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10 Potential Deal Breakers When Acquiring a Franchise System

By Andrae Marrocco , McMillan LLP

Franchise systems present a valuable investment proposition for strategic and financial investors. The appeal of robust, long-term, and diversified royalty income streams, proven business concepts, potential for scalability and expansion, shared expansion costs, and the goodwill and strength of an established brand has increasingly caught the attention of private equity, family offices, and other sophisticated acquirers. Set out below are several critical franchise specific considerations for investors exploring the acquisition of a franchise system?

Immediate Red Flags. Certain deficiencies rise to the level of immediate red flags including the following. (1) High franchisee turnover and/or poor franchisee satisfaction/culture within the system. Franchise systems with such attributes do not thrive and, in many cases, may be on the decline. (2) Weak unit economics, declining same-unit sales, or challenging broader economic conditions (eg emerging or shifting market dynamics). Franchise units are the engine of the franchise system; if not functioning optimally, the franchise system’s value is impaired. (3) Overall lackluster rating on legal documentation, system compliance (and enforcement), and significant litigation with franchisees and third parties. The latter elements individually may be explainable and ameliorable, but grouped together could be a perilous sign.

Weak Brand Strength/Infrastructure. Franchise systems must possess a proven replicable business concept that is adaptable across markets. There ought to be a sound platform and associated infrastructure to conduct the existing corporate operations and units including manuals, training programs, ongoing consultation, franchisee communication strategies, compliance monitoring, marketing, technology, processes for modification, and updating products and services, etc. Strong franchise systems possess a blueprint for building out that platform and infrastructure (for future growth and expansion).

Poor Unit Economics. Investors must analyze the certainty and recurring nature of the ongoing royalty revenue (together with other revenue such as technology fees, supply arrangement fees, etc) independently of one-time fees (eg initial franchise fees). Additional important inquires include the following. (1) Consider carefully the remaining term on franchise arrangements and the likely percentage of renewals together with the age, demographic, and level of sophistication of the franchisee population, jurisdiction and regional trends or differences, and payment delinquencies. (2) Watch for suspect sources of revenue (eg self-dealing) as well as concentration among small pools of franchisees. (3) Explore the future potential for royalty stream growth including through increased same-unit sales, an increase in the franchisee population, or the introduction of new products and services.

No Protection. The core assets of a franchise system are the intangible assets such as intellectual property (trademarks, trade secrets, copyright, patents, etc). Has the existing franchisor taken appropriate steps to protect its owned or licensed intellectual property rights (through registration, contractual covenants, conduct with franchisees etc)? Investors should assess whether the franchisor has conscientiously policed its intellectual property rights. Equally important is the investigation of whether there is scope to protect the intellectual property in jurisdictions that form part of the growth strategy.

Impaired Human Capital. In some cases investors will look to keep existing management (or at least part of it) in place. This necessitates due diligence on each member of the team, their current roles and responsibilities, confirmation that all of the typical franchise system roles and functions are covered, together with an analysis of where things might fit post-acquisition. A number of circumstances with respect to human capital can create inauspicious conditions. For example, the imminent retirement of key personnel like senior franchise development or franchise operations managers where there are no trained replacements. Of equal concern is the risk that key personnel will leave shortly after completion of the acquisition.

Unhealthy Systems. Franchisees have been referred to as the “lifeblood” of a franchise system. It stands to reason that the franchisor’s relationship with franchisees is critical to the health of the system. If that relationship is characterized by constant tension, disagreements, defaults, and a high turnover of franchisees, it may not bode well for any incoming franchisor. The existence of franchisee associations can be a symptom of a previous or current unhealthy system (eg particularly where the association was established for the purposes of mounting a challenge against the franchisor). On the flip side, the non-existence of a franchise advisory council (typically established to permit franchisees a forum to voice their ideas and concerns, and to have regular meaningful communication with the franchisor) can also be symptomatic of an unhealthy system.

Breaking the Rules. Franchising has become increasingly regulated and is also an increasingly litigious area of law. The remedies available to franchisees under franchise laws are strict and extreme. It is critical that franchisors be in a position to demonstrate compliance with all applicable franchise laws. This includes keeping appropriate documentary records to establish that: (i) franchise sales, disclosure, and other processes were carried out in a manner that complied with applicable franchise laws, (ii) any earnings projections or estimated operating costs provided were based on reasonable assumptions and were appropriately substantiated, (iii) there has been ongoing compliance with franchise laws. Non-compliance with franchise laws creates significant exposure for acquirers, and is not taken lightly in their due diligence and assessment.

Bad Deals. The franchisor’s contractual rights and obligations with respect to its franchisees frames the franchise system’s legal structure. A second-rate approach to drafting, negotiating, and implementing franchise agreements (and ancillary agreements and arrangements) with franchisees may render a franchise system unacceptable. Numerous versions of franchise agreements with different terms, “one-off” side deals, and/or poor record keeping may make understanding the rights and obligations vis-à-vis the franchise system a lengthy, complex, and uncertain undertaking. Any respite or concessions made with respect to a franchisee’s financial obligations may be harmful to the economic assessment and viability of the franchise system.

