The latter part of 2020 saw a pick up in M&A activity, as sales volume began to return to normal, pre-pandemic levels, following a pause of many planned sales in response to uncertainty posed by COVID-19 shutdowns. In the last two quarters, Caber Hill Advisors has been working with businesses across multiple industries as sellers are looking to take advantage of current market conditions. Below are highlights from a few featured deals:
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Caber Hill Advisors very own Maria G. Melone was invited to speak on a panel to discuss the drivers and direction of consolidation in the dental industry at this year’s ADSO conference, a virtual event with a theme of “Boldy Evolving Dentistry.” A managing director on the firm’s healthcare team, Maria joined Caber Hill in early 2021, and was quick to share her expertise and viewpoint with over 100 attendees on March 24 (which was also her birthday!). Joining Maria on the panel were two other industry pros in M&A: Katie Douglas, a shareholder at Fredrikson & Byron; and Greg Wappett, a director of corporate development at 42 North Dental. Below, we summed up a few takeaways from their conversation.
1. More Deals Involve More Doctor Participation
In many recent deal structures, there’s been a focus to put in place programs that allow for doctor representation in the ownership of the business. In past years, most consolidation deals left owner dentists with no equity, or with a small minority position. But now, there’s more recognition to the importance of having the dentist fully aligned with the larger organization. Some of these programs include joint-venture opportunities and ownership models that go deeper to the doctor base.
2. Sellers Shouldn’t Expect an All-Cash Deal
As recently as February of 2020, many sellers expected to receive an all-cash deal for their sale. But with the challenges and uncertainty the pandemic has presented, there are few all-cash deals to be had. Now, buyers deploy other tools that might still give practices the valuations they held in 2019, but with some safeguards to the risk and uncertainty still present in the market. Some of these tools include deferred payouts, equity packages, and earnouts.
The decision to sell a business is a major event. For many business owners, they’ve spent years building a professional legacy that has value that extends well beyond dollars and cents. And yet, as big of a milestone, as significant of an event a sale is in the lives of owners, many don’t treat it as such. Rather than seek the expert guidance they would for other major decisions, a sale is often treated like another task on a typical to-do list—something owners can handle themselves.
This kind of thinking can be risky, with repercussions that can sour a seller’s exit plan. Here, I break down some of the common misconceptions that surround proprietary deals, giving a gentle (though much needed) reality check to the go-it-alone mentality too many owners cling to when considering selling their business.
What Is a Proprietary Deal?
First things first: let’s align on what I mean when I talk about proprietary deals. A proprietary deal involves a seller and buyer negotiating directly with each other. Communication is on a one-to-one basis, and—most crucially—without the presence of other competitive buyers or an investment banker advising the seller.
Perception vs Reality in a Proprietary Deal
There are a few common assumptions many owners make when contemplating selling their business themselves. If this were a shorter article, I could boil all these misconceptions into a single one: proprietary deals are simpler.
And that thought makes some sense on the surface. If two people can get into a room and hash out a sale, isn’t that better—and simpler—than having to involve teams of advisors? In a perfect world, sure. But the reality is that very few sales involve this idealized one-to-one negotiation. On the seller side, even a small independent owner-operator will consult with an accountant, lawyer, wealth advisor, family, friends, neighbors, and probably even the first-baseman on their neighborhood softball team. On the buyer side, most groups actively seeking acquisitions are large, sophisticated organizations. These firms employ teams of experienced, expert analysts and investment bankers who compile reams of financial workbooks, models, and valuations going into every deal. What this creates is an information asymmetry, a reality that totally shatters the illusion of that idyllic one-to-one negotiation.
So hopefully I’ve put to rest the assumption that a proprietary deal can be simple. Now let’s talk through a few more common misconceptions many small-business owners make about proprietary deals:
“I’ll save money.”
Caber Hill Advisors earned a special distinction on this year's Inc. 5000 list. With a three-year revenue growth of 465%, Caber Hill was the fastest-growing private financial services company in the Midwest. The team's performance was also strong enough to notch the 19th overall spot on the second annual Inc. 5000 Regionals: Midwest list.
The ranking puts Caber Hill Advisors in the upper tier of an impressive class of companies. On average, the Midwest honorees grew their revenues by 199% between 2017–2019. In that last year of accounting, this regional list of 250 companies employed 43,000 employees across 12 states, from Ohio to North Dakota. Collectively, they added $11 billion to the U.S. economy with high performance in a diverse set of industries that range from healthcare, tech, retail, energy, education, professional services, and more.
