post-COVID-19 landscape. Essentially, the risks surrounding purchasing are less apparent as the healthcare industry copes with the demands of the pandemic, thus creating new challenges in conducting due diligence. Our modern healthcare system has not dealt with such a large-scale challenge until now, so we must be mindful of how this affects company performance.

3. How to cope with new, more cautious lending practices

Obtaining debt financing often poses a number of challenges even when there isn’t a global pandemic to contend with – banks are quite cautious at the moment, and facing that cautious behavior is currently seen as a top challenge. In describing the overall state of the debt market, Opus Connect’s M&A network provided valuable insight the lending climate. Brandon Bethea, Co-Founder and Partner at Aterian Investment Partners notes that “our financing went well because by the time we actually entered the market, the market was largely healed.” This sentiment was echoed by Don McDonough, Managing Director at JLL Partners, who said that capital markets have largely returned to where they were pre-pandemic. Additional insight from Renee McCalla-Taylor, Co-Founder & Managing Partner of 4C Capital, discusses the importance of remaining flexible: “We have a lot of flexibility in terms on how we look at deals. We work alongside with the other side so everyone’s happy, so that we can get what we need to get done and get to the finish line.” The characterization of the healthcare sector as “good” and “aggressive” by several respondents is indicative of a rebounding, if not accelerating, market, at least for healthcare.

In addition, it is important to note that the market is not seeing many discounts due to COVID-19. While a few in our community have received discounts, this is not something that should be counted on and most deal flow professionals are not experiencing discount offers.

4. Adjust EBITDA to assess the COVID-19 impact

When calculating earnings, M&A professionals will almost certainly have to adjust EBITDA to account for the COVID-19 impact. This is not necessarily a negative aspect of our new landscape, as increased scrutiny at the beginning can create positive outcomes in the long run as the business continues to grow. If a business or industry vertical has survived or even thrived in 2020 and into 2021, the forecast has great potential for the years to come.

If you’re seeing more challenges than opportunities, you aren’t alone. Regarding EBITDA adjustments, Brandon Bethea described a particular use case in which the challenges of COVID-19 impacted product sales and profitability. “In this case, we were negatively impacted COVID-19. Our product is used in surgeries, both required and elective, and there was a period of time during the year where for elective surgeries in particular were shut down. In addition, the family was very focused on its workforce, culture, and sustainability of that culture. We had to do our diligence and decide for ourselves if we feel like the market opportunity is coming back for this asset.” Since that time, elective procedures and other surgeries are resuming. It is likely that COVID’s impact will be felt less going forward and its absence will create a spike in profitability for this particular company.

5. Pricing and quality of deals is on the rise, but quantity is down

How middle-market M&A professionals in healthcare are viewing pricing, quality, and quantity of deals varies with fluctuations particular to their subsector in the healthcare space. Overall, pricing seems to have remained the steady? or increased, evidence that the healthcare sector is bouncing back from the blows dealt by 2020 and COVID-19 – thus demonstrating market confidence that will provide a boost to middle-market M&A. In fact, zero respondents in our community described deal quality as worse, a telling metric that is showing positive trajectory for the first time in a year.

Quantity of available deals is down according to healthcare deal professionals, and this contraction of deals is expected given some of the stagnation created by multiple lockdowns, the inability to travel, and a slowdown in lending as a result of market uncertainty.

6. Seeking capital partners requires a business development mindset

Cultivating and growing your network are two of the building blocks we focus on at Opus Connect. When it comes to seeking capital partners, Andrew Polsky provides solid, actionable advice that can be readily implemented by the Opus Connect community. He states that “we’re looking for somebody who understands the space, as our place within healthcare is very unique and requires understanding of insurance reimbursement, Medicare, and opportunity on the real state side of the business. We want somebody who can join us in the journey.” Research into the more nuanced aspects of a deal will create better relationships and connections, especially alongside a robust business development strategy. Reach out to your existing network, but don’t be afraid to try new avenues and untapped resources when seeking partnerships.

7. Keep investing in digital growth

The biggest trend for 2021 discussed by Opus Connect’s network of M&A experts is the continued use of telemedicine and any technologies that support home care or virtual appointments. Adam Fried, Partner at The K Fund, concurs with this, noting that he sees trends focusing “around bringing technology and technology solutions into the antiquated parts of the health care system in the U.S.” Since far fewer processes are automated and digital in large, slow-to-adopt sectors like healthcare, further implementation of technology is needed to secure future growth. Andrew Polsky refers to this as “filling gaps in our business” as healthcare continues to adapt and change to fill the vast need created from an unprecedented global health event.

What challenges have you seen lately in your sector? Do they mirror the challenges and opportunities we’re seeing in healthcare? Tell us more on LinkedIn, Instagram, Facebook, or Twitter! @opusconnect.