Stuck or Prohibited. There may be unfavourable or prohibitive provisions that stand in direct opposition to growth and expansion plans. For example: (i) near ending or extended term and renewal provisions (depending on the investors plans may be of concern), (ii) the precise breadth and limitations of system modification rights and obligations may be incongruent with strategic plans, (iii) the nature and scope of territorial rights granted to franchisees (including exclusivity terms) may stifle growth strategy and structure for particular regions (for example, where large development areas have been granted with long development terms), (iv) inferior reservation of rights may prevent expansion through alternative distribution channels or the achievement of economies of scale (eg not being able to leverage the same infrastructure across multiple franchise systems), or (v) termination rights that are too lax for franchisees and/or too onerous for the franchisor may also present challenges.

Outdated Technology. Franchisors face a precarious three-way intersection of increased accountability and regulation over consumer privacy, a growing volume and sophistication of cyberattacks on consumer data, and the expanding boundaries of franchisor liability for matters arising at the franchise unit level. It is imperative that franchisors maintain, update, and make continual investments in their technology systems to ensure that they are operating at optimum levels. Looking at technology as an asset, in many cases, technology is a critical aspect of the competitive advantage that franchise systems have in their particular market. Accordingly, aging technology can translate to loss of market share.

Industry-specific considerations exist in many M&A transactions, franchise M&A transactions are no different. An understanding of the franchise business model, the underlying assets, and the sorts of issues and challenges that can arise in that context is critical when looking to acquire a franchise system.

About the author:

Andrae Marrocco is a partner in the Toronto office of McMillan. His transactional practice is focused on advising domestic and international businesses on franchise & distribution matters and corporate/M&A transactions. He has particular expertise in complex franchise arrangements, franchise system mergers and acquisitions, and cross-border/international transactions. Andrae can be contacted at

The contents of this article formed part of a longer article co-authored by Andrae Marrocco and Mike Bidwell, President and CEO of Neighbourly, a US franchisor with over 20 franchise concepts in the repair, maintenance, and enhancement of homes and properties sector (with over 3,300 ultimate franchisees).




Connection Success: WestCape Advisors

Opus Connect’s mission is to form connections and foster relationships between professionals in the private equity, banking, finance and other transactional industries in order to improve outcomes in deal flow and negotiation. We all know that it can take a huge amount of effort and years of networking to achieve results, and so when those results come to fruition, it’s important for us to highlight and congratulate the parties. A few months ago, we hosted our LA Deal Connect in which we interviewed several members of Opus Connect about their experiences and what is so valuable for them about coming to our events. Not surprisingly, a few of these interviewees told us about actual deals they’ve closed as a result of relationships forged through Opus Connect.

One such deal was the closing of a $6MM senior credit facility, consisting of a $4.5MM revolving line of credit and a $1.5MM term loan from TAB Bank. Opus member Cary Hurwitz, of WestCape Advisors, a division of KEMA Partners LLC, served as the exclusive financial advisor to The Triangle Group in the transaction. For the past 40 years, The Triangle Group has provided 3PL services, including transportation, warehousing, fulfillment, and supply-chain management to major retail enterprises, global brands, and the manufacturers that support them. The company operates from two central hubs in California and New Jersey, supported by warehousing and distribution depots nationwide which, combined, cover more than 1.5MM square feet.

Proceeds went towards supporting the company’s ongoing double-digit expansion, the on-boarding of two new national retail customers, and the extension of services to its already impressive client base. The Triangle Group had been largely self-funded prior to this financing, but its rapid growth called for more efficient access to capital from a financing partner that could appreciate the growth opportunity and understand the intricacies of the company’s operations, assets, and cash flow. Caryn Blanc, owner and Managing Partner of The Triangle Group expressed that “WestCape Advisors played a critical role in analyzing our situation and structuring a transaction that was favorable for all parties. This financing has enabled us to acquire key infrastructure and support and to continue serving our valued customers in the exceptional manner they have come to expect.”

Hurwitz commenced the process of finding a loan for The Triangle Group with a number of candidates and prospects. One prospect was Opus Connect member Michelle Rogers of Corbel Capital Partners, with whom Hurwitz discussed the transaction at an Opus Connect event. Rogers recommended an ABL lender, TAB Bank, which was a perfect fit for the Company and transaction. TAB quickly and aggressively jumped into the process, resulting in the above transaction. Opus Connect congratulates Hurwitz and WestCape Advisors on this successful endeavor, and also applauds Rogers for using an extremely effective business development tactic that we encourage all of our members to employ – the personal referral.


Lou Sokolovskiy
Founder/CEO, Opus Connect

Guns v Butter: Understanding the Present Value of Business Development

“Many people have a hard time understanding the present value of business development because they see it as a nebulous concept that may or may not help them in the future.”

