Revenue Recognition for Private Equity

The Pine Hill Group
Opus Connect NYC Private Equity Chapter Sponsor


Revenue Recognition for Private Equity
How an accounting standard can impact your deal

The new accounting standard for revenue recognition (ASC 606), which goes into effect early next year for privately held companies is just an accounting change, right? Not at all. It could prompt private equity firms to adjust the way they project the growth of portfolio companies and revise the way they market those companies for sale. The goal of the standard is to create a comprehensive revenue recognition model that is agnostic to all industries and capital markets and increases comparability of companies’ financial statements. To do so, it ties the recognition of revenue more closely to when control of a product or service is transferred to a customer. Depending on the type of company, that could mean big changes to key financial metrics and ratios, including EBITDA, and could impact the financials in ways that could have an impact on debt covenant compliance, taxes, mergers and acquisition activity, and other exit strategies such as IPOs.

You may feel an impact whether buying or selling

On the buy side, it’s important that private equity (PE) firms understand the standard well enough to evaluate the impacts during their due diligence. If a target hasn’t yet implemented the standard, the PE firm needs to understand what the financials will look like in the future once the new rules become effective for all companies.

On the sell side, PE firms need to make sure their portfolio companies have implemented the new standard or be able to provide an explanation of why they have not and their action plan to do so in due course. This is especially important if the potential buyer is a public company that has already complied with the new standard.

The new standard offers two transition options – modified or full retrospective. Under full retrospective, an entity can choose to apply the new standard to all its contracts – and retrospectively adjust each comparative period presented in its 2017-2018 financial statements if it waits until the mandatory effective date.

Under the modified approach, an entity can recognize the cumulative effect of applying the new standard at the date of initial application – and make no adjustments to its comparative information. However, the company will need to report under both legacy and new accounting rules during the year of adoption.

The choice of transition option can have a significant effect on revenue trends. For example, if a company elects modified retrospective, i.e., cumulative catch-up, it may not be appropriate for a sponsor to look at trends from 2017 – 2019 because the periods will be presented on different accounting bases. Buyers may discount the offer price because of the lack of comparability. Therefore, to maximize value, private companies that may be involved in potential sale-side transactions might want to strongly consider adopting ASC 606 on a retrospective basis.

Take a SAAS company that has $9 million in revenue over a period of years, and the contract has two deliverables/obligations that are distinct from each other. Under the standard, depending on the obligations outlined in the contract, some of the revenue may now be recognized upfront, and some revenue may be recognized over time. The result is that revenue will temporarily increase, creating a temporary blip in profitability or EBITDA.

Or consider a pharmaceutical company that currently recognizes revenue only when their distributor sells to the end customer. Under the new standard, the company may be able to recognize revenue earlier based on when “control” has transferred, or when the product is provided to the distributor. Further, certain contract-related costs like sales commissions, which were previously expenses when incurred, may now have to be capitalized and amortized over the life of the contract, which would increase EBITDA in certain periods.

Under legacy GAAP, some companies didn’t expressly disclose their unbilled receivables – a very risky account which represents revenue recognized, but which can’t currently be billed to customers under the terms of the contract. Under ASC 606, unbilled revenues are now captured as part of a “contract asset” account, the balances of which need to be clearly disclosed in the financials. Prospective buyers should scrutinize this account during their due diligence process as it carries significant risk if the target’s estimates of contract profitability, or the customer’s ability/intent to pay, turn out to be different than initial expectations.

The bottom line is that even if a company’s total revenue doesn’t change, the “timing” of when the revenue is will likely change which may have an impact on key metrics during the acquisition and divestiture processes. Private equity firms should understand how to tell the story as to why revenue year over year is different even if the overall profitability is the same.

The value creation story may change

When a company implements the new standard, private equity owners may need to rewrite the value creation story they tell potential buyers. PE firms use financial modeling to identify and project revenue streams, then devise a strategy for improving those numbers with the goal of exiting the investment in a set number of years. These growth projections are the heart of their story.

