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On-Demand: M&A | Achieving Value in Turbulent Times

Nov 15, 2022

EisnerAmper, along with investment banking and commercial real estate subject matter experts, share their insights as to the current M&A environment and its effect of the global economy.


Travis Epp: Good afternoon to everyone on the East Coast and good morning to those of you attending from the central and western part of the United States. My name is Travis Epp and I'm the partner in charge of EisnerAmper's Manufacturing and Distribution growth Initiative. It is my pleasure to welcome everybody to today's webinar entitled M&A, Achieving Value in Turbulent Times.

The last three years have been incredibly demanding for companies that are involved in all sectors of manufacturing and distribution. And somewhat to my surprise, and as a credit to those in the industry, many companies have performed extremely well. The challenges that all of you have faced since the pandemic started through today have been many, and they are primarily related to weaknesses in supply chain that have been amplified. Whether it's the availability of raw materials, supplier concentration, availability of containers, challenges in ports and the US distribution system, labor shortages, shortages in warehouse space, record inflation, and rising interest rates.

You have all addressed so many factors and these have definitely been turbulent times. To move quickly in today's presentation, I really am excited to be joined by a great group of individuals who I've known for a number of years. First there's Milt Kahn; he's a Chief operating officer of the DAC Group Limited, a leading M&A advisory firm dedicated to assisting middle market business owners. Judd Appel. Jud's a managing director and transaction advisory services national practice leader at EisnerAmper. Andrew Zezas, strategist and CEO of Real Estate Strategies Corporation. And last but not least, a close friend and colleague is Phil Bergamo, a managing director in the Transaction Advisory Services group at EisnerAmper that I've worked with for many years.

I thank each of our guests for participating today, and again, I thank you for attending today. So, let's get started with the webinar and the first question we'll start out with Milt. What is the current state of the merger and acquisition market in the M&Ds industry and how has it changed over the last year milt?

Milton Kahn: Thanks, Travis. We're all reading about a supposed slowdown in M&A in the public markets. However, it's still very, very robust in the lower middle market, especially in the manufacturing and distribution industry. The majority of the transactions that are occurring today are with private equity groups, also known as PE groups. Before COVID the majority was really with strategic buyers, but now it's certainly private equity groups. What they're doing is they're initially acquiring what they, what's called the platform company, which is their initial acquisition, usually on the larger side. And then they subsequently have add on transactions, which bring smaller companies to help grow their initial platform company.

As far as the economy is concerned, economic uncertainty is clearly the major concern for both the buyers and the sellers of businesses. Inflation and rising interest rates are causing some buyers to retrade, basically renegotiate terms of negotiated contract at the last minute, and just trying basically to get a better price because of certain economic conditions. The PE firms are either being more cautious or they're making contrarian investments, hopefully buying at a lower price, taking a bit more risk, and hopefully in the future basically making more money on the transaction.

Another trend we're seeing is reps and warranty insurance. It's become much more popular, especially with buyers of the larger transactions. Another area which we're seeing increased dramatically is the quality of earnings reports, also known as Q of Es. They're now a norm by the buyer and becoming the norm for sellers. And I'm sure Phil and Judd will talk about the Q of Es at more length. And finally, the high real estate values, which I'm sure Andy will discuss, is a major factor for many of the M&A transactions for the manufacturing and distribution companies, especially those that own their property, where they're owner occupied.

Travis Epp: Phil, do you want to weigh in please?

Phil Bergamo: Sure, yeah, thanks Mil. I fully agree. In terms of the numbers, we are seeing a slowdown in the transactions from 2021, but it appears that both deal count and deal value is on track to surpass the pace of deals prior to the COVID 19 pandemic. And as most of us were aware on this call, the deal volume and flow in 2021 was, broke all kinds of records. Transactions are still getting done. We are hearing from some that they're busier ever with deal activity, but we're also hearing from some financial sponsors that they're struggling to find the next good deal. There is still a lot of capital waiting to be invested in the market. So, if you have a solid M&D company with good cash flow, a good deal is certainly out there to be made. I would say here at EisnerAmper, we continue to see a consistent flow of opportunities to provide buy and sell site QV services relative to M&D companies. So, from our perspective, the market is still pretty hot.