If you read our recently published series Mastering the Art of Business Development, then you know how important it is to prioritize business development in your career. And yet, despite this knowledge, many people still don’t spend enough (or any) time on business development. One of the reasons for this is that while people know that business development is important, they don’t understand the present value of doing it. This is a challenge even for those who enjoy doing business development because at the end of the day, we all still need to get our actual work done. This article will teach you how to find the “sweet spot” where you not only get your work done, but you enhance your career and income through an optimal amount of business development.

Many people have a hard time understanding the present value of business development because they see it as a nebulous concept that may or may not help them in the future. Therefore, they choose to focus their time on things that appear more concrete (like billing hours) despite evidence to the contrary. For example, the beneficial effects of meditation are now well-known and studied. Meditating even just five minutes a day can improve productivity and reduce stress, illness and fatigue. I know a few people who take this seriously and incorporate a meditation ritual into their daily routine, but for most (myself included), we make excuses like “I don’t have time today” or “I’ll get to it later.” There’s an old Buddhist saying: “You should meditate one hour a day, but if you don’t have an hour to meditate, you should meditate two hours a day!”

In contrast, there are many other choices that produce delayed and uncertain results that we as a society routinely accept as normal. For instance, most Americans will give up working at a full-time job for four years in order to attend college because they believe that the long-term payout is worth it. Many people will also give up income in order to start their own business because they believe that in the long run the benefit will be worthwhile. Hundreds of thousands of Americans visit a gym multiple times a week to achieve both long-term health and aesthetic results despite the opportunity cost and hard work involved.

So, what is the difference between someone who is willing to go to the gym five times a week for an hour, but who won’t spend five minutes meditating even though it’s proven to make him or her more effective and healthier? Why would someone give up four years of income and work experience to attend an expensive University when that same person years later won’t give up one billable hour a week to attend a networking event or grab drinks with a business contact? The answer is that the risk of not taking those five minutes to meditate, or not going to that networking event or grabbing a drink is not immediate and there is no guarantee that it will occur. In contrast, societal standards and the long-standing cultural norms associated with going to college and the gym give us more certainty that we will make more money in the future with a college degree and that we will reduce our risk of heart attack and look more attractive if we regularly exercise.

It’s that certainty or lack thereof that this article aims to address, because it is, in fact, certain that you will gain a whole host of benefits from spending some amount of time doing business development. By attempting to calculate the present value of doing business development, you can be more certain that you are spending your time in an optimal way.

One way you might contemplate this issue is by calculating your marginal utility. In classic economics, marginal utility, or the idea of opportunity cost, is demonstrated through a model of guns vs. butter. In a theoretical economy with only two goods, a choice must be made between how much of each good to produce. As an economy produces more guns (military spending) it must reduce its production of butter (food), and vice versa.[1]

In other words, there is a “sweet spot” where you will benefit the most from working x number of hours and doing business development for y number of hours. Doing more or less business development than this sweet spot will decrease your utility.  For example, the first hour(s) of business development may help you a lot, but at some point the utility of business development starts to drastically fall and you need to switch to work mode.

Using this model as a frame of reference, take a look at your investments and returns and make some estimates. Note: the following examples are oversimplified and in reality, there are likely many other factors to consider, but they illustrate the concept. Let’s say you are an attorney at a firm. The opportunity cost for doing business development is lost billable hours. But the opportunity cost for not doing business development is that you may not be able to make partner or eventually run your own business. Let’s say that you make about $200 an hour if you outsource and do work for other lawyers. If you were billing your own clients, you’d be able to charge $400 an hour. The question then becomes, how much time will you need to spend doing business development in order to get (and keep) a client?

In one scenario, the lawyer who bills 40 hours a week at $200 an hour makes $8,000 a week. If you were able to secure clients by doing 10 hours of business development a week and billing 30 hours at a rate of $400 an hour, that would be worth it because you would end up with $12,000 a week. If, on the other hand, you are just starting out and have no experience and no network, it might take you 30 hours a week to get enough clients just to bill 10 hours a week, which means you’d only be making $4,000 a month. Perhaps in that scenario, it would be better to build your experience and network working for other people before going out on your own.

Remember, more business development doesn’t necessarily equal more new clients! I, for example, have cut down on the number of networking conferences I go to per year because I found that I did not have enough time to follow up with each contact. Without follow up, the time spent on the conference is meaningless. This is a situation in which more networking decreases utility. You may also want to consider that not all clients are equal. Some clients may pay lower rates, but take up a lot more of your business development time to acquire and keep. In that situation you’d want to focus your business development efforts on fewer clients but those that are less of a headache and pay higher rates.

Some additional questions you might want to ask yourself in order to make this calculation might be:

  • What have you invested? (Ex:  tuition)
  • What has been your opportunity cost (Ex: not having a job while in grad school)
  • How much do you currently make? For what amount of work?
  • What is your current quality of life?
  • How much does someone in a comparable position to what you see yourself in in the future make? How many hours do they work?  What is their quality of life like?

Hopefully this helps you identify your own personal sweet spot so that you can optimize your utility. Stay tuned for more business development tips from myself and other experts in the Opus Connect community.