Under the new rules, the whole model may be impacted as a result of the revenue numbers reported in your financial statements changing. It will make it harder to tell your story to attract buyers even if nothing actually changes in the performance of the company. You need to be smart about how you tell the story and how the financial statements reflect that story. Given the complexities of ASC 606, implementation will require a carefully planned methodology and an experienced project management team. Unlike some previous standards, ASC 606 requires significant effort, knowledge, and judgment to ensure that disclosures in the financial statement are accurate, complete, and timely. The new guidelines also add significant new disclosure requirements that may vary across different companies based on their operations. It will be very difficult to use boilerplate disclosures to satisfy the requirements in ASC 606. Most businesses will need to seek outside advisors since in-house ASC 606 expertise is few and far between.

Time is running out

As the effective date of ASC 606 is imminent, implementing ASC 606 should be a high priority for portfolio companies. If an acquisition is in your future, you may have to modify or normalize the information you receive from the target company (seller) to compare apples to apples to get a good sense of the impact on key metrics, ratios, EBITDA.

To have a further discussion regarding the revenue recognition standard, please contact:

Dan Rudio
Managing Director

William Andreoni
Senior Director

© 2018 Pine Hill Group llc. This document is for general information purposes only, and should not be used as a substitute for
consultation with professional advisors.

Chicago Chapter July 2018 Roundtable

Steve Sahara (Opus Connect Chicago Chapter Board Member)
Director, Global Financial Advisory Services at Stout

The July Opus Connect Chicago event was kindly hosted by law firm Bryan Cave Leighton Paisner on the 26th of July at their offices. Jason Berne of BCLP welcomed approximately thirty bank, private equity, and other M&A deal intermediaries and introduced the roundtable discussion topic moderated by Steve Sahara, of Stout:

“Creative Deal Structures – How to Differentiate yourself in a Competitive Market”

  • An overriding theme from member conversation exchanges is that sellers value “Certainty of close / speed of close” – so nimble buyers that move quickly and have a demonstrable reputation and track record for hitting agreed milestones / deadlines may have an advantage.  Some strategic / international buyers may be perceived as having a longer / more opaque internal approval process and in such cases maybe disadvantaged in a competitive auction process.  Members seemed to also agree with comments that implied buyers who “Front Load due diligence” pre LOI stand out – the meaningful expense incurred shows commitment to deal / close.
  • Chilton McKnight, from Lockton commented “It was great to hear how Opus members commented on the use of Reps & Warranties insurance and how it can facilitate getting deals done smoothly / quickly”
  • Jason Berne, partner at BCLP, reasserted that he sees a lot of similarity in his deals and what was noted by some debt capital providers including how creative lending structures can be a differentiator and that including variations in collateral types, security interests and hybrid degrees of subordination in capital structures can help otherwise difficult deals get done.  Lenders who are willing to include unusual collateral pools / payment streams or partner with other lender in split collateral pools (where an ABL lender is first on some hard assets, and the enterprise lender is first on A/R and other intangible assets) can find deals that other lenders do not.  Other differentiators include being willing to accept payment streams from non-typical sources (ice machines in the south or air machines for car tires), or in high net worth financing accepting illiquid assets such as art, mineral rights or even thoroughbred horses.
  • Rick Lopez from Rush Street Capital mentioned “participants discussed a wide range of alternatives and differentiation strategies reflecting the competitive market environment, including alternative like  uni-tranche structures (i.e., a single interest rate for the borrower based on a blended senior and mezz debt offering), multi-draw facilities that provided access to funds for specific capital projects, and variable rates based on debt / leverage reduction milestones”.


About the author:

Steve Sahara is a Director in the Valuation Advisory group responsible for assisting the Stout management team with the acceleration of their U.S. and international growth strategy by sourcing new relationships with law firms, accounting firms, family offices, private equity, hedge funds, financial institutions, and public/private companies from middle market to Fortune 500. Steve aligns business opportunities with Stout resources to respond to a clients’ valuation, financial opinion, investment banking, or litigation support needs. Steve has extensive experience working with client management and directors, transaction attorneys, financial sponsors, institutional investors, asset managers and administrators, regulators and accounting professionals across a broad client spectrum including industrial corporations, banks, funds, and insurance companies.