“It’s an honor to be recognized as the 19th fastest-growing company in the Midwest,” says Craig Castelli, CEO of Caber Hill Advisors. “We have a small but dedicated team and it’s a testament to them—and our loyal clients who believe in them—that we achieved this feat.”
Each year, the Inc. 5000 list celebrates the most successful companies within the American economy’s most dynamic segment—its independent small businesses. Past honoree have included brands that are now household names, like Zappos, Under Armour, Microsoft, Patagonia, and Oracle.
“This list proves the power of companies in Midwest states no matter the industry,” says Inc. editor-in-chief Scott Omelianuk. “The impressive revenues and growth rates prove the insight and diligence of CEOs and that these businesses are here to stay.”
It’s just a few weeks into 2021, and it’s already clear that several factors are aligning to make this an historic year for deal activity. Last year, sellers who hit pause to wait out uncertain market conditions are back at the table and motivated to accept offers. While on the buyer side, there remains a pressure to put capital to use, as investors eye acquisitions in familiar industries where M&A activity has long been trending.
Below, I break down a few of the reasons why I’m painting a rosy outlook for the year. Then, I focus on the seller-side of the equation, outlining the crucial considerations sellers must make in the preparations leading up to a sale. The market conditions for sellers are looking advantageous, so even if you’re just contemplating a possible sale sometime in the near future, it’s a good idea to familiarize yourself with a few key questions that address how to sell a business. But first, let's take a look at the year ahead of us.
Why I Expect Historic Sales Activity in 2021
Like a lot of life in 2020, many planned sales were put on pause. Shutdowns hit certain industries more than others, and even as more segments of the economy began to open up, uncertainty still loomed. While there were bargains in 2020, most deals involved healthy sellers receiving fair prices that ignored the pandemic, at least for the purposes of valuation. At the start of the year, deal activity returned as if it were a normal year, and I expect momentum only to build as the year goes on.
Last year, M&A activity largely followed other business cycles, which experienced historic oscillations in response to the COVID-19 outbreak. So a white-hot start to the year came to a screeching halt in March, only to pick up some midyear as virus cases leveled out and as new pandemic protocols normalized. By the end of the year, M&A activity resembled a fairly normal year. We spotted some bargains among the transactions, but mostly we saw healthy sellers getting fair prices that ignored the pandemic, at least for the purposes of valuation.
That momentum from the end of last year, paired with increasingly positive news on virus containment, leaves us an optimistic outlook for 2021. To give a little more insight into why, here are five predictions for what we expect to see in the year ahead.
In addition to this article, we published six industry-specific deep dives. Click the following links to read about audiology, dentistry, home health, HVAC services, janitorial services, and landscaping.
With the way M&A activity began to heat back up at the end of 2020, we expect the full-year activity for 2021 to meet or exceed 2019 levels. Strategic buyers have returned to the market in most industries, lenders are making capital available, and private equity balance sheets remain flush with cash. Further, pent up seller demand and looming tax changes will continue to drive the supply side of the equation.
Private equity investment accelerated through the 2010s and there are hundreds—if not thousands—of sponsor-backed companies nearing the end of their expected hold periods. As the year unfolds, given the lack of activity in 2020, coupled with previously planned 2021 exits, expect a surge of PE-owned company sales.
Caber Hill Advisors is proud to announce that Maria G. Melone has joined the firm as Managing Director on the firm’s healthcare team with a primary responsibility to co-lead M&A activities in the dental industry. Over the past decade, Maria has become one of the most successful and highly respected sell-side advisors to group dentistry practices. Maria joins alongside another industry veteran and Caber Hill Managing Director, Kurt Harvey.
Maria received her CPA license in 1998 and began her career at KPMG, LLP in Boston, working primarily with clients in the Healthcare/Life Science sector. She then worked in corporate development for American Dental Partners, Inc where she was involved in nearly 100 transactions, ranging in size from $50,000 to $90 million. During the last half of her tenure, she was director of her department and was responsible for overseeing all aspects of the acquisition process.
In 2012, Maria co-founded MORR Dental Transitions to assist individual dentists and dental groups with all aspects of transitions, sharing her inside knowledge of how DSOs operate with small and middle market practices.