Lou Sokolovskiy
Founder/CEO, Opus Connect

Race to the Finish Line: Proprietary Deals in Today’s Hypercompetitive Market

By Carrie DiLauro, Hamilton Robinson Capital Partners

This weekend the Indy 500 will take place at the Brickyard in Indianapolis for its 103rd year. The race has grown to become the largest single-day sporting event in the world, drawing 300,000-400,000 spectators (to put this in perspective, the largest crowd to ever watch a Super Bowl live was Super Bowl XIV in 1980, drawing 103,985 spectators). The Brickyard has been owned by the same family since the end of World War II, so you might be wondering what in the world does this have to do with proprietary deals? Proprietary deal flow is the act of identifying companies that no other investor has engaged with in the hopes of actually closing a deal with better terms and a lower purchase price multiple, achieving a significant competitive advantage. There has been a lot of talk in the private equity sector recently about the decline of proprietary deal flow. Many even believe that proprietary deals no longer exist at all.

There are several “causes of death” of the proprietary deal. The American Investment Council reports allocations to private equity increased 8% from 2017 to 2018 topping out at $331 billion, and 47% of institutional investors intend to increase their exposure to private equity again this year.  While the increase in allocations to private equity is exciting, it also means that firms need to identify companies to purchase and deploy this growing pool of capital. Higher levels of competition have made identifying inefficiencies in the system and finding a discount or off-the-beaten-path opportunity virtually impossible. Now ratchet up the competition with the explosive growth of the independent broker-dealer, which is now at an all-time high due to the reversal of the DOL’s fiduciary rule, rising interest rates and the steady growth of the stock market. The Bain Global Private Equity Report estimates for every 100 potential targets that go into the top of the funnel, it is estimated that only 1-2 will actually result in a closed deal and Sutton Place Strategies reports private equity firms are only seeing a median of 17.2% of their target market deal flow.

Additionally, increased use of technology has considerably democratized deal flow, decreasing proprietary barriers and transferring the balance of power to the business owner. LexisNexis estimated back in 2011, only 57% of private equity firms were utilizing a CRM system. Today, a CRM is table stakes for an effective deal sourcing program. As transparency increases and market forces take over, the best products will attract the best buyers at the best prices in the shortest amount of time. Private equity firms have adapted by expanding technology usage back to the due diligence phase of courtship. By applying advanced analytics, firms can develop a faster more comprehensive assessment of which assets of a potential target are essential to support growth. Analytics are used to evaluate management and operating capabilities as well as develop better probability ranges around pricing the deal. In this hyper-competitive market, private equity firms are becoming more focused on “winning” deals at an acceptable price than on where deals are sourced from. With purchasing prices approaching all-time highs (GFData headlined a near-record valuation mark of 7.8x Trailing Twelve Months (TTM) adjusted EBITDA for the fourth quarter of 2018), as well as the decreasing cost and ability to easily implement many of the data analytics programs, private equity firms are again adapting and refining their strategies to seek out competitive advantages not just in deal sourcing, but in the ability to close a deal.

So how can private equity firms differentiate themselves and improve their odds in this hypercompetitive market? One strategy is to focus more on sourcing the right deals. Quality trumps quantity, and quality deals are sourced by adding a humanizing element to the process. Firms should develop a core identity around the collective skills and expertise of the people who work there. The ability to clearly articulate the types of businesses you would like to buy and having a unique angle on that deal will set you apart from others in a competitive process. In addition, deal sourcing should become a company-wide initiative, with professionals aligning themselves across industry verticals to foster better conversations and a more in-depth understanding of the unique financial and operational attributes in that industry. The ability to identify and expand a network of intermediaries, advisers and influencers in a particular vertical and foster “contacts” into “relationships” will give a private equity firms an edge in identifying new deal opportunities and perhaps a path to that elusive unicorn, a proprietary deal.

Back to the race. Over a hundred years ago, at the very first Indy 500 race in 1911, most cars used a co-pilot to warn the driver when he was being overtaken. The winner of the race that year, Ray Harroun, outfitted his car with a rear-view mirror instead of a co-pilot. At this year’s race, thanks to new “smart racing” technology, over 50 million data records will be recorded off the cars in an average 2-hour race. Spectators will be able to monitor a driver’s heartbeat and even the muscle movement in their forearms! While advances in technology have clearly changed the way that both drivers and fans experience the Indy 500, at the end of the day the driver is still an integral component of winning the race. So too, with private equity, relationships and professional expertise, in combination with advanced technology, is the formula that firms need to win the deal.


About the author:

Carrie joined HRCP in 2009 and brings over 25 years of experience in global manufacturing and finance. She is responsible for a wide scope of operations management for the firm including investment sourcing, investor relations, marketing, IT, facilities management, human resources, compliance and accounting. Prior to HRCP, Carrie spent 15 years overseeing worldwide textile production. Carrie received a BS from Cornell University and a Master of Finance from Harvard University.