Steve focuses on valuation and dispute consulting for M&A (pre-acquisition diligence, purchase price allocation, post-acquisition disputes, fairness and solvency opinions), financial reporting, corporate and estate / gift tax valuation, business reorganizations, and expert testimony / litigation support for analyses of economic damages across the spectrum of commercial litigation and shareholder disputes.

Steve began his career in business valuation at Price Waterhouse (Chicago), was CFO/board member of a UK telecom messaging software company, and ran financial structuring/execution groups focused on debt/equity capital, funding and liability management solutions at Investment Banks: Merrill Lynch, Morgan Stanley, Lehman Brothers, ABN AMRO and Credit Agricole CIB in New York and London.

London Roundtable (April. 11th): Technology and Emerging Market valuations, ICO’s and Real Estate

London MA events

Colin Lloyd
Investment Writer/Presenter/Consultant
In the Long Run- Colin Lloyd Consulting


London – third event – Technology and Emerging Market valuations, ICO’s and Real Estate

In the more protectionist trade environment, technology deals have been domestic rather than cross-border.’ Opus Connect Member’

Firstly, our thanks to Tom Whelan – Private Equity Partner of Hogan Lovells for hosting the Third Opus Connect London event. More than 30 delegates attended the luncheon where family offices together with other private equity and venture capital investors gathered to discuss investment opportunities in what seems to be a fast-changing investment environment.

Tom Whelan commenced the discussion with an overview of what his firm has seen in the technology arena. Credit funds continue to fill the void of bank financing, however, the rising wave of protectionism and high valuations in the technology sector have led some investors to become more cautious at this time. Cross-border activity is lower and whilst the value of deals has risen the volume is down.

Within Emerging Markets, there has been substantial interest in Africa, especially since President Zuma stepped down in South Africa. The Chinese administration has been slow to approve external investment by domestic operators which presents an opportunity for international investors to fill the gap. A member suggested, however, that this trend was not driven so much by the government as by Chinese investors examining projects domestically. He recommended sectors such as sport and entertainment, travel and tourism, financial services and, most importantly, logistics connected with the one belt one road initiative. Even without official Chinese support, these sectors should perform strongly.

Another area which members discussed was the investment environment for Oil and Gas projects: recent interest has been high. This led to a discussion of ICO’s, since many of the recent issues have included an asset backed element to the issuance of tokens. Many large corporations are looking closely at the ICO market. One member suggested that tokens are filling the gap between bank finance and venture capital for higher risk projects.

Another member asked whether ICO’s will maintain their value in the longer term? There was general consensus that more than 90% of the existing ICO’s will prove to have no real value. However, another member mentioned research suggesting that, far from disappearing, cryptocurrencies are predicted to account for 5% of all global trade transactions by 2022. Of the delegates only five out of thirty are currently actively involved in the cryptocurrency space.

One member, who recently raised Eur23mln for an ICO, cautioned about falling foul of the US SEC. He also suggested that one should identify the underlying value in any token and be comfortable with the liquidity of the secondary market, ‘Tokens need to be traded on an exchange.’ Another member commented on the deep discounts available to large buyers of ICO’s, likening the market to PIPE – Public Investment In Private Equities – investments in the US equity market.

The debate then switched to Real Estate. A member asked whether the recent weakness in Sydney and Toronto Real Estate, is a signal for investors to take a more nuanced approach. Another member countered, suggesting that, with LTV’s of 70%, bridging finance deals are still available with yields of up to 12%. One family office advisor discussed the opportunities in assisted accommodation, both in the UK and elsewhere. She pointed out that government support for such investments made them attractive, especially if an investor was prepared to engage, ‘early,’ at the project planning stage. Outside the UK, members alluded to attractive opportunities in Vietnam and Malaysia. In the US the yield on bridging finance deals has diminished from 12% towards 9% and LTVs are nearer 80%, nonetheless plentiful capital is available, even as official interest rates increase.