5 Steps to Take by The End Of 2020

Mergers and Acquisitions events

By Lou Sokolovskiy, Founder & CEO at Opus Connect
December 15th , 2020

5 Steps to Take by The End Of 2020

 

2020 has been a challenging year for many people. Families have been kept apart, jobs have been lost, businesses closed, and parents are pulling their hair out trying to balance working from home with round-the-clock childcare and distance learning. The pandemic has wreaked havoc on both our personal and professional lives, and with 200,000 reported cases in the U.S. per day and a new stay-at-home mandate in California during the busiest retail season of the year, America’s economy is still reeling from the impact of this novel virus.

Some people and businesses are faring better than others. Why is that? Some of it is industry specific; for example, those working in pharma or in tech may even be thriving. But those of us in the private equity and investment banking world have certainly had to adapt and make difficult adjustments this year. On March 9th, I arrived in Chicago for what would be Opus Connect’s last in person event of 2020. When I stepped off the plane, my team informed me that a third of the participants had already canceled. The next morning, we made the decision to cancel dozens of upcoming events, with no idea of when we would be able to reschedule. For the first three weeks of  the COVID-19 national emergency, we had no incoming revenue. And yet, by the end of 2020, Opus Connect is not only thriving, but it is growing. Here are the steps we took to make that happen, and how you can do it too.

Always Be Prepared for a Disaster
I was born in the Soviet Union to a family of post-Holocaust Jews and immigrated to the U.S. when I was 18 years old. My grandparents fled their homes days before they were overrun by Nazis, narrowly escaping the camps and likely death. Once they heard the rumors, they didn’t hesitate, even though it cost them dearly. This somewhat paranoid mentality ultimately saved their lives from the horrors of WWII, and they passed it down to future generations. My parents and I were taught to always be prepared for disaster, to always assume the worst, to always keep the refrigerator fully stocked in case of emergency. So, when COVID-19 hit, I automatically assumed the worst-case scenario: We’d be in lockdown for months if not years. One of the biggest mistakes that businesses made in the beginning of the pandemic was to assume that things would be back to normal shortly. I recall people’s disbelief and outrage over the idea that the virus might affect their summer Europe trip. Due to this cautious attitude, I immediately began working on strategies to pivot Opus Connect and saved months of wasted time.

Drive the Change
Be proactive, not reactive. Very early on in the pandemic, when most people were still postponing conferences and events, I decided not to postpone and instead to go virtual. We were up and running on Zoom within a week, and we have now hosted over 100 events including 30 Deal Connect events virtually. We have not seen any reduction in attendance at events, clients are still making valuable connections, and they are saving countless hours and dollars that would have been spent traveling. I, myself, traveled 162 days in 2019 and spent over 200 hours in the air! Having that extra time has enabled me to be so much more productive and to work on ventures and ideas that I simply didn’t have the time to implement before. For example, for the last 3-4 years we had been exploring the idea of creating a network of mastermind groups, but up until recently we didn’t have the bandwidth to make it happen. The extra time the pandemic afforded me, and other team members enabled us to finally launch Opus Mind, a curated, peer-to-peer community of like-minded M&A professionals who participate in monthly mastermind groups. Opus Mind was one of 30-40 ideas we have had over the last few years. It was one we actually considered launching at the beginning of lockdown and given the environment COVID-19 had created, it was the timeliest one of them all to implement; and so we did just that. This illustrates how important it is to not only continuously innovate but to also always have a backup plan or two.

Think Outside the Box
Be flexible and creative. Tough times can actually serve as a catalyst for innovation. When things are going well, it is easy to be complacent and rest on our laurels, but when something like the pandemic hits, people are forced to think outside the box. The marketplace is more receptive to new ideas and people are more willing to say yes to new things because the old ideas and ways aren’t working anymore. For example, Opus has been a membership and events company for the last decade, but during the pandemic we decided to expand our thinking and focus on being more of a complete solution to our customer base through the use of technology. So, we created our own virtual data room, or software for investment bankers to manage deals, and we simultaneously created a virtual deal platform to integrate this software into a marketplace for buyers and sellers.

Map Out Your Course
Before navigation systems existed, we had to get directions to our destinations before leaving the house. We’d write them down on a piece of paper – turn right on this street, turn left on that street, blue house on the left. The same goes for business preparedness. You must know where you are headed and be able to plot your course if you are to survive the journey. Once you have this roadmap, you can simply move from point to point. Many people talk about having a personal business plan, but few ever create one. A personal business plan includes your goals, steps you must take to achieve those goals, and contingency plans. I suggest having multiple back-up plans so that when you face a dead-end in the road or a difficult path, you can easily turn right or left and still arrive at your destination safely.