Recap: LA Deal Connect For Private Equity and Investment Bankers

Economics vs. Relationship – How the Two are Measured When Choosing a Deal Partner

On March 19, 2019 Opus Connect produced an Investment Banker Deal Connect, hosted by Buchalter in Downtown Los Angeles. Over 50 lower middle and middle market M&A senior executives attended the event, which was sponsored by Avant Advisory, Sapient Investigations, USI Insurance, Lawrence Financial Group, GemCap Solutions, First Republic Bank, and CohnReznick. Opus kicked off the day with a panel on how relationships play a significant role in today’s highly competitive market, followed by the Deal Connect portion of the event in which attendees were paired up for multiple one-on-one meetings.

The panel, entitled Economics vs. Relationship – How the Two are Measured When Choosing a Deal Partner, was moderated by Phil Schroeder, one of Buchalter’s Shareholders. Panelists included two investment banking professionals (Burke Dempsey, Managing Director of Wedbush Securities and Scott Cohen, Vice President of Metropolitan Capital) and two private equity professionals (Carrie DiLauro, Director of Operations at Hamilton Robinson Capital Partners and Larry Simon, a Partner at Clearview Capital). Mr. Schroeder asked questions relating to how relationships affect deal-flow, from getting to the negotiations table to closing the deal.

DiLauro posited that in the highly competitive private equity market of late, proprietary deals have become a thing of the past. Dempsey generally agreed, and explained how this affected the role of investment bankers who now strive to save private equity firms the trouble of chasing irrelevant deals by understanding these firms and bringing only appropriate deals to the table. Cohen, in turn, posited that coming to events such as the Deal Connect is a great way for investment bankers to learn more about the private equity firms and to understand what they are looking for.

The panelists had some interesting perspectives on how best to ensure that a transaction closes once the parties are at the table. While economics are obviously relevant to some degree, Simon shared his view that “relationships are everything.” He analogized the negotiations table to a date: “You get in the room and you are either feeling it or not. You need to feel the vibe and have a like-mindedness.” DiLauro also agreed that economics isn’t everything in a deal. She recounted an experience in which her firm was buying a family owned business run by a husband and wife, who disagreed on what they wanted out of the deal. The wife wanted to stay on and run the company, while the husband was looking to buy a marina. Ultimately, a higher bidder lost out because they were too aggressive in their approach and the couple felt more comfortable with Hamilton Robinson.

The investment bankers also agreed that the relationship aspects of a deal cannot be understated. Cohen, for example, always asks families what the legacy is they want to leave and what would they view as a success in 5 years. In his experience, there is more to these transactions than only the money. Dempsey also conferred that there is an element of trust and goodwill that goes into a successful transaction. When terms and conditions are being presented, it’s important to feel confident that the people across the table from you are knowledgeable, fair and honest.

Following the panel, participants entered into an afternoon of one-on-one meetings, carefully curated by Opus Connect to facilitate meaningful and relevant connections. Matches were mostly between capital providers and investment bankers and were based on criteria such as industry and asset classes. In addition, each individual was pre-qualified by Opus Connect prior to the event.

Upcoming Deal Connect events are taking place in San Francisco, Denver and Toronto this May. You can find more information about these events as well as many others on our website. Contact us today to sign up or to become a member.



Deal Connect: A Pre-Filled Dance Card For M&A Professionals

‘But perhaps the most important value-add that Opus Connect provides its members is a basis for relationships that result in transactions.’


Deal Connect: A Pre-Filled Dance Card For M&A Professionals

Opus Connect hosts frequent Deal Connect events in various cities throughout the country for M&A professionals. On March 19, 2019, Opus produced an Investment Banker Deal Connect, hosted by Buchalter in Downtown Los Angeles. Over 50 lower middle and middle market M&A senior executives attended the event, which was sponsored by Avant Advisory, Sapient Investigations, USI Insurance, Lawrence Financial Group, GemCap Solutions, First Republic Bank, and CohnReznick. The day began with a panel on how relationships play a significant role in today’s highly competitive market, followed by the Deal Connect portion of the event in which attendees were paired up for multiple one-on-one meetings that were carefully curated by Opus Connect to facilitate meaningful and relevant connections. Matches were mostly between capital providers and investment bankers and were based on criteria such as industry and asset classes. In addition, each individual was pre-qualified by Opus Connect prior to the event.

According to OFS Capital’s Michelle Rogers, the Deal Connect portion of the event is like getting a “pre-filled dance card” of relevant connections. For Carrie DiLauro, “usually our selection of who we are meeting with is pretty well vetted towards what we actually do and the deal we would actually partake in.” Having so many meetings in one afternoon is also an “efficient way of meeting new potential investors,” according to Isaac Palmer, Founder and Managing Partner of Qualia Legacy Advisors. Qualia is a boutique investment bank based in Los Angeles that focuses exclusively on entertainment and media. For Palmer, Deal Connect is a great way of getting on people’s radars who are specifically interested in these industries.

