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Interview with an Investment Banker: David Modiano of City Capital Advisors

Interview with an Investment Banker: David Modiano of City Capital Advisors
May 17, 2021 by Chase A. Stuart, Office Managing Partner | J.C. Brown, Of Counsel | Chelsea Abramowitz, 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 interview, conducted with J.C. Brown, is the fifth interview of the series and summarizes their interview with David Modiano of City Capital Advisors.

David is a Managing Director at City Capital Advisors where he focuses primarily in the Business Services, Consumer, Industrials and Technology sectors. In his nine-year tenure at City Capital, David has completed more than 25 mergers and acquisitions, recapitalizations and private placement transactions totaling in excess of $1B in transaction value. He has also historically led the firm’s outbound marketing efforts, as well as the firm’s hiring, training and recruiting responsibilities.

J.C.: What are the biggest surprises that family-owned or founder-owned businesses experience when they go to sell their companies, and how to do you manage those expectations as their advisor?

David: Our family-owned or founder-owned business owner clients often tell us that City Capital encourages them to think about their businesses differently than they historically have, even for entrepreneurs who have run their business for, say, 40 years. Although this can be challenging and new, we find that it actually strengthens and makes the business stronger in the long run. As a result of our process, owners often are forced to view their businesses through a new lens and inevitably learn new ways to view, track or run their businesses following the sale process. Our sale process is unique to each client because we first seek to understand and learn about our client’s objectives and goals. There are always unique challenges when selling a business, but by understanding our client’s goals and objectives, we help mitigate the inevitable surprises. For instance, it’s important for us to understand—especially with founder- or family-owned businesses— whether the founders want to continue a relationship with the business, what the internal family dynamics are or whether there are buyers to which our clients do or do not want to sell.

J.C.: Are there certain obstacles you have to overcome as an advisor that you see on a regular basis?

David: At the top of the list would be gathering information and the level of detail that is required when selling a business. We approach the process by doing a lot of upfront work and trying to limit our client’s involvement, especially during the marketing stage of the process. Our goal is to be a strong conduit for the business. To do so effectively, we need to understand the unique aspects of our client’s business to help reduce the time they spend on the process. One of our clients’ biggest challenges is simultaneously running the business and pursing a sale process. A great amount of time and detail is required to go from the ideology of “I’m selling my business” to its execution, and our assistance makes their job much easier.

Chase: We are halfway through the second quarter of 2021, and the M&A market remains very strong. What are some of the reasons the market has been active?

David: Due to the impact of COVID-19, there was pent-up demand from the very limited deal activity in the first half of 2020. I also think that having the presidential election behind us, regardless of politics, and having clarity about who is in the White House have supported a strong financial market. The financing markets were preoccupied with PPP Loans and both strategic and private equity firms were very focused on their own balance sheets and ensuring their companies secured their own capital. After doing that, I think they looked to grow, both organically and inorganically.

Chase: David, you work across many industries. Are there some that are particularly hot right now?

David: Three industries are particularly interesting right now. First, I think anything touching technology is extremely attractive right now, whether that’s tech-enabled services, Software-as-a-Service or IT product companies. The pandemic shined a light on the haves and have nots. Technology companies and companies that are able to effectively leverage technology to impact their businesses have been a strong driver of M&A activity. Second, health care has been on a nine-year tear and continues to be hot. Finally, e-commerce, especially direct-to-consumer businesses, is another strong area. E-commerce has become a larger piece of the overall retail pie as a whole, and tools such as Facebook and Shopify have enabled small to medium sized businesses to more easily transact or reach their customers.

Chase: It is an interesting point about the e-commerce market, which has been more active than ever during the COVID-19 pandemic. As a financial advisor, how do you deal with any pushback from potential buyers citing COVID-19 adjustments?

David: It really depends on the company and industry. A buyer has to be competitive, so companies that are in a very competitive process may be given the benefit of the doubt as it relates to COVID-19 impact. In less competitive processes, owners can utilize tools such as seller notes and earnouts. As investment bankers, we are typically not fans of those structures, but those types of tools can sometimes help bridge the gap on value, especially for companies that were temporarily impacted by COVID-19. In many cases, both parties can generally agree on a baseline pre-COVID value, and the company may feel confident that the uptick due to COVID-19 will continue, or the negative impact will correct in the coming months. Financial instruments like seller notes, earnouts and warrants can help bridge the gap in those situations and help sellers garner a higher ultimate value.

J.C.: Are the complications that tend to arise on smaller-size deals the same or different than those you see on larger-size deals?

