Middle Market Mergers and Acquisitions by Colonnade Advisors Gina Cocking and Jeff Guylay

In this episode, we discuss strategic steps for Equipment Leasing and Finance companies as they grow and evolve. The leadership of some of these businesses may decide to remain a certain size and complexity and be “ lifestyle businesses”, providing healthy cash flow to the owner(s) while they continue to run the business.
However, other options exist, and exiting the business for a favorable multiple to a bank or other buyer can be an excellent strategy, the dream plan for many entrepreneurs. 
In this interview, we interview Bob Rinaldi and discuss the potential to grow and leverage a business to realize a win-win exit strategy. 
This episode is a great follow-up to our previous show, Start Early & Exit Right, as we dive deep into many of the concepts of M&A rationale. What’s unique about this episode is that it is geared toward a specific target audience, our friends in the Equipment Leasing and Finance (ELF) industry.
In this episode we cover:
How partners such as Rinaldi Advisory Services (RAS) and Colonnade work with Equipment Leasing & Finance (ELF) companies to prepare for a successful sale (1:00) What are the biggest challenges for the independents as they look to be “bank ready” for an acquisition? (4:00)  What are some of the biggest challenges for banks pursuing an acquisition of an equipment leasing company? (9:30) What determines the level of a premium in the sale price that an ELF company can expect? (20:00) What has M&A activity looked like in recent years and what are the prospects? (23:00) What about Private Equity buyers in this space? (26:30) How partners such as Rinaldi Advisory Services (RAS) and Colonnade work with Equipment Leasing & Finance (ELF) companies to prepare for a successful sale (1:00) Bob: My practice has evolved around three target audiences in the equipment leasing space. About 60% of my clients are independent leasing (ELF) companies that I work with through the Confidential CEO Resource℠ model. This is multi-year exit strategy planning. Whether the company exits or not is not important. The idea is to get them from point A to point B so they’re prepared if that time comes.
The second part of my practice is working with banks, predominantly community banks who are looking to get into the ELF space.
Third, I work with a handful of service providers in the industry, as well.
Rinaldi Advisory Services (RAS) offers the Confidential CEO Resource℠ (CCR) as a robust, full-scope advisory service that provides clients with a broad base of support for long-term strategic management. RAS works with CEOs and Principals to provide meaningful analysis and actionable insights. The aim is to help ELF senior management arrive at strategic and tactical decisions geared toward managing growth as well as operational and financial efficiencies.
Colonnade has deep experience in the ELF industry. Colonnade is a leading investment banking firm that has completed over $9 billion in M&A transactions for clients in the business and financial services industries. Colonnade has advised many companies in the EFL sector on strategic transactions. Please see our Quarterly Updates on the ELF industry here.
What are the biggest challenges for the independents as they look to be “bank ready” for an acquisition? (4:00) Bob: The biggest challenge is predominantly that these founders/owners are very much entrepreneurs. They started the business. They’re very much involved in the everyday transactional nature of their business. They don’t have the time to gain the perspective to look at their company objectively and determine what needs to happen to be a better company from a non-transactional standpoint or to be a better company for the purpose of acquisition.
Jeff:  Let’s drill down a little bit on some of the biggest challenges for the independents. There’s size and scale, where are you today and where are you going? Banks are the natural resting home for specialty finance compa