I think there are two ways that the M&D deal making market has changed over the last year. The first is there appears to be a growing gap between buyers and sellers, and the EBIDA multiples to value companies. This is likely driven by increases in interest rates and the decline of the stock market. However, it seems to be much more pronounced in larger transactions. The middle market transactions we have been involved with have been much less impacted, but it certainly is something to look out for in the future. Additionally, deals that are getting done right now appear to be with sellers who have a differentiated product and are not as impacted by cyclical factors. Buyers appear to be more selective in the transactions that they're pursuing, which could be leading to processes taking a little bit longer than they had been in 2021. There also appears to be more pre LOI negotiation and diligence to ensure that the purchase price is appropriate for both the buyer and the seller. Andrew, I'd love to hear your perspective on it as well.

Andrew Zezas: Guys, this is a pretty interesting time in both M&A and in corporate real estate. On the facilities acquisition side, you've got things like very strong demand that's expected to continue, strong demand for commercial real estate. You've got constrained supply, and as a result you've got very high rental and purchase costs. Companies are seeking to acquire facilities are very challenged, often both in their ability to locate suitable properties and in the cost to acquire them. So, you've got a very interesting sense of dynamics going on. Companies seeking to sell owned properties are frequently looking at substantial profits because there's been such a significant run up in commercial real estate values. But the economic changes that are in front of us that are heading rapidly toward us, they could have a devaluing effect on corporate real estate prices. How much, we don't know yet, and we're unsure as to whether that devaluation will be moderate or significant. Travis, back to you.

Travis Epp: Thank you, Andy. So, we talked a little bit about where we are in the M&A environment and what's changed over the last year. Any thoughts on how you anticipate it changing the next year? And I'd like to start with Judd please. Unmute.

Judd Appel: Apologize. Apologize, Travis. Thank you for having me here today, it's a pleasure to speak. In terms of the market changes, we're seeing different things in different places. But overall, the market has slowed over the past, I would say, three to four months in terms of the deal activity. I've had the privilege to be at three different conferences over the last month and really understanding private equity, there's plenty of private equity money out there and it's sitting on the sidelines. But they still need to go into deals that they think will be very successful. The issue they're having today for most of the private equity is that they use debt and leverage to increase the value of their returns. And what we're seeing in the market is with interest rates nearly doubling for private equity firms, it puts a squeeze on the returns that they've promised to their investors. So, we're going to continue to see that effect as we go through.

Hopefully we're seeing the interest rates flattening out here over the last couple of weeks, the rebound in the markets, but it's still to be told whether we're going to go down again, and interest rates are going to go higher. That's the first thing. The second thing is I think the comeback in the markets is going to be slow. We are still seeing robustness in certain markets, but in other markets we are seeing slowness. And we got that feedback in the last couple weeks at these conferences that I was going to, where we had a lot of different investors coming into the market. So, it's been a little bit challenging, but for the most part, there are still buyers out there and there are still sellers. And the last thing that I'll say is that more transactions will happen when the multiples, the deal multiples moderate.

And where we're at right now is in the macro level M&A market we are seeing things moderate in terms of valuation multiples declining. But in the small cap and mid-cap markets where we're seeing many of our deals, they haven't done that yet. A little bit down, but not at the rate that the bigger deals are. So, we think over the next six months we will see valuations come down, which should be very productive for private equity. And in using that as a component to offset the higher interest costs in deals. Maybe Milt, I'll hand it back to you and tell us what you've been seeing in the markets?

Milton Kahn: Great. I agree with you. We're predicting that the EBIDA multiples will be adjusted slightly downward over the next year for the mid-market deals, but especially in the highly leveraged transactions. The P groups are becoming much more selective. They're looking only for superior companies that have very strong management teams, very strong EBIDA and very strong predictable growth potential. We're seeing less all cash transactions, which is certainly the desire of most sellers of businesses. And we're starting to see larger earn outs, and also sellers holding paper and notes that are not very long term, but certainly span out for a number of years. I guess Andy?

Andrew Zezas: Well, for those companies, here are my thoughts, for those companies that are operating efficiently in facilities that best support their operating in financial objectives. If they're in the right type, the right size, and the right location of facility, and assuming that they own or they have long-term leases on those facilities, they're doing fine and they can expect to continue to do fine, from a real estate perspective. Those companies that see they're seeking to relocate or will, or those that are looking to acquire additional facilities, they're dealing with many of the challenges that I mentioned earlier. Constrained supply, very, very strong demand, very, very high prices. Yet those companies on the other side of the equation who seek to dispose of lease facilities, could experience challenges if they're offering short term leases. Because if they've got a short-term lease, it's not very much in demand. And those who are seeking to sell owned properties could see a drop in valuation, as I mentioned earlier, due to economic pressures. Now this is despite expected continued strong real estate demand in the M&D sector. Travis, back to you.