The discussion ended with delegates opinions as to the largest risks to the investment environment. One member suggested the unwinding of Index Tracking investment posed the greatest threat, another focussed on the reversal of institutional flows into Risk Parity strategies. Higher interest rates and a lack of bond market liquidity were regarded as further concern and, inevitably, the prospects for a fully-fledged trade war was regarded as a significant risk to the second longest bull-market in history.

London Roundtable (Dec. 6th): How Challenging Markets Drive New Exit Strategies

London MA events

Colin Lloyd
Investment Writer/Presenter/Consultant
In the Long Run- Colin Lloyd Consulting

The bitcoin bubble will burst but blockchain will be the foundation of the next technology revolution.’ Opus Connect Member.

The second Opus Connect London event was kindly hosted by Hogan Lovell on Wednesday 6th December at their City offices. Tom Whelan – Head of the Private Equity practice – welcomed more than thirty family office and private equity delegates and introduced the discussion topic:

‘How Challenging Markets Drive New Exit Strategies’

Many delegates agreed that the length of the current bull-market has made it increasingly difficult to find attractively valued opportunities. They noted that the five year private equity deals, which were common prior to 2008, are now typically seven or ten years in duration due to the slower turn-around seen in the new low interest rate/low growth environment.

A major topic of discussion was real estate. New York and London were both regarded as expensive, although a number of members mentioned Chinese interest as a result of the decline in the value of sterling. Rental yield remains the key factor with 5% or higher opportunities still available outside the prime locations.

The discussion then switched to the technology sector. Several members made comparisons with 1999, however a number of family offices still see value. The smaller family office appears to be in a favourable position since they are seldom forced to invest capital in the same manner as the giant VC operators. Relieved of the pressure to invest, the family office can take its time identifying better value propositions and by making direct investments. The general view was that many recent VC and PE fund launches have been obliged to pay hefty multiples of earnings in order to allocate their capital. Investors in these vehicles may have acted in haste, they may repent at leisure.

The large scale capital in-flows, which have been dominated by the giant VC and PE firms, has created a lively secondary market in its wake. Several members suggested that, whilst the term structure of deals has increased the ability to exit via the secondary market has redressed the balance to some extent.

Inevitably the discussion moved on to the bubble in digital currencies. There was general agreement that the bubble will burst at some point but a similarly contrary consensus about the future of blockchain – distributed ledger – technology. As one member put it, ‘The bitcoin bubble will burst but blockchain will be the foundation of the next technology revolution.’

Real Estate Chapter November Panel


Paul Monsen (Opus Connect Member)
Director – Real Estate Lending at Maxim Commercial Capital

Opus Connect – Investing In Multifamily.
In Mid-November, Opus Connect and Sklar Kirsh hosted a panel discussion that consisted of Neil Schimmel (President & CEO, IMG), Max Sharkansky (Managing Partner, Trion Properties), Henry Manoucheri (Chairman & CEO, Universe Holdings), Jerry Fink (Managing Partner, The Bascom Group), and Adam Peterson (First Vice President, CBRE), and was moderated by George Lintz (President, Bellaire Partners, LLC.).

The subject was investing in multifamily real estate in Los Angeles and the greater United States. Topics included valuation metrics for the current cycle, untapped West Coast markets, LP equity structures, and how to invest in a late-cycle market.

Adam Peterson kicked off the panel with a boots-on-the-ground perspective on why Los Angeles continues to be a premier investment market. He noted that there are still several attractive markets and asset types, including Long Beach, Highland Park, and rent controlled properties. Adam hedged his advice with a warning about overbid markets, particularly West LA/Santa Monica. He also noted that rent control tenants are getting smarter.

Acquisition Metrics
The mention of West LA quickly brought up the topic of cap rates. General consensus held that tier one market cap rates range from 3-5% and secondary markets providing a slight premium of 4-5.75%, with overheated markets commanding sub-3% rates. Continued cap rate compression has forced investors to rely on other investment metrics, particularly dollars/unit, gross rent multiples (GRM), and asset quality. Cap rates are still important, particularly for exit underwriting. Investors are underwriting to a 4.5-5.5% exit cap for Tier 1 properties, with another 100 basis points added for secondary markets.
Universe Holdings is focused on SoCal properties in the $185k – $325k/door range. IMG likes partially renovated buildings in B+ to A markets that they can bring to market standard. The Bascom Group won’t buy anything with >15GRM.