Before you sell your company, even the odds.
This episode features guests Mark Achler and Mert Iseri, authors of the recent book, Exit Right: How to Sell Your Startup, Maximize Your Return and Build Your Legacy.
Exit Right demystifies how to conclude the startup journey, a perfect complement to our podcast, which focuses more on the exits of larger middle-market companies. As Brad Feld states in the Foreword, “Mert and Mark set the roadmap for how entrepreneurs and business owners can proactively manage the process of getting to a successful exit along the way”.
As Jeff says at the start of the interview: Mark and Mert cover so many great informative topics in the book. There is a wealth of tips to guide business owners through what can be a tumultuous process, getting through the exit. There are also so many topics we align with: relationships matter most, planning for wealth, time kills all deals, and the importance of following a best-practice process. 
In this podcast episode, we focus on three topics with a lot of meat to each: 
FAIR, Mert and Mark’s framework for a successful exit, (3:00)  The“Exit Talk” and how we suggest that all companies adopt this practice with their board (15:00), and Who is involved in the Exit Talk and why? (28:00) What is FAIR? Why does it lead to the best transactions? (3:00) Mert: What we realized as we started to gather stories and experiences from M&A bankers, lawyers, serial entrepreneurs, etc is that the real question isn’t, “Let’s find out who’s going to pay the most.”
The real question is, “What’s the right home for this business? What’s the right home for my people? What’s the right home for the vision? Who is going to serve our customers the best?”
Our view of an exit went from being a short-term transaction to a long-term partnership. The term “exit” is a poor word choice.  You’re not really exiting anything. If anything, it’s the beginning of a brand new relationship. So when we ask ourselves, “What makes a great home for a startup?” we focus on these four elements that make exits great.
FAIR. Fit, Alignment, Integration, and Rationale. 
If you have all four of those, it just so happens that you’ve also found the person who’s willing to pay the most for your business, because they will realize the long-term value and they’ll price the deal accordingly.
Fit is the cultural fit between the two companies. Amazon and Zappos are a great fit. Time Warner and AOL, are probably not a great fit. It’s easily described. Can you sit next to this person for four hours and not want to kill them by the end of the meeting? Can you actually make decisions without written rules? Are cultural values aligned? Are the DNAs sort of similar, cousins to each other between those two companies?
Alignment is about being aligned with your co-founders, board, and shareholders in terms of the direction of where you want to go. The acquiring company also must be aligned. 
We almost always dismiss the alignment that we need from all sides of the table. This isn’t two sides looking at each other. This is two sides looking in the same direction.

Integration has to do with the plan for how these two companies will come together. We’ve seen so many examples of this plan of integration being done as an afterthought. It’s not just product and sales integration but people integration, finance integration; many, many layers. And all of these stakeholders have different agendas that need to be individually managed. 
Rationale. Can you explain to your grandmother why this acquisition makes sense? How are we going to deliver more value to our customers as a result of this partnership? How is two plus two equal to 100 in this context?
Mark: There are profound financial implications to the FAIR framework. Let’s take Integration. Integration is the ugly stepchild. People always say, “Oh yeah, we’ll deal with integration afterward

