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Interview with an Investment Banker: Carolyn Mathis of Harbor View Advisors

Interview with an Investment Banker: Carolyn Mathis of Harbor View Advisors
June 18, 2021 by Chase A. Stuart, Partner | Stephanie L. Flackman, Associate
The “Interview with an Investment Banker” blog series features Chase Stuart, who interviews investment bankers working across a variety of industries, geographies and markets. This blog is the sixth interview of the series and summarizes Chase’s interview with Carolyn Mathis of Harbor View Advisors.

Carolyn is the CEO, Co-Founder and Partner at Harbor View Advisors. Harbor View focuses on software and tech-enabled services. Carolyn has more than 25 years of investment banking experience and focuses on the HR technology space.

Chase: Carolyn, thank you for joining us. What is the biggest surprise that family-owned and founder-owned businesses experience when they go to sell their companies?

Carolyn: One of the most surprising things to people is just how rigorous the diligence process is. Even for those who think they are prepared, the diligence process ends up being more work than they expect at the outset. It takes a lot of good preparation and organization in order to smoothly work through the diligence process.

When we work with founder-run companies, we find that while founders are experts in what they do and they spend a lot of time in the trenches building their businesses, they don’t often have the chance to step back and think about the trends driving their businesses. When they have an opportunity to sit with potential buyers or investors, it is always enlightening to them, and it brings a different perspective to how they think about their businesses.

I have had a number of occasions where we started on a process with a client, and their expectation going in was that their ideal transaction was to sell to a strategic buyer, and sometimes that ends up being the case. But on several occasions, we have seen the client’s thinking evolve, and for some of them as they talk about their business to buyers, they get excited about it all over again. They decide they want to take some money off the table but, at the same time, roll equity and participate in the upside for the next stage of the business. For some people, they are surprised to realize that the more they learn, the more attractive the option is for them.

Chase: You have particular expertise in the HR technology industry. What are some of the reasons you enjoy working with these companies, and how has that industry fared throughout the COVID-19 pandemic?

Carolyn: In terms of HR technology, we really think of it in three buckets: talent acquisition, talent management and workforce management. But high level it really is any solution or service that helps enable that relationship between an employer and employee. So, we are working with companies that are looking to reshape and reinvent the world of work. Over the last year or two, it has been a particularly interesting space in which to work.

As we all started to experience the impact of the pandemic, companies had to shift very quickly to remote work, which accelerated the adoption of technology to facilitate that change. The pace of change in the adoption of technology has accelerated over the past year, and people were forced to adapt and change their behavior, which is often the biggest impediment to introducing and adopting technology.

Going into the pandemic, we were 10 years or so into an expansion. This means that in areas like talent acquisition—which is all about the hiring process—a lot of buyers were feeling unsure if it was the right time to invest in something that is generally an earlier cycle part of the industry. That thinking changed rapidly once the pandemic hit. You had a lot of layoffs happening quickly, and as we start to come out of the pandemic, a lot of companies have to hire rapidly. A lot of transactions over the last year were geared toward bringing automation into the hiring process as companies ramped up to position themselves to be more efficient with their hiring. It will be interesting to see how that evolves over the next year. I think there is going to be a lot of pressure on being able to assess talent very efficiently and to hire and onboard people in a very efficient and effective way.

We also went through a period over the last year where workers were not leaving their jobs. If you had a job, you probably wanted to keep it. There has been a lot of conversation around how as the hiring picks up and the labor market tightens, we are likely to see a lot of turnover with employees leaving, and that is expensive for employers. Anything that employers can do to engage their employees and help with retention is front and center right now. We are going to see a lot of investment in that area.

There is also a large need for reskilling the workforce. This is not new to the pandemic, but it has been an ongoing trend: as companies need employees with different skill sets than those needed in the past (for example, being productive with technology). There is a lot of demand for training, and the way that training happens has evolved. It used to be primarily done onsite and in person, and now it tends to be done in shorter segments in a much more technology-enabled way. Learning in the flow of work is where a lot of the progress and evolution has happened. I think we are going to see continued transaction activity around technology that can help with re-training and professional development.

Chase: How would you summarize the M&A market in your industry over the last 18 months, and what are the factors that you see driving demand?

Carolyn: In terms of the market in general, over the last year or so (and this is probably true over most sectors of M&A), we went into 2020 with a pretty healthy pipeline of transactions, but then the economy shut down. In the second quarter, everything came to a halt. One of the early surprises last year was how quickly everything picked back up again. There is a lot of capital in the market, and it led to a pretty quick rebound in transaction activity coming out of the second quarter of 2020. But we lost a quarter, and it caused some transactions to be delayed last year. Coming out of that period, there was pent up demand on both sides for transaction activity. We saw a busy third and fourth quarter, and that has continued into 2021 and continues to accelerate. It is a very active deal market, and both buyers and sellers have a strong appetite to transact. The credit market has helped to facilitate that; debt is easily accessible and inexpensive right now. You take all of those factors and an economy that is starting to recover at a pretty good pace, and all of these things are helping to drive transaction activity.