“The unique regional nature of these events” is also attractive to participants, according to Jeff Parent, Vice President of Insight Equity, a middle market majority equity buyout firm based outside of Dallas, Texas. It “enables us to meet people we wouldn’t ordinarily be able to meet.” For Michael Grenier, who was attending his first Deal Connect, the draw was to network and meet relevant contacts face-to-face. Grenier, the sole member of Ballard Canyon Capital, lower middle market- focused investment bank based in Santa Barbara, CA, spoke of the importance of face-to-face meetings like those at a Deal Connect which foster a level of comfort and trust, an invaluable aspect of a transaction.

Attending a Deal Connect is also a great marketing opportunity. For Britt Terrell of Backbone Capital, a capital raising advisor in the lower middle market, a huge value-add from attending Deal Connect events has been the ability to speak on or lead panels. Terrell believes that these opportunities have helped build his brand and increase his firm’s exposure. This could prove especially useful for newer or up-and-coming firms, such as G2 Capital Advisors, a boutique investment bank and restructuring firm. Ben Wright, G2’s COO claimed that Deal Connect events have helped him “get our name out” as well as provided “great marketing and opportunities to go to new geographies.”

But perhaps the most important value-add that Opus Connect provides its members is a basis for relationships that result in transactions. Ben Wright shared that “there is one firm attending today that is currently bidding on one of our assets.” Wright had met this firm at three previous Opus Connect events and was “hopeful that this will lead to a closed deal.” Indeed, several attendees described their successes due to Opus Connect events. Stefan Okhuysen, a Principal at CVF Capital Partners, a lower middle market mezzanine financing and private equity group based in CA said that he’s seen a number of deals come out of Opus Connect events. Okhuysen shared that he was attending this Deal Connect because his firm currently has a $200 million fund that it needs to deploy and was hopeful that the event would help them do that.

On the investment banking side, Cary Hurwitz of West Cape Advisors mentioned a deal that he closed through Opus Connect. Several years ago at another Opus event, he showed Michelle Rogers of OFS Capital a transaction in the transportation logistics space. Rogers referred an asset-based lender for the deal that turned out to be the perfect fit for the company. She introduced Hurwitz to three other people and one of those connections led to a closed deal.

One of the challenges of having such a full dance card is how participants can still stand out and be memorable. We asked some of the participants how they use their “personal brand” to differentiate themselves at Deal Connect events so that they create memorable, lasting relationships. AJ Somers of Arrowmark Partners starts by trying to figure out who he is talking to first, so that her can target it the conversation in a way that it will resonate. “I usually start out by asking people, what would make this day successful for you? I’ll try to figure out what they are actually after, and then I can talk to it.” Michelle Rogers uses a more “personal touch,” asking questions such as where the person went to school or whether they have kids so that when she sends a follow up she can speak to more than just the professional overlap.

Upcoming Deal Connect events are taking place in San Francisco, Denver and Toronto this May. You can find more information about these events as well as many others on our website. Contact us today to sign up or to become a member.

Revenue Recognition for Private Equity

The Pine Hill Group
Opus Connect NYC Private Equity Chapter Sponsor


Revenue Recognition for Private Equity
How an accounting standard can impact your deal

The new accounting standard for revenue recognition (ASC 606), which goes into effect early next year for privately held companies is just an accounting change, right? Not at all. It could prompt private equity firms to adjust the way they project the growth of portfolio companies and revise the way they market those companies for sale. The goal of the standard is to create a comprehensive revenue recognition model that is agnostic to all industries and capital markets and increases comparability of companies’ financial statements. To do so, it ties the recognition of revenue more closely to when control of a product or service is transferred to a customer. Depending on the type of company, that could mean big changes to key financial metrics and ratios, including EBITDA, and could impact the financials in ways that could have an impact on debt covenant compliance, taxes, mergers and acquisition activity, and other exit strategies such as IPOs.

You may feel an impact whether buying or selling

On the buy side, it’s important that private equity (PE) firms understand the standard well enough to evaluate the impacts during their due diligence. If a target hasn’t yet implemented the standard, the PE firm needs to understand what the financials will look like in the future once the new rules become effective for all companies.

On the sell side, PE firms need to make sure their portfolio companies have implemented the new standard or be able to provide an explanation of why they have not and their action plan to do so in due course. This is especially important if the potential buyer is a public company that has already complied with the new standard.

The new standard offers two transition options – modified or full retrospective. Under full retrospective, an entity can choose to apply the new standard to all its contracts – and retrospectively adjust each comparative period presented in its 2017-2018 financial statements if it waits until the mandatory effective date.

Under the modified approach, an entity can recognize the cumulative effect of applying the new standard at the date of initial application – and make no adjustments to its comparative information. However, the company will need to report under both legacy and new accounting rules during the year of adoption.

The choice of transition option can have a significant effect on revenue trends. For example, if a company elects modified retrospective, i.e., cumulative catch-up, it may not be appropriate for a sponsor to look at trends from 2017 – 2019 because the periods will be presented on different accounting bases. Buyers may discount the offer price because of the lack of comparability. Therefore, to maximize value, private companies that may be involved in potential sale-side transactions might want to strongly consider adopting ASC 606 on a retrospective basis.