This episode continues with our “industry spotlight series” where we focus on specific trends and opportunities in middle-market M&A transactions. Our previous episodes have covered four industries in which Colonnade has played a significant role as an M&A advisor to both buy-side and sell-side clients. We add F&I Agencies & Payment Plan Providers as industries where we deeply know the dynamics and players so as to provide exceptional service to clients who hire us to assist them in a transaction. Colonnade has studied the F&I Agencies and Payment Plan Provider markets for the last 20+ years. We have worked on nearly 30 M&A transactions on the buy-side and the sell-side. We have gotten to know the industry players and the buyers. We’ve identified some high-opportunity M&A plays that could help to drive even more value, scale, and customer satisfaction in the industry.
Spotlight on F&I Agencies (1:00) In this first part of our episode, we answer the following questions:
Where do F&I agencies sit in the F&I ecosystem? (1:00) What does a typical F&I agency look like? (7:00) What is going on in terms of M&A and what are the value drivers in the industry? (9:00) What is driving M&A transactions right now and what are some potential M&A plays? (12:00) Where do F&I agencies sit in the F&I ecosystem and what value do they provide? (1:00) Gina: Between the F&I administrators and the F&I office and the dealership, there are F&I agencies. They are independent agencies with independent agents. They are like insurance agents. They bring together the product administrators and the dealers. 
Gina:  The agents have deep knowledge about the products they represent. They can train the F&I office on those products and how to sell the products. They also act as the middle man or the interface with the administrator. They are one distribution arm for the administrators, which makes them critical in the ecosystem. They are a valuable component of the overall F&I ecosystem.
Jeff: The F&I agency is a particular point in the value chain. It’s a differentiator. Some administrators sell to dealers through a direct sales force, others use F&I agents. 
Gina: There are administrators who go direct to dealers, but most administrators also use independent agents. They may have a direct sales force, but they have independent agents also. The only sector where that seems to not always be the case is selling into independent dealerships. You tend to see more direct agents that are employed by the administrators selling into the independent dealerships.
Gina: An important component of what the agents do is help the dealership with reinsurance. Reinsurance is an important component of a dealership owner’s profits. For every contract, every F&I product that is sold, there is a reserve set aside for future claims. F&I agents are usually very fluid and educated in talking about reinsurance and making sure that the dealership has the right reinsurance programs. So they deal with reinsurance, they do training on products, they do training on how to sell products. They sometimes help with staffing in the F&I office, and they’ll help with some of the technology that is between the F&I office and the administrator.
Gina: F&I represents a third of a dealership’s profits. Everybody within the organization and affiliated with the organization is going to make sure that F&I runs smoothly.
What does a typical F&I agency look like? (7:00) Gina: There are well over 100 independent agencies, and approximately 75%-80% of F&I agencies are less than 10 employees. There are very few large agencies. There are a few that are scaling, but there really aren’t many. There is only one national agency that comes to mind and that’s Vanguard (owned by Spectrum Automotive). Vanguard has been very acquisitive in building out its agent network.
We also see Brown & Brown, which is a P&C insurance brokerage. They’ve been acquiring F&I agencies over t

In this episode, Gina Cocking and Jeff Guylay pick up their discussion around the due diligence process related to the sale of a company. This episode is a great add-on to the previously released four-episode series exploring the due diligence process:
EP003: Business aspects of due diligence
EP004: Legal aspects of due diligence 
EP005: Accounting aspects of due diligence 
EP006: Technology aspects of due diligence 
As we explore the organizational aspects of a due diligence data room, you’ll hear the reminiscing of both Gina and Jeff as they remember their days on Wall Street physically managing the data rooms of decades past when there were literally rooms full of documents that buyers would make appointments to review while the analysts on the deal watched.  
You’ll hear how much data rooms have transformed in recent years with the birth of the electronic data room.
Get ready for a call-to-action, which Gina describes as a “resolution” that you can make any time, to get your company’s documents located, organized, and filed in a neat system to be ready for a transaction.   
Thus our title for the episode: Get your Ducks in a Row.
We answer the following questions in this podcast episode:
What are data rooms, and why are they so important in the due diligence process? (2:00)
What were data rooms like in decades past? (2:30)
What are data rooms like today? (4:30)
What is contained in an electronic data room? (6:20)
Are data rooms static or do they change over time? (10:00)
How is confidentiality protected in a data room?  (16:00)
What can a company do to prepare for a transaction? (20:00)
What do you suggest companies do immediately after listening to this episode in regards to data rooms? (27:00)
What are data rooms, and why are they so important in the due diligence process? (2:00) Jeff: Big picture, data rooms are the electronic location of all the materials that we help our clients collect and collate during our process of selling the company.
They contain all the information that buyers and investors will need to complete a transaction. So it’s everything from articles of incorporations, to financial models, to contracts, etc.
Gina: The data room is critical in any buyside or sellside process. The data room is where all the documents are kept that the buyers have access to when reviewing the business. We also give access to the buyers’ accountants, attorneys, HR consultants, marketing consultants, etc.
Datarooms are all electronic (online) nowadays, but it has not always been that way.
What were data rooms like in decades past? (2:30) Jeff: As an analyst in investment banking in the ’90s, I would sit in a physical data room on Wall Street. We would have buyers come through, and they would have to sign into the data room and show ID.
It was a room full of documents where buyers could spend several days going through documents. They were not able to take any documents out of the data room. They could ask to selectively photocopy certain documents, and we analysts would photocopy them.
The business folks, the attorneys, the accountants would come in in-person and spend days digging through the documents. 
Gina: I remember being stuck in Bethlehem, Pennsylvania in a basement of a chemicals manufacturing facility for about two weeks.
One of the challenges in a physical data room is you couldn’t have multiple buyers come in at the same time. 
You also had to double-check all the files when everyone left to make sure nobody took a document. 
What are data rooms like today? (4:30) Jeff: The efficiency with electronic data rooms has been a game-changer.  You can have 30 professionals across various functions looking at documents at the same time and really increase the cycle time of the transaction.
Everybody has a unique password, they sign in (online). We can see what documents they’ve downloaded, which ones they’ve reviewed, and which ones they haven’t looke