Rent/sf can be misleading in multifamily. One panelist explained that he checks Rent/SF but always focuses on the gross number. Very few renters are doing the math to figure out rent/sf. The average renter is focused on the gross dollar impact on their bank account. Mr. Fink noted that any units priced below $2k/door in LA will rent immediately, regardless of size.

Investor Structures & Returns. 
Panelists were all seeing LPs demand preferred returns of 6-9%, with a 75% (LP) / 25% ( GP) split thereafter, avoiding waterfalls if possible. Bascom detailed another popular structure: 10% pref, 20% promote to a 15% total return, then a 30% promote thereafter.

Trion’s LPs are focused on the deal’s return on cost, and want a 2x multiple on their equity, with a high teens IRR over a 3-5-year period. Further, investors are deeply scrutinizing all underwriting assumptions.
However, the panel admitted that those return profiles are increasingly difficult to achieve. Typical deals today provide a 1.6-1.8X return on equity, an IRR from 12-16%, and yearly cash on cash returns of 6.5%-8%. Mr. Manoucheri pointed out that larger institutions and foreign companies are squeezing out local investors in primary markets, as they are willing to accept down to an 11% IRR.

Investment and Growth Philosophy
Each panelist’s company is continually torn between two competing goals: 1) beat the market and 2) scale. Option 1 is increasingly difficult because competitors have flooded the market while option 2 is beneficial to the company but brings lower risk-adjusted returns. So, each panelist tries to find a niche, i.e. Trion’s focus on tired assets, the East Bay Portland, etc., while IMG needs to have “boots on the ground” experience and fosters local relationships.

2008 Recession & The Next
Mark Weinstein, Founder and President of MJW Investments, added to the panel’s insights by noting that prudent use of leverage is vital at this point in the cycle, with an eye towards long-term holds.
Adam Peterson further pointed out that while LA as avoided the worst of the last downturn, all panelists are actively avoiding C properties and tertiary markets at this point.

Additional Takeaways.
Don’t buy from smart brokers for smaller investors.

Buying off market deals can be more trouble than its worth because they hear 3% cap rates and think that’s what their property should demand.

Trion Properties is bullish on digitizing property & asset management. 90% of their renters pay online.

At this point in the cycle “you don’t need to make money, you need to not lose money.”

Real Estate Chapter May Roundtable

Real Estate Networking Events in Los Angeles

Rebecca Pedooem
Account Manager
Opus Connect

Moderator: Robert Clippinger, President at Clippinger Investment Properties


Developers can agree that mixed use projects can be challenging in the simplest of circumstances. This roundtable will focus on the following:

Why mixed use?
Why does it work?
When does it not work? Socio/Economic?
Financing Mixed Use
How do retail/restaurant/residents cohabitate?
Parking Issues?
Picking the right retail/restaurant
• Managing Mixed Use
A good, well planned mixed-use project can be beneficial for everyone involved!

From the city, developers, lenders, residents, and retailers, everyone can profit. In this month’s discussion, we heard from the expert Bob Clippinger. (Bio attached)

So why do mixed use projects work? Mixed use projects can attract better tenants, lenders and retailers. Landlords can charge higher rents from tenants and tenants can benefit from the wide range of amenities they can be offered (i.e, coffee shop/mini mart/restaurant). Mixed use projects can also be beneficial to the city because they can create a more “neighborhood feel”- food brings everyone together!

In fact, mixed use developments can alleviate many service needs by providing parking options, convenient retail, accessible restaurants, and residential living quarters all throughout a walkable area. Walkability (walk scores) are popular once again – people prefer this over driving/commuting to different places so from an urban planning perspective, they offer efficiency and a decrease in traffic congestion.