In terms of areas of particular demand, I think we are seeing this change of pace in technology adoption in other areas as well. IT services is an important area for us, and digital transformation has been a big theme that has become an important focus. Incorporating artificial intelligence and automation into a lot of areas of the industry landscape has been an important industry driver.

Chase: We are hearing from our clients and prospective sellers about a desire to get a deal done before the end of the year and concerns potential changes to the tax code. Are you hearing these questions and expecting a busy fourth quarter?

Carolyn: Yes. In a word, yes! Going into the election there had been talk about changes to the tax code and what that could mean for transaction activity, and there is still uncertainty as to how that could play out. But we are seeing a heightened sense of urgency to get deals done before the end of 2021. We expect a very busy second half of the year. That is a pretty constant theme as I talk to other people who are active in the market. It has gotten to the point where capacity constraints are becoming an issue in the M&A market. Especially on the accounting side, quality of earnings reviews have been more difficult to do as quickly as buyers and sellers would like to see.

Chase: If a founder comes to you and says exactly that—“I want to sell my business before the end of the year”—how much time should a seller anticipate between engaging Harbor View and actually consummating the sale?

Carolyn: It really depends on the company’s situation. Some companies have their books and records in a position where they can pretty quickly be ready to go to market, and there are others where it takes a little more time to get that preparation done. Generally speaking, it takes six to nine months to get a transaction done. If you want to get it done by the end of 2021, it is already June, so it requires an accelerated timeframe to do that. Some of those capacity constraints I just mentioned are causing some challenges to getting things done as quickly as they would like. For a business owner contemplating a transaction, if you have your financial records in good shape, then it is easier to get that market preparation done more efficiently and quickly. If you have been doing financial audits already, that makes it easier; if not, it is harder to get that done right in front of the transaction. Generally, we will get a quality of earnings done, and that can solve a lot of those issues, but that may be harder to get done quickly in this current environment. For smaller companies, it is challenging because the leadership team that would be very involved in the transaction tends to be hands on in running the business too. You want to be realistic about balancing the needs of running your business and the demands of a transaction.

Chase: In terms of thinking about prospective buyers, how do you advise clients to consider a private equity fund, family office, or independent sponsor as a buyer versus a strategic buyer? How do you think your job is as their advisor to guide them through that process?

Carolyn: It is so dependent on the objectives of the owners and what they are hoping to accomplish in the transaction, where they are in their career and what their goals are in terms of transitioning the business. A financial buyer is best suited for someone who still has a lot of energy and enthusiasm to stay involved with the business at least for a period of time with the new financial partner. For a seller who is ready to transition the business pretty quickly after a transaction, that would be more difficult to get done with a financial buyer than a strategic buyer. Companies with a strong management team can remain excited about taking on a financial partner with more resources that can help them build out an effective board and bring a lot of experience to the table; they have an opportunity to roll equity and get a second bite at the apple, and that could be a very compelling outcome for a lot of people. But, it is not the right outcome for everyone. It most depends on what your objectives are in the transaction.

Chase: Carolyn, are some of the advantages that Harbor View brings to the companies you represent that people should know about?

Carolyn: One thing to know about us is we are pretty focused from an industry perspective. We work with software and tech enabled service companies. Within that we have five verticals, which are HR tech, fintech, IT services, industrial tech and financial services. Within those 5 segments, the senior bankers who lead those teams have a lot of experience within those industries, and we think it allows us to bring a deeper level of value add to our clients with our vertical focus and vertical expertise.

The other thing I would say is that we have a lot of experience working with founder-led companies. That is an important element of it. The priorities in a transaction for a founder can often be different than for a sponsored company. Understanding how to work with a founder to really prepare the company to maximize value for the transaction but also recognizing that there are other things that are really important in addition to the enterprise value—finding the right home for your company, finding the right situation for your employees and your customers. It is a legacy that the business owner has built. Being mindful of what those priorities are and being mindful of which buyers are best suited to make that fit is important. We spend a lot of time getting to know the buyers in our industry verticals, and I think that allows us to do a really good job for our clients in making sure that the transaction is successful in all ways that are important.

Chase: Carolyn, thank you so much for joining, and I really appreciate speaking with you today.

Carolyn: Thank you so much, Chase. I really appreciate it too.

Click here to view the other “Interview with an Investment Banker” blogs.

Chase Stuart is a partner in Ice Miller’s Business Group. He represents a variety of private equity funds, family offices, independent sponsors, mezzanine funds, and privately held businesses. He provides strategic and legal advice in their investment and general corporate strategies, including leveraged buyouts, mezzanine financings, growth capital transactions, early and late stage private equity investments, and secondary transactions. He represents family, founder, and entrepreneur-owned businesses as general corporate counsel and as a sell-side advisor. He has represented a variety of companies in sectors such as technology, manufacturing, health care, aerospace and defense, gaming, and business services.

Stephanie Flackman is an associate in Ice Miller’s Business Group. Stephanie earned her juris doctor from Seton Hall University School of Law and bachelor’s degree in neuroscience from Muhlenberg College.

This publication is intended for general informational purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstance.
 


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