Travis Epp: Thank you, Andy. Next question is, what are the biggest challenges that M&D companies are facing today when they are preparing to go to the market? Judd, do you want to address that?

Judd Appel: Yeah, let me take this one, Travis. I think one of the biggest things, first of all is a lot of small companies and even middle-sized companies that we work with don't have their books and records in order to the best they can be when they're entering a sale process. The understanding is when you enter a sale process, you're going to have a very, very heavy level of due diligence done on your books. And one of the things that we do here at EisnerAmper is help prepare a company for that sale process. In doing what we call, and I think Mil talked about it earlier, which is a quality of earnings. And what a quality of earnings does is really go back and try to set what the real sustainable earnings are for a business, while taking account for onetime items that happen, a big order that might have happened, and we go and we normalize those financial statements to get them in order for a buyer to be able to understand them.

It also gives the banker that a company might have selling their company comfort and the seller comfort in their numbers and ability to respond to questions. So, what we're seeing is a lot more quality of earnings being done in the markets for sellers. In the past, it used to be mainly prevalent for buyers only, but many, many bankers are requiring sell side quality of earnings to be done. Right now, I would say we're probably about 50%, and 50% how much work we're doing on the buy side. So, for a buyer on due diligence, and 50% for the seller on due diligence, in helping prepare the information materials that they're going to utilize to go and sell the company. So that is one big thing is the quality of earnings and making sure that you have clean books and records when you go into a sale process. Because the last thing you're going to want to do is put out a set of numbers and then they're not supportable, and that becomes very embarrassing for the company and also can be a turnoff to many buyers.

I think the other thing that's really prevalent right now is that you have to make sure that the CEO is involved in a sell side process. So, the CEO understands the ins and outs of the companies, they're running this, there's nobody better to describe the business than the CEO. And I think that's important for the past and I think it's even more important for the future. So having the management team engaged in the process is critical. And then there's a few other things that maybe someone else will talk about, maybe Mil if you want to talk a little bit about other things you're seeing as helping companies today getting ready in the market.

Milton Kahn: Sure. As far as the challenges, many of the companies are just not prepared for transaction. Judd mentioned financial records. Typically, companies have either a compilation review or an audit. Obviously, those companies that have had audits consistently done over the years have a distinct advantage. Usually, the due diligence is less of an issue than if it is a review or certainly a compilation. Believe it or not, there's still companies out there who do not have financials, they just have tax returns because they feel they don't need the financials because they don't have outside financing. But definitely an audit helps in speeding up a transaction.

The company, a lot of the books and records of the companies are not GAP compliant. They're not in compliance with generally accepted accounting principles. And one area that we find that occurs more often than not is revenue recognition. Making sure that revenue is recognized consistently and in accordance with GAP. Most companies feel they are, I would say about half the companies end up having revenue recognition issues. So, their EBIDA is eventually adjusted accordingly. And another challenge is many businesses are just too dependent on the business owner, and they do not have a well-rounded management team in place. And in our experience, the stronger management team, the better likelihood there is in the business selling and selling for a premium price. Keep in mind that the business, the acquirer of a business and who's going to be the eventual employer is always nervous about people quitting. And the employees and the business that's being acquired, their biggest concern is that their jobs are going to be eliminated. For the most part, none of this ever happens.

Also, just doing business as usual and not having a clear path to future growth and profitability, which I mentioned before, is challenging to many. Keep in mind that a buyer is purchasing the future, it's not purchasing the past. So, the seller needs to provide the buyer with their ideas and what they expect the business to do in the future and there needs to be substance behind that. Another challenge is family dynamics. We deal exclusively with entrepreneurial family businesses. And each that we find to be the most interesting and challenging. A lot of times the family members, the owners have different goals, different values. It could be a first-generation business, second, third, we even see some fourth generation businesses that are ready to sell.

Some of the reasons is there is no next generation who is ready to take on or desire to continue the business. And many times, there is a next generation that is willing and wants to continue the business, but the older generation does not feel that they have the capability and are concerned about risking the family fortune and putting it in the hands of that generation. And that can be a challenging conversation.