When deciding on developing a mixed-use project, there are some consideration to keep in mind from financing to retail and resident cohabitation. Lender relationships are important because mixed use projects are complicated. Most commonly the 80/20 Rule apply but things can get tricky if you are not properly prepared. Pre-leasing can make the lending process easier, however, if that becomes an issue, there’s always other kinds of loans such as mezzanine.

Can we all get along?! That is, how can your residents and retailers cohabitate? Devil is in the details. According to experts, the best way is to plan ahead and define the terms of the lease clearly to all parties. Make sure your tenants are aware of where they are living. Smells and noises can be an issue so a developer can bypass this matter by making sure not to take on any Ethnic foods as a tenant and ensure your ventilation system works! Hiring an acoustics specialist can also save you a lot of headaches down the line. As far as your retailers, they can’t complain if you pay for cleaning or CAM, you’re getting 90 units of residents, and there’s nothing like foot traffic for any retail business.

For more information regarding this topic or Opus Connect, contact Rebecca Pedooem at

London Panel Recap: Limited Partners and Trends in Private Equity

London MA events

Colin Lloyd
Investment Writer/Presenter/Consultant
In the Long Run- Colin Lloyd Consulting

Limited Partners and Trends in Private Equity

The inaugural Opus Connect London event was generously hosted, on Thursday 27th April, by Faegre Baker Daniels, at their offices near St Paul’s Cathedral. There were more than forty attendees who listened to a distinguished line-up of industry experts. Chaired by Blazo Ivanovic of recruitment specialists, Norman Alex.

The Panellists

Silvi Wompa Sinclair, who heads up the Private Equity (PE) practice at Willis Towers Watson, provided an institutional perspective on the current trends in PE. Ted Cominos, of Faegre Baker Daniels, who has more than 20 years’ experience, in the PE business, both as a lawyer and practitioner, described the place PE has within an investment portfolio alongside Real Estate and Fixed Income. Completing the panel, Francois Aguerre, Co-Head of Origination at Coller Capital, a leading player in the PE “secondaries” market, articulated the case for PE in the current environment, but cautioned investors to expect low double digit returns given the low interest rate environment prevalent in developed markets.

The Debate

The panellists covered a number of key issues including the change in investor return expectations, which have fallen as interest rates have declined, but, according to Sinclair, so too has their risk appetite. Sinclair went on to allude to a bifurcation of institutional investors approach; either choosing to invest with the largest players in the industry or focussing on specialists within a specific industry, sector or geography.

Aguerre noted the increased appetite for private debt in response to the collapse in government bond yields, whilst Cominos opined that within the equity space almost all the deals he had encountered were focussed on the technology sector.

The panellists all agreed that LPs are no longer passive investors. They have grown more demanding, especially in relation to the management fees charged on un-invested capital. Aguerre estimated that $1.4trln of PE assets are held in cash, which could amount to $20bln in management fees if fully loaded.

With equity markets entering the ninth year of a bull market, the question of what investors should expect from PE over the near term was inevitable. Sinclair noted that a number of larger investors were bringing PE investment in-house, but at the same time smaller PE specialist managers were winning mandates, whilst larger managers were taking on specialist consultants and industry experts to bridge to gap between scale and specialization. Cominos reminded the audience that, given the fiduciary obligations of many large institutional investors, larger PE managers were still garnering a larger proportion of the new capital which continues to flow into the sector. Aguerre countered that LP’s are still focussed on hiring “talent”. Cominos, concurred, stating that his own analysis showed that newer, smaller managers tended to outperform the behemoths of the industry. Sinclair suggested that, first and foremost, investors were interested in a manager’s track record. Looking ahead, at this late stage in the cycle, Sinclair urged investors to look for managers who had experience in restructuring in order to avoid a disappointingly long wait to glean acceptable returns.

The panellists’ went on to discuss the issues with the large, established General Partners (GP). Sinclair highlighted the importance of succession planning, Aguerre alluded to the importance of deal-flow, pointing out that the average GP would be expected to spend 60% of their time travelling in search of investment opportunities: a punishing schedule for someone in their forties, even more so for a manager in their sixties. Cominos picked up on the question of deal flow, pointing out that pipeline management was the key to delivering sustainable returns over the long-term.