Invest in Tools
There are many tools out there to help you implement your personal business plan despite the pandemic. Zoom is just one example of a tool that has changed millions if not billions of lives in the past nine months. In addition to technology, there are other tools that you might find particularly helpful right now: If you don’t have one already, create an advisory board for your business and/or yourself. Make yourself accountable to someone such as a coach, a group, or a learning partner. Sign up for peer-to-peer networking opportunities through offerings such as Opus Connect or Opus Mind. The connections you may make through such events and groups are beneficial in a number of ways: Facilitating deal flow, providing accountability and support, sharing new ideas, helpful tips and information, and in some cases, providing new job opportunities.

Wherever you find yourself at the end of this challenging year, these steps can help you ensure that 2021 is a better year for you, for your business, for your family, and for our world. Happy Holidays and may you be healthy and prosperous in the year to come.

Snapshot of the Family Office Investing Universe: A Q&A session with Michael Felman of MSF Capital Advisors

By Nancy Vailakis
October 6, 2020

Michael Felman is President and CEO of MSF Capital Advisors, a family office advisory firm with 60+ clients around the globe.

Given the complex variety of needs represented by such a large family office base during a 20 year firm history, Michael has a unique and informed view of the current investing opportunity set. His knowledge spans all popular strategies and structures in play today, from complex private credit funds to independent sponsor deals across a broad array of sectors and geographic locations.

Michael has a deep understanding of how and why families invest and has outlined his views in this interview.

Vailakis: Thank you for agreeing to share your knowledge with Opus Connect members, Michael.

In recent years we have seen a meaningful increase in family office co-investment and independent sponsor deal activity. As you advise around 60 families on such allocations, how would you describe this shift?

Felman: Thank you for having me, Nancy.

There has definitely been a shift to more direct investments by family offices in recent years. Some of the reasons for that shift include:

  1. Payment of fees.
    Numerous studies have shown that fees over time significantly reduce your overall returns.
  2. Return of capital.
    Many funds, whether private equity or venture capital, have not done an amazing job of returning capital to their investors.
  3. Selection Bias.
    There is a risk of selection bias in any co-investment opportunities offered by funds.
  4. Generational inclinations.
    In many instances, the next generation of younger family members may be more averse to the “blind pool” concept as they tend to want more control over their investments. I’ve found that they are also showing this tendency through their philanthropic giving patterns.
  5. Family member involvement.
    Direct investments provide a way for the next generation to become more actively involved with the family office.

I believe there is still a role for independent sponsors to play as these shifts continue. Independent sponsors often help family offices become knowledgeable about their specific strategy sectors and have typically already identified their investment targets, thus negating the “blind pool” model.

Vailakis: Some families, not all, prefer to partner on deals shared with them by other families they’ve participated with many times before. Trust is a clear component of all deal making, but please speak to other aspects of this dynamic.

Felman: With respect to direct deal making in the family office sphere, there are many factors, but here are my top questions or considerations:

  1. As you pointed out, Nancy, trust is the number one factor, really in any investment arrangement including direct deal making.
  2. Does the partner have subject matter expertise that could benefit the family?
  3. How well does the partner know the political landscape if this is a foreign deal. Are they on the ground in the country being invested in?
  4. Can the partner open new distribution channels in the situs of the investment?
  5. What are the long terms goals of this partnership? Is it a buy and hold or an improve and sell opportunity?

Vailakis: What investment sectors and geographic locations are of most interest to the families you currently serve? How did COVID-19 related considerations shift such interest?

Felman: The majority of the families that we serve are not located in the United States. Most of our investments are overseas. We remain interested in developing markets as they are, in our opinion, presenting the greatest growth opportunities.

COVID-19 made us think more heavily about supply chains and how fragile they are. Obviously, there has been considerable growth in e-commerce, internet usage, etc. since the crisis. Cybersecurity and cloud computing are two areas of investment focus for our group.

Vailakis: Over the course of your time running MSF Capital Advisors, what has changed in the family office investing universe and where do you believe trends could evolve from here?

Felman: COVID-19 has created a sea change in how people work. Most people are now working remotely. I don’t see this trend changing any time soon.

MSF Capital Advisors has always been virtual as team members are located around the US and abroad. I’ve been told that other family offices are looking closely at this model if they haven’t implemented it already.

This new model does however have implications from an investment perspective. Obviously, you don’t need as much or any office space. The industries that serve office workers will be negatively impacted. There is more automation coming in the supply chain through robotics, etc.

At MSF Capital Advisors, we like to get ahead of the curve on our investments as the old saying goes, and “skate to where the puck is going and not to where it is presently.”

Vailakis: Do you have any advice for families looking to start investing in direct deals, either through independent sponsor engagement or otherwise?

