Dealmaking activity remains steady in Northeast Ohio, particularly amongst private equity firms, says John Grabner, president of the Association for Corporate Growth, Cleveland Chapter.
“Typically a private equity firm will buy a privately held company, roll it up and sell it to a strategic buyer,” Grabner says. “Now, they're buying and selling with other private equity firms.”
Grabner serves as business development leader and vice president at Hylant.
“Hylant has a private equity practice, which I lead in Cleveland, and we are busier than ever,” Grabner says. “People keep talking about a recession and that can become a self-fulfilling prophecy. But we haven’t seen a slowdown yet.”
In his role at ACG, he'll work to strengthen the organization's voice in the dealmaking community.
In this Dealmaker Q&A, we spoke with Grabner about some of the trends affecting dealmaking activity.
How would you appraise the dealmaking climate in Cleveland more than halfway through 2019?
Having been in the manufacturing business for 30 years, I know that there are ups and downs and cycles in every industry. This cycle that we're in for mergers and acquisitions and middle-market deals has been going on for a long time and every year, I hear the same thing: ‘Now is the time it's going to slow down. The multiples won't be so great.’ I have yet to see a slowdown and I think one of the big reasons is there is so much investible capital out there. As long as that supply of investible capital is there, the demand will be there to do deals.
What are some recent trends that affect M&A activity?
Too often, escrow becomes an impediment to getting a deal done. The buyer says I'm going to hold back 10 percent of the selling price, which can’t be collected until a couple years go by and all the known and unknown liabilities are identified. Attorneys, buyers and sellers are now using reps & warranties insurance as an alternative. You can buy a very inexpensive insurance policy to cover these unknowns. The seller walks away with all his money and typically will split the premium, which is not very expensive, with the buyer. This has taken away some of the friction that often existed when negotiating a deal.
As a seller, I didn’t like the idea of having to hold back that 10 percent. The insurance market recognized this and came up with a product that can facilitate a deal and use it as capital, in a sense. The big question was whether the insurance companies were going to pay out on any of the claims, but we have found that carriers like AIG, Travelers Insurance and Hartford, the big firms, are paying out on claims.
What's the key to maintaining a positive deal negotiation?
Trust is the most critical thing. Often, there will be an investment banker involved and he establishes that trust among all the parties. But what I've seen and have personally experienced is it really comes down to great attorneys. Cleveland is the fifth-largest private equity headquarters of any city in the country. Consequently, we have a lot of service firms in place that service the private equity firms. Law firms like Benesch and Calfee are extremely strong in specific aspects of dealmaking. When you get into the nitty-gritty and you need to really establish that trust factor, I find that the legal profession is really good at helping with that.
Any final thoughts?
I’ve always had the saying, ‘Do what you do best and buy the rest.’ It’s important to hire really good people because in my business, I was really good at making my product. But I wasn't that good at doing deals. I didn't do it for a living. So consider hiring a really strong team of folks to represent you if you're going to buy or sell a business.
At ACG, there is an annual event called the Great Lakes Capital Connection that Cleveland started. There are eight chapters around the Great Lakes and we get together once a year on a rotating basis in one of the cities. This year, it happens to be in Detroit on September 4 and 5. There will be 1,200 to 1,500 people show up for this thing and there is always a lot of dealmaking activity.