In terms of geographic demand the panel saw growth in the US, a stable environment in Europe and a decline in interest in Asia. Sinclair mentioned that Willis Towers Watson’s clients were focussed on sectors including sustainability, cyber-security and technology.

When asked what they thought would be a significant PE trend over the next five years, Aguerre stated that he was positive about the growth of the industry given the steady pace of global economic growth. Cominos saw the trend towards manager specialization as gathering momentum, whilst Sinclair, noting that the industry was in the process on maturing, compared PE to a “teenager” with the potential to develop good or bad habits as it reaches maturity.

Roundtable Recap: Diligence Under Pressure

private equity networking


Steve Sahara
Stout Risius Ross


Growth through mergers and acquisitions remains a key growth strategy given slow single digit growth in GDP and other headwinds to organic growth and/or perceived risks of new product/new market development. This growth motivation, coupled with ample sources of low cost debt capital, have led to very high transaction multiples and deals that some say are “priced to perfection.” Sellers and intermediaries that represent them are driven to reduce execution risk, seek certainty of close, and minimize time in market through a well-orchestrated auction process. Many academics and consultants warn that as much as 50% to 80% of M&A transactions fail to add shareholder value, and media headlines have covered numerous high profile multi-billion dollar mergers that have failed to deliver the intended shareholder benefits, often due to factors that due diligence is designed to uncover.

Commonly cited high risk areas for transaction due diligence include: Intellectual Property, R&D, competitive analysis, accounting policy (historical and forecast results, revenue recognition, working capital), integration issues versus assumed synergies and other key business value drivers.

Interestingly, some of the most frequent items that are said to be disputed (or submitted as claims against reps and warranties insurance) include: taxes, financial statement presentation, legal & regulatory compliance, undisclosed liabilities, IP, customer contracts, and employee related issues.

Transactions with an international / cross-border component may increase risks geometrically (regulations, laws, customs) and at the most basic level foreign currency exposure in cost and/or revenue line items should be considered.

So the risks surrounding proper selection, execution, and integration of M&A targets are clear and may be equally or more challenging to address in middle market companies where, despite smaller size and often lower business complexity, there may be offsetting risks because of fewer professional resources and perhaps less developed reporting systems.

Participants commented on the increased use of sell side due diligence by PE firms to speed the process, increase perceived certainty of close, and reduce “re-trade” potential when portfolio companies are being sold.

The roundtable was moderated by Steve Sahara, SRR, hosted by Bryan Cave and sponsored by NFP, Victory Park Capital, and Baker Tilly.

Opus Connect Event Recap: Real Estate August 15, 2013

Real Estate Networking Events in Los Angeles

Guest Blogger:

Denise Nix
Marketing and Business Development Manager
Glaser Weil


Opus Connect Event Recap: Real Influence: How to Persuade Without Pushing and Gain Without Giving In

Was there a time recently when you were talking to a colleague (or a friend or family member) and he was looking at his phone? His eyes cast down, thumb flying furiously across the tiny keyboard as he nods vacantly along to what you were saying? Was there a time recently when you were the one with the phone in your hand as someone was speaking to you?

While we all, hopefully, know that this is rude behavior and counter to positive communication … the lure of the device and other modern-day distractions can be hard to resist. Dr. John Ullmen, an author, executive coach and motivational speaker who gave a lunch talk hosted by Glaser Weil last month, calls this “bad listening.”