David: Smaller deals can sometimes be more difficult to get done than larger ones due to financing market constraints, as well as resource and infrastructure limitations. We specialize in trying to produce outsized outcomes through intense competitive processes utilizing both financial and strategic buyers. When helpful, our firm is often able to assist and supplement the diligence process for clients who are resource constrained in order to help complete a transaction. Typically, a smaller transaction may run into financing challenges and may require a buyer to over equitize a transaction. Setting realistic expectations for clients is important while also achieving their other goals. For instance, a company that has $3-4 million of EBITDA cannot obtain the same leverage multiples that other clients who are larger and have EBITDA of $15-20 million can garner. This may cap the value a private equity firm can pay to a seller. We encounter situations where smaller companies have significant value and they deserve that value, but they are not able to get sufficient leverage from a financial buyer. That situation may lend itself to a strategic process wherein a strategic buyer can leverage its own balance sheet or produce significant synergies to pay more of a fulsome value compared to its counterparts.

J.C.: That makes perfect sense. Switching over to potential buyers, strategic versus private equity, how do you advise your clients on whether to go one route versus another?

David: Our firm is great at creating processes and competition, but any investment banker who tells you they know who is going to buy your company likely does not. We may know who should buy a client’s business, but because of unknown circumstances, another buyer may end up buying a company. Our job is to run a process and produce outliers in order to drive competition and create a good outcome for our clients. We run processes with both strategic and private equity buyers, as well as family offices, because having all options available ensures higher likelihood of generating a higher sale price and the desired outcome.

If there is a situation to do a buy and build strategy, that typically lends itself to family offices or private equity firms because those types of buyers love the buy and build strategy. In this strategy, buyers are able to back a strong platform and pay a higher price for an opportunity and then “buy down” the purchase multiple by doing smaller, less expensive add-on acquisitions. Additionally, in situations where management would like to stay and continue to grow the business either organically or inorganically, there may be a strong preference to sell to a financial buyer. In a situation where management would prefer to transition out of the business, that lends itself to selling more to a strategic buyer who has an existing infrastructure and team within a much larger organization. We try to conform our process based on the company and its owners’ goals. There are many considerations when selling a business, but in general, we like to involve both types of buyers to drive competition and maximize the transaction outcome.

J.C.: There is an ever-growing population of independent sponsors over the last couple of years. Within the private equity umbrella, are there certain situations that apply more to a committed fund versus an independent sponsor?

David: It is more situation specific. We do not outright discriminate between an independent sponsor and a private equity firm. We do however make sure our clients understand that with an independent sponsor, there can be more risk because they do not have a committed fund. Our job is to ask questions upfront and assess the certainty of closing the transaction. We do this by diligencing the firm’s history of completing transactions, access to capital, types of LP investors, debt financing relationships, diligence requirements, etc. When deciding to go exclusive with any party, we want to make sure the certainty of close is as high as possible. Based upon the facts and circumstances of each transaction, the likelihood of getting to a close with an independent sponsor could be equal to or higher than a particular private equity fund. We help our clients understand those dynamics and explain the risks regardless of the type of buyer. In certain circumstances, an independent sponsor can be an attractive opportunity because it may have unique operational or industry expertise that is unique.

J.C.: I think that is a great answer and really weighs the pros and cons of both.

Chase: I love that answer because I think a lot of times, we hear that some banks can be dismissive, so I like highlighting the pros of an independent sponsor.

David, how do you highlight to your clients what makes City Capital the right advisor for a particular transaction?

David: Personally, I have had a lot of unique deal experiences with over 25 transactions in a wide variety of industries for M&A as well as capital raising transactions. Early on in my career, I was exposed to a lot of capital raises and, at the time, did not fully appreciate the type of perspective and skills that capital raising can bring to M&A transactions. Capital raising is all about structure and understanding how legal documentation can dictate both transaction decisions as well as returns for investors. Finding creative structures and solving problems are things that both our firm and I do well. We find creative solutions to problems that on the surface may not be apparent in order to drive unique outcomes. We typically work with entrepreneurs and families, as well as represent private equity firms. We know our clients well and continue to educate them along the way. Our firm’s unique model is to put two very experienced managing directors on each transaction and lead every step of the transaction. In investment banking, there’s a lot of judgment calls throughout a transaction and having two very experienced managing directors on each deal tends to lead to more robust and outsized outcomes.

Chase: That is a good way to think about it, I agree. Thank you so much, David, we really appreciate it.

J.C.:Thanks David.

David:Thank you both.

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.

J.C. Brown is of counsel in the Ice Miller's Business Group. J.C. focuses his practice on private equity and venture capital funds as well as strategic investors in various transactional matters. He also focuses heavily on business development, opening up opportunities and adding value to Ice Miller’s client relationships.

Chelsea Abramowitz is an associate in Ice Miller’s Business and Bankruptcy, Restructuring, and Creditors’ Rights Groups. Chelsea earned her Juris Doctor from Fordham University School of Law and her Bachelor of Science from Tulane University.

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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