This episode is an excellent continuation of our discussion in E023 about the pros and cons of partnering with a financial sponsor. When a company is considering an M&A transaction, there’s a range of alternatives. On one side of the spectrum, there’s selling 100% of the company and exiting. On the other side of the spectrum is no transaction at all (“stay the course”). 
In the middle are the options to sell various amounts of a company’s equity.
When considering raising capital, more often, we see our clients sell a majority stake, in which an investor buys more than 50% of the equity in the company. In some cases, we see a minority stake investment, which is less than 50% of the economics.
Today’s episode dives in deep on minority investments, and Colonnade Advisor’s Managing Directors Gina Cocking and Jeff Guylay explore:
Reasons companies take on minority investments Different types of minority investors and what they are seeking  How minority investments are valued What rights come with minority investments  The biggest challenges associated with a minority stakes investment  Advice for companies exploring minority stake investments  Reasons companies take on minority investments (1:56)
Gina: The most common reason we see is to buy out a minority partner. Another reason is to increase the equity capital in the business so it can raise debt and finance growth. Often, there’s a thin layer of equity in founder-owned companies because they’ve been distributing their own capital. They now want to make an acquisition, for instance. To make that acquisition, they will need more capital in the business. They need equity to then raise debt.
We hear business owners say, “I want to diversify my investments. Or, I would like to fund my kids’ education, weddings, etc.” Minority investments can be raised to give owners of businesses some liquidity.
Jeff: In our last podcast (E023), we talked about the value that financial sponsors bring to a founder-owned or an entrepreneurial-run company in terms of strategic benefits to the growth of the business. Sometimes we hear our clients say: “I don’t need a lot of growth capital” or “I don’t need a lot of liquidity” or “I don’t need to buy anybody out. But this might be the right time, given what’s going on in my industry, at this particular point in time, to bring on somebody who can help me out. I might need help in the capital markets. I might need help with a growth plan. I might need help with acquisitions.”
These strategic issues are important and sometimes supersede the economics of the transaction.
Different types of minority investors and what they are seeking  (4:58) Gina: I tend to put the investors into three buckets: venture capital firms, strategic investors, and private equity firms and family offices. 
Venture capital funds frequently make minority investments in companies. VCs are more focused on companies that are pre-profit and in the early stages with a lot of growth ahead. When you take an investment from a venture capital firm, you’re not getting liquidity. Dollars are not going into your pocket. 
Jeff: Venture capitalists are focused on putting capital into the business to help you grow. 
A strategic investor is interested in investing in a company to lock in a long-term relationship. If one of your vendors has an investment in you, you’re probably not going to move away from that vendor. So that’s where you can get strategic money.

Strategic investors will also invest in companies to watch new technologies as they grow. They are then at the forefront and in a position to make an acquisition later of that company.
Jeff: Strategic partners bring not just capital but relationships. They’re investing in you because there’s a good business case, and they’re going to help you grow. 
Gina: The third bucket is private equity firms and family offices. Some PE firms will make minority inv