Take a SAAS company that has $9 million in revenue over a period of years, and the contract has two deliverables/obligations that are distinct from each other. Under the standard, depending on the obligations outlined in the contract, some of the revenue may now be recognized upfront, and some revenue may be recognized over time. The result is that revenue will temporarily increase, creating a temporary blip in profitability or EBITDA.

Or consider a pharmaceutical company that currently recognizes revenue only when their distributor sells to the end customer. Under the new standard, the company may be able to recognize revenue earlier based on when “control” has transferred, or when the product is provided to the distributor. Further, certain contract-related costs like sales commissions, which were previously expenses when incurred, may now have to be capitalized and amortized over the life of the contract, which would increase EBITDA in certain periods.

Under legacy GAAP, some companies didn’t expressly disclose their unbilled receivables – a very risky account which represents revenue recognized, but which can’t currently be billed to customers under the terms of the contract. Under ASC 606, unbilled revenues are now captured as part of a “contract asset” account, the balances of which need to be clearly disclosed in the financials. Prospective buyers should scrutinize this account during their due diligence process as it carries significant risk if the target’s estimates of contract profitability, or the customer’s ability/intent to pay, turn out to be different than initial expectations.

The bottom line is that even if a company’s total revenue doesn’t change, the “timing” of when the revenue is will likely change which may have an impact on key metrics during the acquisition and divestiture processes. Private equity firms should understand how to tell the story as to why revenue year over year is different even if the overall profitability is the same.

The value creation story may change

When a company implements the new standard, private equity owners may need to rewrite the value creation story they tell potential buyers. PE firms use financial modeling to identify and project revenue streams, then devise a strategy for improving those numbers with the goal of exiting the investment in a set number of years. These growth projections are the heart of their story.

Under the new rules, the whole model may be impacted as a result of the revenue numbers reported in your financial statements changing. It will make it harder to tell your story to attract buyers even if nothing actually changes in the performance of the company. You need to be smart about how you tell the story and how the financial statements reflect that story. Given the complexities of ASC 606, implementation will require a carefully planned methodology and an experienced project management team. Unlike some previous standards, ASC 606 requires significant effort, knowledge, and judgment to ensure that disclosures in the financial statement are accurate, complete, and timely. The new guidelines also add significant new disclosure requirements that may vary across different companies based on their operations. It will be very difficult to use boilerplate disclosures to satisfy the requirements in ASC 606. Most businesses will need to seek outside advisors since in-house ASC 606 expertise is few and far between.

Time is running out

As the effective date of ASC 606 is imminent, implementing ASC 606 should be a high priority for portfolio companies. If an acquisition is in your future, you may have to modify or normalize the information you receive from the target company (seller) to compare apples to apples to get a good sense of the impact on key metrics, ratios, EBITDA.

To have a further discussion regarding the revenue recognition standard, please contact:

Dan Rudio
Managing Director

William Andreoni
Senior Director

© 2018 Pine Hill Group llc. This document is for general information purposes only, and should not be used as a substitute for
consultation with professional advisors.


Mergers and Acquisitions events

by Lou Sokolovskiy (12/12)

Accountability is another way to ensure that you are making the most out of your personal business development strategy. In this article, I discuss three different techniques that you can employ to create accountability.


Mastering the Art of Business Development Blog Series
Article 12: Accountability

In my recent series of articles, we’ve been working on developing our own Personal Business Development Plans.  A personal plan is like a roadmap, and having one makes it much easier to conduct business development in a way that is meaningful, enjoyable and ultimately, successful. As you may recall, the final step in creating a personal business development plan is to set up a system for tracking your progress and goals. However, there is an additional tool that can help ensure that you are able to get the best results out of your plan:  accountability.

A good analogy is a dieter. People go on diets all the time. Some go to a group like Jenny Craig, others see a private nutritionist, and others buy a book or read up online. In most cases, these people start out with a plan. So what is the difference between those who succeed and those who fail? Some of it is certainly about will-power, but another big factor is accountability. When dieters are held accountable for whether or not they stick to their plan, they tend to see better results. Accountability in this situation may take its form in having to report to other people, or to the motivation created by virtue of a financial investment.

Like a dieter, you might start out with a great Personal Business Development Plan.  But if you don’t stick to the action items and time budget that you’ve created, then it isn’t worth much. Additionally, sometimes these plans may need to be altered based on circumstances and also based on trial and error. If something isn’t working you likely need to adjust it.