Felman: Look, there is no free lunch here. If you are looking to make direct investments to save money, then you are often enough being “penny wise and pound foolish.” You could end up costing yourself and your family more money if you aren’t in a position to assess the direct deals well, if, for example, the sector is unfamiliar.

If you are at a point in your life where investments are not your main focus, then I would stick to investing in funds. If you still want to be somewhat active, then I would invest through an independent sponsor or hire a team to reside in-house or as part of a separate entity.

Many more family offices are starting outsourced private equity teams that have only the family as a capital source. Some of them are launching funds for other families to participate in.

Vailakis: As many are anticipating a more comprehensive corporate default cycle in the next 6-18 months, what investment plays seem less risky / more likely to preserve capital and capture upside, as we are poised for a deeper recession?

Felman: I agree there will be a tsunami of corporate and real estate defaults coming in the next 6-18 months. I am not sure what investments will be less risky but there will definitely be a need for capitalfor recapitalizations, workouts, origination, etc. I believe patient capital will be in the ‘cat’s seat’ ready to pick off some plum opportunities.

Thank you so much for providing me this opportunity to share my views, Nancy.

10 Potential Deal Breakers When Acquiring a Franchise System

By Andrae Marrocco , McMillan LLP

Franchise systems present a valuable investment proposition for strategic and financial investors. The appeal of robust, long-term, and diversified royalty income streams, proven business concepts, potential for scalability and expansion, shared expansion costs, and the goodwill and strength of an established brand has increasingly caught the attention of private equity, family offices, and other sophisticated acquirers. Set out below are several critical franchise specific considerations for investors exploring the acquisition of a franchise system?

Immediate Red Flags. Certain deficiencies rise to the level of immediate red flags including the following. (1) High franchisee turnover and/or poor franchisee satisfaction/culture within the system. Franchise systems with such attributes do not thrive and, in many cases, may be on the decline. (2) Weak unit economics, declining same-unit sales, or challenging broader economic conditions (eg emerging or shifting market dynamics). Franchise units are the engine of the franchise system; if not functioning optimally, the franchise system’s value is impaired. (3) Overall lackluster rating on legal documentation, system compliance (and enforcement), and significant litigation with franchisees and third parties. The latter elements individually may be explainable and ameliorable, but grouped together could be a perilous sign.

Weak Brand Strength/Infrastructure. Franchise systems must possess a proven replicable business concept that is adaptable across markets. There ought to be a sound platform and associated infrastructure to conduct the existing corporate operations and units including manuals, training programs, ongoing consultation, franchisee communication strategies, compliance monitoring, marketing, technology, processes for modification, and updating products and services, etc. Strong franchise systems possess a blueprint for building out that platform and infrastructure (for future growth and expansion).

Poor Unit Economics. Investors must analyze the certainty and recurring nature of the ongoing royalty revenue (together with other revenue such as technology fees, supply arrangement fees, etc) independently of one-time fees (eg initial franchise fees). Additional important inquires include the following. (1) Consider carefully the remaining term on franchise arrangements and the likely percentage of renewals together with the age, demographic, and level of sophistication of the franchisee population, jurisdiction and regional trends or differences, and payment delinquencies. (2) Watch for suspect sources of revenue (eg self-dealing) as well as concentration among small pools of franchisees. (3) Explore the future potential for royalty stream growth including through increased same-unit sales, an increase in the franchisee population, or the introduction of new products and services.

No Protection. The core assets of a franchise system are the intangible assets such as intellectual property (trademarks, trade secrets, copyright, patents, etc). Has the existing franchisor taken appropriate steps to protect its owned or licensed intellectual property rights (through registration, contractual covenants, conduct with franchisees etc)? Investors should assess whether the franchisor has conscientiously policed its intellectual property rights. Equally important is the investigation of whether there is scope to protect the intellectual property in jurisdictions that form part of the growth strategy.

Impaired Human Capital. In some cases investors will look to keep existing management (or at least part of it) in place. This necessitates due diligence on each member of the team, their current roles and responsibilities, confirmation that all of the typical franchise system roles and functions are covered, together with an analysis of where things might fit post-acquisition. A number of circumstances with respect to human capital can create inauspicious conditions. For example, the imminent retirement of key personnel like senior franchise development or franchise operations managers where there are no trained replacements. Of equal concern is the risk that key personnel will leave shortly after completion of the acquisition.

Unhealthy Systems. Franchisees have been referred to as the “lifeblood” of a franchise system. It stands to reason that the franchisor’s relationship with franchisees is critical to the health of the system. If that relationship is characterized by constant tension, disagreements, defaults, and a high turnover of franchisees, it may not bode well for any incoming franchisor. The existence of franchisee associations can be a symptom of a previous or current unhealthy system (eg particularly where the association was established for the purposes of mounting a challenge against the franchisor). On the flip side, the non-existence of a franchise advisory council (typically established to permit franchisees a forum to voice their ideas and concerns, and to have regular meaningful communication with the franchisor) can also be symptomatic of an unhealthy system.