Another challenge and what's happening a lot is unsolicited offers. I'm sure most of the business owners who are on this webinar today have received communication from either investment bankers or PE firms or others indicating an interest in acquiring the company they have. They basically almost guarantee that they can put a deal together. Our experience indicates that over 90% of these supposed opportunities fail. And they fail for many reasons, including low ball pricing since there's really no competitive process in place. So, if I can give you one piece of advice, if you get an unsolicited offer is just proceed with caution. And finally, one of the biggest challenges facing manufacturing and distribution companies, again, is that economic uncertainty. And on that note, Phil?

Phil Bergamo: Great, thanks Mil. There are two additional items that I see as challenges facing M&D companies preparing to go to market. The first is having the ability to tell the story underlying the financial results. Typically, in due diligence, financial results are looked at on a monthly basis by a buy side diligence team. And manufacturing and manufacturing distribution companies are facing several different headwinds. Such as supply chain issues, inflation, increasing backlog, labor shortages, and they've all seen or most have seen significant volatility in the financial information that they're going to present to a buyer. A buyer's going to be keenly focused on that volatility. And whether or not the volatility is one time or is expected to continue post transaction.

I'd like to give two examples that we're seeing at least recently. The first is the M&D companies that are faced with inflation and rising prices, and we've seen directly impacting their margins. And many times, it can take a quarter or two or even three for those price increases to be passed on to customers, which many times results in margin deterioration. It is important that instances such as this that the company's able to articulate the background of the input pricing increases, as well as when those costs could be passed to customers to achieve the target and forecasted margins that are in the company's forecast. If not, there ultimately could be an impact to the valuation of the company. Secondly is the company should have good control over their inventory. As the company considers entering into a transaction, they should consider performing periodic inventory counts just to support and validate the quantity of inventory on hand as well as the margins achieved in the historical period.

And the second thing, second point I'd like to make is it's always a good selling point for a manufacturing distribution company to demonstrate that they have a good pipeline and demonstrate the recurring revenue base that the company has in as much detail as possible. Travis, back to you.

Travis Epp: Yeah, Phil, thank you. What I've seen from some of my clients too is through the pandemic, I think there was a willingness for customers to maybe accept the price increases. I think now as we head into maybe more turbulent times, which may be a little bit more challenging for companies so that's a key factor as well. Now I want to focus order of on a company that may be considering a sale. So, for those privately held M&D companies that are considering the sale or are transforming, given what may be a pending recession, how can management protect the enterprise value of the company? Andy, any thoughts? Andy, please go off mute.

Andrew Zezas: I apologize for that. There was a comment made earlier about how many entrepreneurs and other sellers of businesses are frequently not prepared. Their documents aren't in order and their information's not in order as well. I think that's true in the real estate side on whether it's talking about a sale or a transformation or otherwise. And making intelligent decisions during the make ready stage, prior to bringing a business to market. That's really where the rubber hits the road, where the value opportunity can best be identified. And again, that's true whether we're talking about a transformation, a sale or some other kind of transaction. Now, Travis, I know you'll agree with me that intelligent managers, they know whether the most beneficial and certainly the most likely sale of their business would be to either a strategic buyer or to a financial buyer. And there's those two kinds of transactions have different personalities and the real estate implications have different personalities as well.

A strategic buyer may very well be interested only in acquiring the IP and the customer list of the business. And in that case, they'd likely see little or no value in the real estate, whether that real estate's leased or owned. And by forcing, by the seller forcing the real estate into that kind of transaction with an acquirer being strategic and not interested, well that just makes a deal much more difficult. It increases the likelihood of a devaluation in the sale price and in the enterprise value and possible derailment of the deal. So, in a case of strategic transaction separating the real estate and viewing it as a separate asset with separate value, the seller taking that approach could be much more advantageous. Now, there could be many approaches to securing enterprise value by treating the sale of business and the facilities separately.

In the case of a financial investor, the opposite of a strategic buyer. Well, a financial investor in most cases will likely want to maintain current operations including facilities on an as is basis. Now of course that's subject to driving greater efficiencies, whether they be operational or financial. So, management should conduct a similar advanced assessment in the case of a financial investor, but with an eye toward a complete separation of facilities. Excuse me, not a complete separation of facilities, but as a means of ensuring that the most efficient facilities plan is part of the sale. So that could include consolidation, surplus disposition, sale lease backs before or after the sale and more.