Ullmen, who appeared as part of a lunch speaker series by Opus Connect Event’s Real Estate Chapter, said positive communication — especially active listening — can be a powerful tool in the quest to persuade and influence people. A few small changes in communication style, the UCLA Anderson School of Management faculty member said, can make a big impact. Some techniques he suggested:

  • 3:1 — That ratio represents the number of positive communication interactions that should be given to every single negative one. That’s really just a starting point, Ullmen said. Some experts, he added, suggest a 5:1 or 6:1 ratio. Just think about the fly choosing between the proverbial honey and vinegar.
  • “Yes…” — What follows after that “yes” can mean the difference between a positive or negative communication experience, Ullmen said. “Yes, and…” acknowledges what the speaker said and builds on it. “Yes, but…” sends the message that what the speaker said was wrong, and what is about to be said is right.
  • The Power Thank You — “Notice when something good happened and be in a position to point it out and articulate it,” Ullmen said. There are three ways to make a “thank you” powerful: 1.) Be specific about why you are thanking the person; 2.) Acknowledge the effort it took to do that specific task and 3.) Note the impact the deed had on you.

Learn more about Ullmen and his work at

Opus Connect Event Recap: San Francisco June 12, 2013

Guest Blogger:

Eric Desai
Robin Lane Capital


Opus Connect Event Recap: The Consumer Sector: Winning in Low Growth Times, M&A Activity, & Overall Trends and Condition

In case you were unable to attend the recent Opus Connect San Francisco panel on the Consumer sector, we had a great turnout and some valuable insights into the current deal market and industry trends. A big thanks to our moderator, Ted Kuh (Lecturer at Haas School of Business, University of California, Berkeley and formerly Managing Director and Global Head of Retail Industry Investment Banking at Citigroup Global Markets), and panel members: Julie Bell (Partner – San Francisco Equity Partners), Robert Brown (Co-founder and MD – Encore Consumer Capital), Joe Rainero (CEO – Kinder’s Meats & BBQ), Kevin Sherman (VP Marketing – BJ’s Restaurants) and Brian Sullivan (MD – The McLean Group).

The conversation kicked off with a brief macro perspective and highlighted that high-end, club and low-end retailers are doing well, while middle market retailers are underperforming. Consumer confidence is improving due to a recovery in jobs and income, but remains volatile as consumers are maintaining their frugal habits developed during the past years. Global CPG brands are having difficulty growing in the U.S. while new, exciting companies with innovative business models and targeted product offerings are rapidly growing as they gain small market share in the huge consumer sector. This presents interesting opportunities for lower middle market investors

Our investor panelists noted that valuations in the consumer space are high, especially for quality targets when competition among bidders is likely to be strong. In such an environment, bidders can position themselves more favorably by convincing targets that their relationship will lead to a better medium-to long-term outcome with greater certainty. Companies should substantiate exactly where and how they will grow and bidders must set expectations with target management that not every company will be the next “Annie’s”. Earlier stage deals are also seeing high valuations, especially for companies that raise investment through crowdsourcing. Such a model can attract investors whose motivation is more than just returns, but also a desire to be involved in an exciting new company. While a high valuation might please an entrepreneur in the short-term, he/she could face a crunch later and find it difficult to raise subsequent rounds of funding.

B2B remains important as companies increasingly focus on multi-channel retailing, where it is imperative to understand the purpose of each channel, how they interact with one another and how to prevent conflict amongst them. Companies also need to closely manage retail relationships. Kinder’s Meats & BBQ believes in developing strong relationships with its retail buyers to garner early support for new products and thus accelerate the brand with lower levels of trade spend.

B2C is becoming a top priority as emerging technologies and ever increasing amounts of consumer data enable companies to better segment, communicate and listen to their consumers. The strongest brands codify their mission and tell it through a compelling story. Gone are the days when a company had a singular message to target a singular audience. Instead, companies are targeting multiple segments with tailored yet consistent messaging. Furthermore, a democratization of influencers, facilitated by a surge in blogs and social media, has enabled these messages to be communicated more cost effectively. The future of B2C will go beyond social messaging and evolve into social listening. For example, imagine how advantageous it would be to know when your consumers are sending pictures of your products to their friends? And, even better, what specific products and from which location (store, home). Better segmentation can also enable companies to develop more customized products and useful experiences for its users. Millennials are demanding that products serve their individual needs and immigrant populations are poised to invest more in durable goods should immigration reform give them more assurance of their presence in the U.S. Despite these opportunities, many companies are not poised to seize them. This presents opportunities for savvy investors to help their companies’ transition to the new way of building brands and realizing greater value.