Breaking the Rules. Franchising has become increasingly regulated and is also an increasingly litigious area of law. The remedies available to franchisees under franchise laws are strict and extreme. It is critical that franchisors be in a position to demonstrate compliance with all applicable franchise laws. This includes keeping appropriate documentary records to establish that: (i) franchise sales, disclosure, and other processes were carried out in a manner that complied with applicable franchise laws, (ii) any earnings projections or estimated operating costs provided were based on reasonable assumptions and were appropriately substantiated, (iii) there has been ongoing compliance with franchise laws. Non-compliance with franchise laws creates significant exposure for acquirers, and is not taken lightly in their due diligence and assessment.

Bad Deals. The franchisor’s contractual rights and obligations with respect to its franchisees frames the franchise system’s legal structure. A second-rate approach to drafting, negotiating, and implementing franchise agreements (and ancillary agreements and arrangements) with franchisees may render a franchise system unacceptable. Numerous versions of franchise agreements with different terms, “one-off” side deals, and/or poor record keeping may make understanding the rights and obligations vis-à-vis the franchise system a lengthy, complex, and uncertain undertaking. Any respite or concessions made with respect to a franchisee’s financial obligations may be harmful to the economic assessment and viability of the franchise system.

Stuck or Prohibited. There may be unfavourable or prohibitive provisions that stand in direct opposition to growth and expansion plans. For example: (i) near ending or extended term and renewal provisions (depending on the investors plans may be of concern), (ii) the precise breadth and limitations of system modification rights and obligations may be incongruent with strategic plans, (iii) the nature and scope of territorial rights granted to franchisees (including exclusivity terms) may stifle growth strategy and structure for particular regions (for example, where large development areas have been granted with long development terms), (iv) inferior reservation of rights may prevent expansion through alternative distribution channels or the achievement of economies of scale (eg not being able to leverage the same infrastructure across multiple franchise systems), or (v) termination rights that are too lax for franchisees and/or too onerous for the franchisor may also present challenges.

Outdated Technology. Franchisors face a precarious three-way intersection of increased accountability and regulation over consumer privacy, a growing volume and sophistication of cyberattacks on consumer data, and the expanding boundaries of franchisor liability for matters arising at the franchise unit level. It is imperative that franchisors maintain, update, and make continual investments in their technology systems to ensure that they are operating at optimum levels. Looking at technology as an asset, in many cases, technology is a critical aspect of the competitive advantage that franchise systems have in their particular market. Accordingly, aging technology can translate to loss of market share.

Industry-specific considerations exist in many M&A transactions, franchise M&A transactions are no different. An understanding of the franchise business model, the underlying assets, and the sorts of issues and challenges that can arise in that context is critical when looking to acquire a franchise system.

About the author:

Andrae Marrocco is a partner in the Toronto office of McMillan. His transactional practice is focused on advising domestic and international businesses on franchise & distribution matters and corporate/M&A transactions. He has particular expertise in complex franchise arrangements, franchise system mergers and acquisitions, and cross-border/international transactions. Andrae can be contacted at andrae.marrocco@mcmillan.ca.

The contents of this article formed part of a longer article co-authored by Andrae Marrocco and Mike Bidwell, President and CEO of Neighbourly, a US franchisor with over 20 franchise concepts in the repair, maintenance, and enhancement of homes and properties sector (with over 3,300 ultimate franchisees).

 

 

 

Connection Success: WestCape Advisors

Opus Connect’s mission is to form connections and foster relationships between professionals in the private equity, banking, finance and other transactional industries in order to improve outcomes in deal flow and negotiation. We all know that it can take a huge amount of effort and years of networking to achieve results, and so when those results come to fruition, it’s important for us to highlight and congratulate the parties. A few months ago, we hosted our LA Deal Connect in which we interviewed several members of Opus Connect about their experiences and what is so valuable for them about coming to our events. Not surprisingly, a few of these interviewees told us about actual deals they’ve closed as a result of relationships forged through Opus Connect.

One such deal was the closing of a $6MM senior credit facility, consisting of a $4.5MM revolving line of credit and a $1.5MM term loan from TAB Bank. Opus member Cary Hurwitz, of WestCape Advisors, a division of KEMA Partners LLC, served as the exclusive financial advisor to The Triangle Group in the transaction. For the past 40 years, The Triangle Group has provided 3PL services, including transportation, warehousing, fulfillment, and supply-chain management to major retail enterprises, global brands, and the manufacturers that support them. The company operates from two central hubs in California and New Jersey, supported by warehousing and distribution depots nationwide which, combined, cover more than 1.5MM square feet.