So, the punchline is whether you're selling to a strategic buyer or a financial buyer, it's essential to understand your facilities in the context of the sale that you're trying to complete. And assess whether those facilities, whether they're leased or owned, would be advantageous to the sale and accretive to achieving enterprise value or have a devaluing effect on enterprise values.

Travis Epp: Thank you, Andy. Milt, do you have any comments on that area?

Milton Kahn: Sure. Well, I've been hearing about this recession coming for quite some time and hopefully we won't have one. But my best advice to management right now is to control their debt, their leverage, and just try to get rid of debt as much as possible. Also, management has to keep their eye on the ball and operate their business as if you're going to be keeping it long term. One of the worst things that a business owner can do during a sale process is take the eye off the ball and then something goes south on the deal and all of a sudden their business does not have the enterprise value at the end of the negotiation that it did at the beginning. And there are also some companies out there that are not in rush to sell and might actually want to consider acquiring another company to expand their capabilities or footprint with the goal of increasing their enterprise value for a future transaction, hopefully at a higher dollar amount.

Just a comment adding to what Andy just talked about with respect to real estate. What we're finding is a number of what we call prospective companies have approached us this past year and even a little more than a year where, and the reason they are considering a sale is because their real estate is worth substantially more than their business. And it's just becoming more common, especially with manufacturing and distribution companies who have large facilities that are quite valuable. Judd or Phil?

Judd Appel: Yeah, this is Judd. I agree with you there, Milton. I think as companies look at the challenges right now in the environment that we're in, whether you call it a recession that we're in yet or recession to come, it's mild recession hopefully. I think you got to look back at the heritage of the business and be an advocate for what you've done for many years. In terms of making it through prior downturns, how you did that and how you're reacting today. I mean, it's obviously going to be a question from any kind of buyer, but you got to go back and look at the heritage of the company and prove out that there is a business model that still works and sometimes can work even better in a downturn. I think as a seller you need to make sure you keep a strong balance sheet. I think it's vitally important that somebody comes in and they're not left with a bunch of debt on the books and payables that haven't been paid. So, you've got to really keep your eyes on the balance sheet.

And then I think you have to think about currency in a transaction and whether you're willing and desiring to accept some equity as part of the transaction rather than just cash. And one of the ways that happens is also through what we call an earn out consideration or a contingent consideration, where a buyer's comfortable to pay a certain amount today and want to pay you additional amounts, but they want to see the numbers being proven out. So, they may ask you to say, I'll be in this and I'm going to stay in the company for the next two years and I'm going to evidence it by my results and I'm going to see a bigger payment then. So, we are seeing a lot around contingency payments based on some number in the future. Usually we try to control that, and make that no longer than two, maybe three years because after that point there are changes in the business and it's really hard to measure.

But I do think that that thinking about taking some equity, and lastly, I think we've talked about this a little bit, is the owner's willingness to stay on. Because if you're selling to a buyer that's in private equity for the most part, they're going to want you to stay on with the business and they're going to want you to keep a piece of the equity so you can hopefully prosper just like they are through the sale process. So, I think all those are important factors. That's what I have Travis.

Travis Epp: Okay. Yeah, thank you Judd. As none of us know what's going to happen in turbulent times, it's definitely, it's been nice to see a nice uptick in the stock market the last week or so, but there's definitely still some ominous signs coming forward. We talked a little bit about from the sales side, but in regard to maybe the buy side for private equity and venture investors and companies seeking to make strategic acquisitions, what risks might be hidden in the facilities that would come along with acquisitions? And how can buyers identify and mitigate those risks? And we'll start with Andy.

Andrew Zezas: Yeah, that's a tremendous question. There are actually tremendous risks associated in the facilities, whether they're owned or leased, that come along with a transaction. And the old adage, buyer beware. Here's a story. So, an entrepreneur builds a business and as he or she succeeds, his advisors typically advise that it would be a good idea for you to own the real estate that you occupy. And the entrepreneur acquires a building, moves this company into it and typically will form a realty company to own the real estate, and will sign a lease between his realty company and his operating company. And he's not worried about suing himself, he's not worried about the landlord defaulting, because he is the landlord and he does run the operating company. So, he really typically will sign a very simple, almost back of the envelope style lease with himself. Not worrying about all the risks and challenges and remedies and rights that he otherwise would need because after all, he's got the operating company, he's got the realty company, he's only moving money from one pocket to another. It's a wise approach for an entrepreneur to run his business that way, or her business that way.

