DealMAX 2024 Recap: The Buyer/Seller Balance of Power Shifts

Sellers no longer hold all the cards in today’s M&A market, and buyers are getting more aggressive on terms during transactions, according to speakers on the “State of the Deal Terms in the Market” panel at DealMAX, part of the event’s Strategic Acquirers Forum.

“Two years ago, it was a seller’s market. They kind of named the price,” said Ryan Mullin, manager of corporate development at Rheem Manufacturing. Now his company is asking sellers, “What are you willing to die for on the hill? And let us negotiate that. Everything else is like a contract. It is what it is.”

The current market is also characterized by uncertainty about the future, leading to payouts to sellers over time. “Earnouts are back,” proclaimed Joseph Kadlec, partner at law firm Troutman Pepper.

Earnouts are back.

Joseph Kadlec

Troutman Pepper

Ken Bond, head of corporate development at Cetera, which acquires financial services firms, noted that one category of earnout used by his company is retention-based—a type of earnout that’s prevalent when buying soft assets, like client accounts or relationships. However, he noted that retention-based earnouts are less common for businesses with physical inventory.

Rheem, which acquires manufacturing businesses, tends to shy away from earnout arrangements because they can hinder the ability to make changes to the management team or product, Mullin noted. He added that his company uses earnouts to close gaps in valuation expectations between the buyer and seller.

With these arrangements, considered growth-based earnouts, a buyer can gain “two to three turns of valuation into an earnout that’s going to sit for one to three years,” according to Bond. “In many ways, those growth-based earnouts are simply pushing compensation that you would’ve paid them onto the balance sheet.”

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Bond stressed the importance of legal protections for buyers to make changes at the business when an earnout is in place, and of communicating that the buyer and seller share the same goals. “Your argument with the sellers is: You have something much stronger than contractual protections. You’ve got economic alignment, right?” he said. “I want to pay the earnout, and I’ll be really clear: I’m keeping more value than I pay. Let’s just be honest, right? I love to pay the earnout because I’m making more money.” When the business grows, everybody wins.

The Strategic Acquirers Forum at DealMAX was sponsored by Datasite, RSM, Sourcescrub and Troutman Pepper. Kison Patel of M&A Science moderated the Deal Terms panel, which also included Evan Karev, managing director at Piper Sandler, as a speaker.

Operating Partners Champion Alignment with Deal Teams, PortCos

At the Operating Partner Forum on Monday, Apollo Global Management’s Aaron Miller said alignment between deal teams, operating partners and portfolio companies is critical. While the timing of operating partner involvement varies between firms and strategies, Miller, who serves as head of portfolio performance solutions at Apollo, said all the parties have to be on the same page and on board with executing the value creation strategy.

“I think one mistake has been for operating partners to follow the path of what investment partners believe,” he said, speaking at the morning fireside chat. “All of us, who’ve worked at a company, know that if we don’t have alignment, there’s massive friction. If there’s massive friction, then we can’t get stuff done.”

One mistake has been for operating partners to follow the path of what investment partners believe

Aaron Miller

Apollo Global Management

When it comes to introducing the operating team to the company during the diligence process or at LOI, experts said the deal team has to pave the way for a successful relationship. “In some cases, I’ve seen deal teams almost look with disdain at their operating partners. They didn’t want them in there and let the management teams do what they want,” said John Bova, managing director at ShipSigma speaking on the “Navigating the Shifting Role of Deal Teams and Operating Partners” panel. “That’s all well and good if you have a good management team, but it all blows up at the first board meeting [post-acquisition] if the c-suite is really not that capable.”

On the subject of how to organize the operating partner bench, speakers said it depends on the size and diversity of the firm’s portfolio. Multi-billion-dollar funds with 30-40 portfolio companies or more tend to have operators focused on functional specialties, while smaller middle-market and lower middle-market funds tend to employ generalists, speakers said. “There is a tipping point, where you will see more specialists when you have larger scale,” said Jordan Sheik, operating partner at Coltala Holdings. “On a smaller fund or in the lower middle-market, the operating partner tends to be a gap filler on the leadership team and needs to be able to step into a ‘CXO’ role and fulfill that position until they get it stabilized.”

The Operating Partner Forum was sponsored by Abacode, deel., FORVIS, Impact Point Co., Insperity, Oracle NetSuite and ShipSigma. The fireside chat with Miller was hosted by Ron Senatore, business performance advisor at Insperity. The 10 a.m. panel included speakers from Hudson Advisors and P4G Capital Management, in addition to ShipSigma and Coltala. Mark Miller, principal at FORVIS, moderated the panel.

Distressed Investors Embrace the Restructuring Opportunity

Bankruptcies were up in 2023, including among private equity-sponsored businesses in the middle market. Yet in today’s tough economic environment, panelists speaking on the “Is a Restructuring Wave Headed Our Way?” panel on Monday, April 29, shared an optimistic outlook for dealmakers on the trend. The panel was sponsored by FORVIS, GF Data and Insperity.

“Bankruptcy does not equal failure,” noted panelist Sam Alberts, a partner at Dentons, highlighting the chance for distressed investors to find high-quality targets at attractive valuations. He spoke alongside Hilco Global Senior Managing Director Daniel Arnold, SC&H Capital Managing Director Michael Fixler and Paladin Partner Stefan Piotrowski; the panel was moderated by Mesirow Managing Director, Financial Sponsors Coverage Doug Brookman.

Bankruptcy does not equal failure.

Sam Alberts

Dentons

The experts pointed to healthcare, consumer  and retail, and commercial real estate as a few of the sectors with high bankruptcy volume that distressed investors—including PE firms, investment banks and private credit firms like asset-based lenders—should be watching closely.

While the panelists agreed that “bankruptcy” can be a scary word, Fixler anticipates “more bad balance sheets than bad businesses” as a result of ongoing economic turmoil. Robust due diligence practices and an understanding of the various debt products and capital structures available can arm investors with the tools they need to turn an ailing company around. Chapter 11 bankruptcy—or any type of bankruptcy—is not the only way to restructure a company, said Arnold: selling a business under Article 9, for example, could offer a more favorable path to restructuring for existing investors. “Bankruptcy has gotten really expensive,” he added.

Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.