Proceeds went towards supporting the company’s ongoing double-digit expansion, the on-boarding of two new national retail customers, and the extension of services to its already impressive client base. The Triangle Group had been largely self-funded prior to this financing, but its rapid growth called for more efficient access to capital from a financing partner that could appreciate the growth opportunity and understand the intricacies of the company’s operations, assets, and cash flow. Caryn Blanc, owner and Managing Partner of The Triangle Group expressed that “WestCape Advisors played a critical role in analyzing our situation and structuring a transaction that was favorable for all parties. This financing has enabled us to acquire key infrastructure and support and to continue serving our valued customers in the exceptional manner they have come to expect.”

Hurwitz commenced the process of finding a loan for The Triangle Group with a number of candidates and prospects. One prospect was Opus Connect member Michelle Rogers of Corbel Capital Partners, with whom Hurwitz discussed the transaction at an Opus Connect event. Rogers recommended an ABL lender, TAB Bank, which was a perfect fit for the Company and transaction. TAB quickly and aggressively jumped into the process, resulting in the above transaction. Opus Connect congratulates Hurwitz and WestCape Advisors on this successful endeavor, and also applauds Rogers for using an extremely effective business development tactic that we encourage all of our members to employ – the personal referral.

 

Author:
Lou Sokolovskiy
Founder/CEO, Opus Connect
lou@opusconnect.com

Race to the Finish Line: Proprietary Deals in Today’s Hypercompetitive Market

By Carrie DiLauro, Hamilton Robinson Capital Partners

This weekend the Indy 500 will take place at the Brickyard in Indianapolis for its 103rd year. The race has grown to become the largest single-day sporting event in the world, drawing 300,000-400,000 spectators (to put this in perspective, the largest crowd to ever watch a Super Bowl live was Super Bowl XIV in 1980, drawing 103,985 spectators). The Brickyard has been owned by the same family since the end of World War II, so you might be wondering what in the world does this have to do with proprietary deals? Proprietary deal flow is the act of identifying companies that no other investor has engaged with in the hopes of actually closing a deal with better terms and a lower purchase price multiple, achieving a significant competitive advantage. There has been a lot of talk in the private equity sector recently about the decline of proprietary deal flow. Many even believe that proprietary deals no longer exist at all.

There are several “causes of death” of the proprietary deal. The American Investment Council reports allocations to private equity increased 8% from 2017 to 2018 topping out at $331 billion, and 47% of institutional investors intend to increase their exposure to private equity again this year.  While the increase in allocations to private equity is exciting, it also means that firms need to identify companies to purchase and deploy this growing pool of capital. Higher levels of competition have made identifying inefficiencies in the system and finding a discount or off-the-beaten-path opportunity virtually impossible. Now ratchet up the competition with the explosive growth of the independent broker-dealer, which is now at an all-time high due to the reversal of the DOL’s fiduciary rule, rising interest rates and the steady growth of the stock market. The Bain Global Private Equity Report estimates for every 100 potential targets that go into the top of the funnel, it is estimated that only 1-2 will actually result in a closed deal and Sutton Place Strategies reports private equity firms are only seeing a median of 17.2% of their target market deal flow.

Additionally, increased use of technology has considerably democratized deal flow, decreasing proprietary barriers and transferring the balance of power to the business owner. LexisNexis estimated back in 2011, only 57% of private equity firms were utilizing a CRM system. Today, a CRM is table stakes for an effective deal sourcing program. As transparency increases and market forces take over, the best products will attract the best buyers at the best prices in the shortest amount of time. Private equity firms have adapted by expanding technology usage back to the due diligence phase of courtship. By applying advanced analytics, firms can develop a faster more comprehensive assessment of which assets of a potential target are essential to support growth. Analytics are used to evaluate management and operating capabilities as well as develop better probability ranges around pricing the deal. In this hyper-competitive market, private equity firms are becoming more focused on “winning” deals at an acceptable price than on where deals are sourced from. With purchasing prices approaching all-time highs (GFData headlined a near-record valuation mark of 7.8x Trailing Twelve Months (TTM) adjusted EBITDA for the fourth quarter of 2018), as well as the decreasing cost and ability to easily implement many of the data analytics programs, private equity firms are again adapting and refining their strategies to seek out competitive advantages not just in deal sourcing, but in the ability to close a deal.