But the interesting thing is, at least from a financial perspective, frequently we see that that arrangement is structured to the benefit of the realty company. For finance and tax purposes and other purposes as well. Wealth management, retirement, so on. But to the financial detriment of the operating company. So, you got a double whammy, in that the operating company typically in that very back of the envelope lease, will agree to pay very high rents, sometimes above market rents, and have a very narrow set of rules of engagement, if you will in a lease. We see these kinds of leases written by entrepreneurs between their own operating companies and realty companies, as few as 10 pages. And they really don't provide much protection of governance because they don't have to.

Well, and that's perfectly okay, nothing illegal about it, nothing unethical about it. It's actually the right way for an entrepreneur to have his operating company occupy real estate in a building he or she owns. The challenge becomes when 5, 10, 15 years later, the entrepreneur sells that business. Because frequently an extreme lack of deep due diligence is conducted on the buy side relative to real estate, because after all, real estate is thought of very often as a second thought at best in an acquisition. And it's one of those things that doesn't get true due diligence, it just kind of gets review and validation in most buy side transactions. So, because of that fact, frequently, the fact that these lease transactions between the entrepreneur owned operating company and the entrepreneur owned realty company are so narrow and so thin, and the documents miss so much, that it becomes a danger zone for the acquirer.

Point of interest is that I referenced that back of the envelope maybe 10-page lease that an entrepreneur will sign with themselves, signed with him or herself. By comparison, a commercial real estate lease today is 75 to 150 pages. Because it contains an awful lot of "what if". An awful lot of remedy applications and solutions in the event that one party defaults and so on. Heck, we've seen renewal options in those 10-page leases that say "The tenant has the right to renew." Period! No terms, no rental rates, no notice periods, no nothing. And it makes for a very, very dangerous and risky transaction. And in my experience, uncovered unidentified risks that occur prior to closing, tend to stick around. And very often they get much larger on a post-closing basis. Opportunities on the other hand don't necessarily stick around, and don't necessarily get larger.

So, the punchline is there's an awful lot of risk that can be identified or missed depending upon how that real estate transaction was structured by the entrepreneur. And it's a very important factor and incumbent upon the buyer and the buyer's deal team to do a very deep dive into the real estate during due diligence to identify those risks and opportunities. Travis back at you.

Travis Epp: Thanks Andy. Milt, do you have comments on that?

Milton Kahn: Yeah, to add to Andy's comments, there are a lot of times when the rent that's paid from the operating company to the affiliated real estate company is not necessarily arm's length. And a calculation should be done on whether, on how that affects the EBIDA. Because businesses generally sell on a multiple of EBIDA and there are times when the business, the operating business is better, often more valuable with the rent being more controlled. So, calculations need to be done, not losing sight of what really the fair market value rent is.

One of the other big concerns that the buyers really need to look out before purchasing a company is the environmental. Especially in New Jersey, especially with manufacturing and distribution companies, many of these facilities have been around for decades, sometimes a century. They've had underground storage tanks; they've had environmental issues. So, we always recommend that if the real estate company or the operating company who is leasing the property, if they haven't done at least a phase one to hire an environmental company, do a phase one. To have some assurance that environmental issues are not discovered right at the end and all of a sudden, the deal could go sideways.

Andrew Zezas: Milt, I couldn't agree with you more. We recommend to our clients always when they're looking to sell, we recommend that they conduct an environmental assessment of their property so that it doesn't rear its ugly head at a later date. And certainly on the buy side, very early on, we advise our clients, make sure that an environmental assessment was completed in advance. In some states, especially with industrial properties, it's almost an impossibility to close on the sale of an industrial property without an environmental assessment having been done. Of course, depending upon the current use, the previous use, the use before that and so on. But your point is very well taken that those kind of assessments should be done well in advance, because either A, you want to dispel the possibility that an environmental challenge exists or if it does, you want to identify how big and how ugly it might be well in advance because that could derail a deal.

Milton Kahn: And I don't want to be giving legal advice, but my understanding of environmental law is that if there is liability, the corporate entity will not protect the individual owners. That there is personal liability to the current owner and all previous owners as far as environmental issues.

Andrew Zezas: That's correct.

Travis Epp: Should we move to the next question? So, we were talking about EBIDA there, and one of the things that's been apparent during the pandemic, well, it's different between service businesses as well as manufacturing distribution. So, I realize there's differences, but there's definitely been differences in sort of the employee work style. So, question is what steps can companies take to balance the changes in employee's work styles and preferences with the need to drive down inefficient facility costs and reduce facility footprints? Again, Andy we'll start with you.

