Thought Leader Forum: M&A best practices - what it takes to strike a deal
By acquiring or merging with another company, businesses can offer a plethora of new products, increase their revenue and keep their customers satisfied.
This can be particularly attractive for smaller players struggling to offer certain services themselves.
Statistics tell us that in most closely held businesses, the majority of the owner’s wealth is tied up in their business. At some point, those owners will need liquidity. Since a merger or acquisition is quite possibly the largest financial event of a business owner’s life, finding the right team of experts is essential.
The Portland Business Journal gathered a panel of experts to share best practices in the M&A world during a discussion moderated by Erica Heartquist. At the table were:
- Mary Lago, executive vice president, Ferguson Wellman Capital Management
- Kristine Loucks, partner, Pittman & Brooks
- Blake St. Onge, senior vice president, Cresa
- Jeff Woodcox, partner, Tonkon Torp
- Linn A. Crader, president, Business Transition Services Inc.
Erica Heartquist: When should an acquiring company or a buying company begin evaluating the target company’s footprint and lease portfolio, meaning leased and owned properties?
Blake St. Onge: Short answer is, at the beginning of the M&A evaluation and discussion, regardless of the type of transaction. In the past, I think real estate has taken a back seat to other priorities in the equation; “Yes, we have interest in the business and the services and oh, by the way, there’s some real estate and so we’ll sort of deal with that later.” Somewhat independent of specific M&A transactions, there’s been an advent of real estate as being a strategic asset to an organization within the last 15 to 20 years, thanks in part to the resurgence of technology companies, who view their experiential and creative spaces as retention and recruiting tools. With that strategic elevation of the corporate real estate department, you are starting to see internal real estate organizations have a seat at the table, that evaluate the real estate footprints at the outset of the M&A discussion, including: evaluating lease structures, marking the subject portfolio to market, understanding assignment provisions, etc. In smaller transactions, you may have a business owner that owns the real estate asset under a different entity, and now a company is coming in and simply acquiring the business. What does that mean when you have the owner of the business that’s no longer owning the business but now owning the asset; the real estate asset? And what impact does that have on the ongoing footprint? It also depends on the corporation and the size. In some acquisitions, it’s just one location, in some, it’s hundreds. So finding out that some of the locations are duplicative; what do you do with that? Do you consolidate? That’s from the actual footprint perspective, but there’s also a culture component to it as well. One example that resonates well is banks. Two different types of banks and two different types of cultures and so now when you’re merging them what does the real estate say about the culture? What does it say about the company that’s doing the acquisitions? So there’s a whole host of things to consider, but I think companies are doing well if they can get their real estate folks involved at the very outset of any sort of evaluation of M & A.
Mary Lago: I think banking is an interesting one to pick because a lot of times in banks, there is a specific intention to acquire real estate within a particular geography, because along with the physical footprint goes the regulatory authority to operate within that state. And that can be true just for a traditional bank, for trust companies, or other businesses that want a tax; they want a footprint in a particular region for taxation or running businesses through that. Banks are an interesting one to pick on.
Jeff Woodcox: From a legal perspective, it’s important to understand the real estate holdings early in the diligence process because getting consents for leases as part of a transaction can be a significant gating item and you need to prepare for any rights a landlord may have to open up lease terms as part of a sale.
Linn Crader: Generally, if our business clients own real estate, we separate the real estate from the business as they are valued differently. If the client plans to retain ownership of the real estate, then we adjust the lease to current market value so as to reflect the true value of the business. If our client plans to sell the real estate, which is not our core competency, we go to someone like Blake and say, “We’re going to have this business event and we need an expert like Blake to advise our client on the real estate portion. Most private equity groups or corporate buyers do not buy the real estate under the business.
St. Onge: I think, too, going back to the banking side of it, a lot of the locations are covering the same geography. For instance, a bank has just been acquired and now the buying company has two branches on the same street, so you now have to consider asset liquidation in looking at values and what that impact is. Which do you keep which to you liquidate? Evaluating the locations, rates, book values, etc. on the frontend and understanding what those implications are, is critical.
Crader: If we were working together on this, I’ll tell you the most important thing for us in recasting to normalize the clients’ financial position, would be to come to you and get market rent because often owners don’t pay market rent. We know that a new buyer or a new partnership is going to come in and expect to pay market rates for whatever’s there. So we’d come to you and say, “look, we’ve been paying ‘X’ for the last five years, what should that number be? What’s the new lease going to look like?” and we want to make sure we represent that in an accurate way.
Lago: Kristine, I imagine you would have some comments because a lot of the business owners that we work with have owned their real estate within the same corporate entity and that’s not always advisable and so having the real estate in a separate LLC allows some of the flexibility at the time of transition as to whether or not to retain the business and have a stream of income through that lease and come from the acquirer of your property or business. It’s a very common thing that we see. Or, if it’s inter-family transitions, maybe some of the family continues to own the real estate and some of the family is owning the business and it’s a way of splitting things out a little bit.
Kristine Loucks: Right. We definitely want our clients to hold any real estate in an LLC separate from the operating entity. If they aren’t set up correctly when they start working with us, that can be a tough issue to fix, and it can have a material adverse tax impact, especially if the real estate is held in a corporation. If our client is the buyer, we’ll work with them to determine if they should have an option to buy the building, or at least right of first refusal. Occasionally the exiting owner doesn’t want to hold the real estate for the long term. They may want to keep it for five to 10 years and then plan on divesting of the real estate as well.
Lago: Seems to be something very common that we see. They want the stream of income for a while, which makes it easier for the buyer to acquire the business without having to buy the real estate and pay off debt at the same time, debt covenants, that sort of thing.
See the full article on the Portland Business Journal.