So how can private equity firms differentiate themselves and improve their odds in this hypercompetitive market? One strategy is to focus more on sourcing the right deals. Quality trumps quantity, and quality deals are sourced by adding a humanizing element to the process. Firms should develop a core identity around the collective skills and expertise of the people who work there. The ability to clearly articulate the types of businesses you would like to buy and having a unique angle on that deal will set you apart from others in a competitive process. In addition, deal sourcing should become a company-wide initiative, with professionals aligning themselves across industry verticals to foster better conversations and a more in-depth understanding of the unique financial and operational attributes in that industry. The ability to identify and expand a network of intermediaries, advisers and influencers in a particular vertical and foster “contacts” into “relationships” will give a private equity firms an edge in identifying new deal opportunities and perhaps a path to that elusive unicorn, a proprietary deal.

Back to the race. Over a hundred years ago, at the very first Indy 500 race in 1911, most cars used a co-pilot to warn the driver when he was being overtaken. The winner of the race that year, Ray Harroun, outfitted his car with a rear-view mirror instead of a co-pilot. At this year’s race, thanks to new “smart racing” technology, over 50 million data records will be recorded off the cars in an average 2-hour race. Spectators will be able to monitor a driver’s heartbeat and even the muscle movement in their forearms! While advances in technology have clearly changed the way that both drivers and fans experience the Indy 500, at the end of the day the driver is still an integral component of winning the race. So too, with private equity, relationships and professional expertise, in combination with advanced technology, is the formula that firms need to win the deal.

 

About the author:

Carrie joined HRCP in 2009 and brings over 25 years of experience in global manufacturing and finance. She is responsible for a wide scope of operations management for the firm including investment sourcing, investor relations, marketing, IT, facilities management, human resources, compliance and accounting. Prior to HRCP, Carrie spent 15 years overseeing worldwide textile production. Carrie received a BS from Cornell University and a Master of Finance from Harvard University.

Recap: LA Deal Connect For Private Equity and Investment Bankers


Economics vs. Relationship – How the Two are Measured When Choosing a Deal Partner

On March 19, 2019 Opus Connect produced an Investment Banker Deal Connect, hosted by Buchalter in Downtown Los Angeles. Over 50 lower middle and middle market M&A senior executives attended the event, which was sponsored by Avant Advisory, Sapient Investigations, USI Insurance, Lawrence Financial Group, GemCap Solutions, First Republic Bank, and CohnReznick. Opus kicked off the day with a panel on how relationships play a significant role in today’s highly competitive market, followed by the Deal Connect portion of the event in which attendees were paired up for multiple one-on-one meetings.

The panel, entitled Economics vs. Relationship – How the Two are Measured When Choosing a Deal Partner, was moderated by Phil Schroeder, one of Buchalter’s Shareholders. Panelists included two investment banking professionals (Burke Dempsey, Managing Director of Wedbush Securities and Scott Cohen, Vice President of Metropolitan Capital) and two private equity professionals (Carrie DiLauro, Director of Operations at Hamilton Robinson Capital Partners and Larry Simon, a Partner at Clearview Capital). Mr. Schroeder asked questions relating to how relationships affect deal-flow, from getting to the negotiations table to closing the deal.

DiLauro posited that in the highly competitive private equity market of late, proprietary deals have become a thing of the past. Dempsey generally agreed, and explained how this affected the role of investment bankers who now strive to save private equity firms the trouble of chasing irrelevant deals by understanding these firms and bringing only appropriate deals to the table. Cohen, in turn, posited that coming to events such as the Deal Connect is a great way for investment bankers to learn more about the private equity firms and to understand what they are looking for.

The panelists had some interesting perspectives on how best to ensure that a transaction closes once the parties are at the table. While economics are obviously relevant to some degree, Simon shared his view that “relationships are everything.” He analogized the negotiations table to a date: “You get in the room and you are either feeling it or not. You need to feel the vibe and have a like-mindedness.” DiLauro also agreed that economics isn’t everything in a deal. She recounted an experience in which her firm was buying a family owned business run by a husband and wife, who disagreed on what they wanted out of the deal. The wife wanted to stay on and run the company, while the husband was looking to buy a marina. Ultimately, a higher bidder lost out because they were too aggressive in their approach and the couple felt more comfortable with Hamilton Robinson.

The investment bankers also agreed that the relationship aspects of a deal cannot be understated. Cohen, for example, always asks families what the legacy is they want to leave and what would they view as a success in 5 years. In his experience, there is more to these transactions than only the money. Dempsey also conferred that there is an element of trust and goodwill that goes into a successful transaction. When terms and conditions are being presented, it’s important to feel confident that the people across the table from you are knowledgeable, fair and honest.

Following the panel, participants entered into an afternoon of one-on-one meetings, carefully curated by Opus Connect to facilitate meaningful and relevant connections. Matches were mostly between capital providers and investment bankers and were based on criteria such as industry and asset classes. In addition, each individual was pre-qualified by Opus Connect prior to the event.

Upcoming Deal Connect events are taking place in San Francisco, Denver and Toronto this May. You can find more information about these events as well as many others on our website. Contact us today to sign up or to become a member.