Andrew Zezas: Yeah, Travis, that's an excellent and very, very timely question. And the answer to that one depends on a lot of different factors. From the employees’ side, I would say that management must first decide whether it will address its employees in the, what we've just seen in the last week or two, the Elon Musk Twitter style that requires employees to work in the office full time. Or if management will permit employees to work from home full time, or on some hybrid modified schedule. That decision really should be based not on a company wide basis, in my opinion, my professional opinion, not on a company wide basis, but more importantly based on job function. In-person interactivity requirements associated with a particular role. And it'll vary by team, by department and other cross-functional arrangements within an organization. So, there's no one answer for an industry, there's no one answer for every industry, and there's certainly no one answer for a company, as it relates to how to manage new work styles.

But going forward, the company certainly should be promoting its culture and once it assesses, again, whether it's going take that Elon Musk approach or some variable approach, the company should use that to promote its culture, its work styles. It should take a look at employee compensation, incentives, and the work environment that it needs to offer employees. I mean, that's been a given forever. It's just become a more important issue given the changes in work styles, that the work environment is essential to attracting and retaining employees. And how the company creates the environments that it'll offer and promotes those two employees and prospective employees will be essential. Companies and their leadership should consider things like relocating to geographic areas where better labor demographics exist, that could be very beneficial. And certainly conducting thorough facility portfolio assessments in search of cost reduction and efficiencies, that'll all be essential.

So, the old rules haven't changed. You still have to run a tight ship. You still have to make sure that you're searching out for financial and operating inefficiencies and eliminating waste. And then from a people perspective, you need to appeal to people and be able to attract and retain them in a manner that will permit the company to run itself. In the case of Elon Musk, I'm not sure I agree with his tactics, but I applaud his approach. He's decided that he wants everybody in the office because he thinks it's beneficial for Twitter and he's making that a condition of employment. We've seen other companies do that as well, and we've seen some succeed very well in that approach and we've seen some fail. Back to you, Travis.

Travis Epp: Thank you, Andy. We do have time for some questions if anybody wants to submit some questions, but right before we get to questions, we're going to have some closing remarks from each of our panelists. And I'd like to start with Judd please.

Judd Appel: Well, thanks Travis. The markets are still good markets. There's plenty of deals happening today. Yes, we might see a slowdown here for a couple months, but these markets are going to come back. There's so much as they call it, I don't like the words dry powder on the sidelines, in terms of private equity money needing to be deployed into new acquisitions. So, we're not going to see a slowdown and I think you just need to be prepared as a seller and be ready when it's time to go into that process. But as we talked about today, I think the best advice is really to prepare yourself for that sale process. Do that by looking at your real estate situation, do that by getting a quality of earnings report that some third party has gone in and looked at your numbers and kind of vetted them. So, I would say those are really important things.

To go through a sale process also is not short. In many cases a sale process, on average, I would say a sale process is six to seven months. But we see many deals that take over a year, 15 months, 18 months, even two years. So, you can't go into a sale process thinking I'm going to get my company sold and next month I'm going to have the cash in the bank. It's just not realistic. So typical process, it's going to take you at least six months to prepare, to go through diligence, to go through contractual issues and finally sign and close. So, you got to keep that in mind as a seller, and as a buyer, because that's the reality of it. Maybe I'll let Phil give a comment or two on his view of closing deals and closing out here today.

Phil Bergamo: Sure. Thanks Judd. So, I want to reiterate Judd's point of just being prepared as you go to market, before the LOI is signed, is of utmost importance. Having all your financial house in order is definitely going to shorten the process, as well as solidify the enterprise value that you're looking to reach. So, engage your advisors early in the process and make sure they're involved throughout.

Travis Epp: Milt. Do you have some closing comments?

Milton Kahn: Yeah. I can't stress enough about people being prepared for the due diligence process. It's very challenging for most business owners. It's probably one of the first times that they're really being held accountable by someone outside the organization. I would highly suggest that the business owner get a copy of a very detailed due diligence checklist. Study it and make sure that they can get the information pretty easily during the process. Otherwise, it could be a very, very frustrating experience. As far as the bottom line, 2023 will certainly be an interesting year. And frankly, when I look back over the years, what year has not been an interesting year? It's just something we live with. Travis and EisnerAmper, thanks so much for allowing me to be part of the panel today, and if anybody has any questions for me, feel free to call or email me at any time. I'd love to help.

Travis Epp: Thanks Milt. Andy?

Andrew Zezas: Yeah, Travis, this has been a great discussion. I would reiterate some of the comments that were made by my colleagues on this presentation today. Specifically though, given the economic challenges that we're all anticipating, after the supply chain challenges that almost every company experienced and the pandemic before that. We know that some companies will struggle through the next year. Some may not survive and others will be acquired and yet others will just power through. Whether buyers or sellers, the companies who will power through this and will succeed will be those that are already on a solid footing and have proactive, intelligent, thoughtful management. And where those management teams will take a sharp knife to operations, take a sharp knife to employment, facilities, and financials. Apply concise metrics, prepare in advance by conducting deep and intelligent due diligence, and take significant actions to ensure ongoing success of their companies. Travis, this has been great. Thank you very much to EisnerAmper and again to my colleagues and I'm also available for questions.

Travis Epp: Yeah, thank you Andy. I'd just like to reiterate for all the companies out there. No matter what happens in the times going forward, there will be opportunities or challenges that come up. So, an awareness of what's going on in the marketplace and if you're in a strong position, that can create opportunities to maybe address some of the problems that came up or were amplified during the last couple of years. I think we have time for one question and it relates to EBIDA question. So, during the last couple years when buyers or sellers are looking at what the normalized EBIDA was, COVID has definitely impacted sort of EBIDA. And maybe I would throw it to Phil or Judd is, how have the COVID adjustments been calculated when the determining what EBIDA is?

Phil Bergamo: Yeah, sure, I can attempt. So COVID adjustments I think are kind of have made their way through the historical financial results, but in order to calculate them, we've seen that very detailed information needs to be presented in order to calculate an adjustment. One adjustment that we've seen on the positive side is maybe lost revenue due to COVID. And in order to do that, you would have to show that you had the revenue before, and you had the revenue after COVID. One area that we find now that is questioned is, was there an actual COVID bump post COVID, and is that continuing today? Or are you going to be able to achieve the run rate that you're projecting going forward, and how? so that's one thing that the company should be able to support. Judd, I don't know, do you have anything else to add to that?

Judd Appel: No, I would just, definitely are going to want to take any checks that you received from PPP or any of the other programs and take those out, those proceeds out of your results to normalize them. And then further adjustments can be made like Phil just spoke about in terms of was there a downturn? Was there an upturn right after this COVID? But you definitely need to take out the proceeds that were received from the government. Some companies got some really big checks, I've seen some 10 million checks from PPP and obviously those need to be normalized out of the regular recurring results.

Travis Epp: Thank you, Judd. And I'm going to throw one last, oh, one question for Milt, and this was alluded to earlier on. Obviously when you're selling a business, the owner, if it's an owner owned business, knows the most about the company because they probably lived it. It's been their lives. When a buyer comes in, are they focused on speaking with the owner or how do they focus on the whole management team? Any comments there Milt?

Milton Kahn: They certainly focus on the owner, but the most important thing from the seller's perspective is to get the management team involved in the meetings and to showcase them. Because more than likely the owner is not going to be involved for a long period of time after closing, but the management team will. So, one of the most difficult situations for a business owner who is a really controlling type, has a controlling type personality, is not to be the center point of the discussion, and allow his managing team to shine. And that really is extremely important.

Travis Epp: Thank you, Milt. And we do have one more question that I will, I'll throw out to the group is, for a manufacturing company with a good amount of IP, how does this further complicate the valuation when one would agree that the values, not just on EBIDA, but also on the IP? Any thoughts on that area from anybody?

Judd Appel: So yeah, in most cases you have to look at the IP separately. Of course it might be part of the business, if somebody is producing products using that IP, then there's a value to the IP. And sometimes it's even easier for you to determine the value. But there's also an external value to that IP. So usually what will happen was you'll want to get a valuation company involved in that, particularly if the IP is sizeable enough to make a difference in the company. And they'll go ahead and value that based on a future earnings stream from that IP. So that's typically what's going to happen is you're going to lay out the timeline, the usage, and there'll be a discounted cash flow method to value the various items of IP that you've got in the business.

Travis Epp: Thank you, Judd. And just to close out again, I would like to thank everybody for attending today's webinar and also a special thank you to Judd, Andy, Phil, and Milt for today's presentation. Thank you very much. At this time I will now return the webinar back to Bella.

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