 

 

Deal Connect: A Pre-Filled Dance Card For M&A Professionals

‘But perhaps the most important value-add that Opus Connect provides its members is a basis for relationships that result in transactions.’

 

Deal Connect: A Pre-Filled Dance Card For M&A Professionals

Opus Connect hosts frequent Deal Connect events in various cities throughout the country for M&A professionals. On March 19, 2019, Opus produced an Investment Banker Deal Connect, hosted by Buchalter in Downtown Los Angeles. Over 50 lower middle and middle market M&A senior executives attended the event, which was sponsored by Avant Advisory, Sapient Investigations, USI Insurance, Lawrence Financial Group, GemCap Solutions, First Republic Bank, and CohnReznick. The day began with a panel on how relationships play a significant role in today’s highly competitive market, followed by the Deal Connect portion of the event in which attendees were paired up for multiple one-on-one meetings that were carefully curated by Opus Connect to facilitate meaningful and relevant connections. Matches were mostly between capital providers and investment bankers and were based on criteria such as industry and asset classes. In addition, each individual was pre-qualified by Opus Connect prior to the event.

According to OFS Capital’s Michelle Rogers, the Deal Connect portion of the event is like getting a “pre-filled dance card” of relevant connections. For Carrie DiLauro, “usually our selection of who we are meeting with is pretty well vetted towards what we actually do and the deal we would actually partake in.” Having so many meetings in one afternoon is also an “efficient way of meeting new potential investors,” according to Isaac Palmer, Founder and Managing Partner of Qualia Legacy Advisors. Qualia is a boutique investment bank based in Los Angeles that focuses exclusively on entertainment and media. For Palmer, Deal Connect is a great way of getting on people’s radars who are specifically interested in these industries.

“The unique regional nature of these events” is also attractive to participants, according to Jeff Parent, Vice President of Insight Equity, a middle market majority equity buyout firm based outside of Dallas, Texas. It “enables us to meet people we wouldn’t ordinarily be able to meet.” For Michael Grenier, who was attending his first Deal Connect, the draw was to network and meet relevant contacts face-to-face. Grenier, the sole member of Ballard Canyon Capital, lower middle market- focused investment bank based in Santa Barbara, CA, spoke of the importance of face-to-face meetings like those at a Deal Connect which foster a level of comfort and trust, an invaluable aspect of a transaction.

Attending a Deal Connect is also a great marketing opportunity. For Britt Terrell of Backbone Capital, a capital raising advisor in the lower middle market, a huge value-add from attending Deal Connect events has been the ability to speak on or lead panels. Terrell believes that these opportunities have helped build his brand and increase his firm’s exposure. This could prove especially useful for newer or up-and-coming firms, such as G2 Capital Advisors, a boutique investment bank and restructuring firm. Ben Wright, G2’s COO claimed that Deal Connect events have helped him “get our name out” as well as provided “great marketing and opportunities to go to new geographies.”

But perhaps the most important value-add that Opus Connect provides its members is a basis for relationships that result in transactions. Ben Wright shared that “there is one firm attending today that is currently bidding on one of our assets.” Wright had met this firm at three previous Opus Connect events and was “hopeful that this will lead to a closed deal.” Indeed, several attendees described their successes due to Opus Connect events. Stefan Okhuysen, a Principal at CVF Capital Partners, a lower middle market mezzanine financing and private equity group based in CA said that he’s seen a number of deals come out of Opus Connect events. Okhuysen shared that he was attending this Deal Connect because his firm currently has a $200 million fund that it needs to deploy and was hopeful that the event would help them do that.

On the investment banking side, Cary Hurwitz of West Cape Advisors mentioned a deal that he closed through Opus Connect. Several years ago at another Opus event, he showed Michelle Rogers of OFS Capital a transaction in the transportation logistics space. Rogers referred an asset-based lender for the deal that turned out to be the perfect fit for the company. She introduced Hurwitz to three other people and one of those connections led to a closed deal.

One of the challenges of having such a full dance card is how participants can still stand out and be memorable. We asked some of the participants how they use their “personal brand” to differentiate themselves at Deal Connect events so that they create memorable, lasting relationships. AJ Somers of Arrowmark Partners starts by trying to figure out who he is talking to first, so that her can target it the conversation in a way that it will resonate. “I usually start out by asking people, what would make this day successful for you? I’ll try to figure out what they are actually after, and then I can talk to it.” Michelle Rogers uses a more “personal touch,” asking questions such as where the person went to school or whether they have kids so that when she sends a follow up she can speak to more than just the professional overlap.

Upcoming Deal Connect events are taking place in San Francisco, Denver and Toronto this May. You can find more information about these events as well as many others on our website. Contact us today to sign up or to become a member.