So how do you create accountability in business development?  Here are three tools you can use:

  1. Hire a personal business development coach: Why do people use personal trainers instead of just going to the gym? Firstly, they get a more tailored approach to their personal needs. And secondly, it’s a lot harder to skip a session that you’ve paid for, whereas if you simply have a membership to a gym there is no penalty for deciding to stay in bed or head to happy hour instead of pumping some iron.  It’s the same with personal business development coaches.  A coach can help you create your personal plan, including identifying things that perhaps you wouldn’t see on your own. And because you are committed to paying for sessions (or at least to showing up since it is one on one), you will be more motivated to make progress between meetings.
  2. Establish a “chavrusa”: Chavrusa comes from a Hebrew word which means a learning partner. Your chavrusa should consist of you and one other person who is also working on improving his or her business development skills. Your partner should be a peer, but not a competitor. For example, a corporate lawyer and an accountant would make a good team because they both understand the subject matter of each other’s professions, but are not in direct competition. The most important thing is that you meet consistently and that you hold each other accountable. When you meet, in addition to discussing new action items or contacts that you might add to your personal plan, you must go over your existing goals and action items and explain your progress (or lack thereof) to your partner. Even though there is no punishment for failing to deliver on an action item, your chavrusa will psychologically motivate you to accomplish your goals because it creates a sense of accountability not just to yourself, but to another person.
  3. Joining a mastermind group: A concept created by Napoleon Hill 100 years ago in a book called “Think Big and Grow Rich”, a mastermind groups offer a combination of brainstorming, education, peer accountability and support in a group setting to sharpen your business and personal skills. It helps you and your mastermind group members achieve success. Participants challenge each other to set powerful goals, and more importantly, to accomplish them. You can create your own mastermind group, or you can reach out to us at Opus Connect and we can try to place you in one that is appropriate and meets your needs.

To sum this up, accountability is an important factor in the success of your ability to implement your Personal Business Development Plan and achieve maximum results. We’ve discussed three tools you can employ to create accountability. I would suggest that you use at least one of these, if not more.


Lou Sokolovskiy
Founder/CEO, Opus Connect


Tracking the Success of Your Business Development Plan

by Lou Sokolovskiy (11/12)

No good plan comes without a way to track success. By creating your own personalized matrix tracking system, you can ensure that you are optimizing your personal business development strategy.

Mastering the Art of Business Development Blog Series
Article 11: Tracking the Success of Your Business Development Plan

We’ve spent the last few months developing our Personal Business Development Plans, and by this point, you should have a clear mission, goals and a well-defined action plan. The seventh, and final step involves setting up a mechanism to track your progress. Why is this necessary? You might have an incredible plan, but you need a way to determine whether it is working, and how well it is working. Many people need to make adjustments along the way, but how will you decide what those adjustments should be? Step Seven is designed to address these issues by helping you create an easy-to-use and effective tracking system.

What are you tracking?

Before setting up your system, you need to define what it is that you are trying to track. There are many different aspects of your business development strategy that you can and should track, the specifics of which are unique in each case. Common things you might want to consider tracking include number of new contacts, number of new clients, number of returning clients, amount of income, number of publications, etc. If you need help figuring out what to track, start by looking at each of your action items as well as your overall goals and identify what would qualify as success in each case.

The Business Development Funnel

As I mentioned above, one of the most common things that people need to track in business development is your contacts and whether and how those contacts translate into revenue. In order to show you how to do this, I first need to define a key concept: the business development funnel. Many of you are probably familiar with the term “sales funnel”, which is a list of the steps that a salesperson takes from lead generation all the way down to a conversion or sale. The funnel is a tool you can use in order to determine how many leads you would need to generate in order to end up with a certain amount of sales, on average. For example, a salesperson might email 100 leads, out of which 50 will respond. Out of those 50, 25 will be interested in setting up a demo, and out of those 25, 10 will move forward with a free trial of the product. Perhaps 5 of the leads that use the free trial decide to sign up as paying clients. In this way, the salesperson can determine how many leads he or she must contact in order to get X number of paying customers, as well as determine the monetary value of a lead at each stage in the funnel.

The sales funnel is pretty straightforward, and therefore, salespeople are great at using it. Professionals who are trying to do business development, on the other hand, do not use funnels as frequently. Yet, it is an integral part of creating an action plan that can be tracked and adjusted for maximum success.

A classic example of a business development funnel looks something like this: Alex knows 1,000 people. Out of those 1,000 people, he is in touch with about 250, 100 of which he maintains a meaningful relationship with. Out of those 100, 50 attend one of Alex’s events each year. 20 of them end up being clients, and in addition, 10 more of them become referral sources which then leads to another 10 clients.

Here is another example that is slightly more complex. Let’s revisit Jackie again. While bringing clients into the firm is obviously great, her main long term goal as you will recall is to pivot into an in-house counsel position at a tech start-up company. In order to do that, she needs to make connections in the tech industry so that when she is ready to make the move, she has people to turn to who can connect her with job opportunities. Here, the funnel is not necessarily linear, but might look something like this: Jackie joins the Bar Association’s Tech Division and goes to 2 networking events each month. At each event, she talks to 10 people, and follows up with 8 of them. Of the 8, she sets up a coffee or lunch meeting with 5, and forms a close relationship with 1 of the 5 over time. This would mean that Jackie meets 2 people per month with whom she forms a close relationship over time who work in the tech industry. After one year, Jackie has 24 meaningful business contacts, approximately 10 of whom work at companies that Jackie would like to work at, and 5 of whom are at companies that are currently hiring.

How Do You Track These Things?

The tracking system I like best is a matrix in which you can follow your goals and/or action items over a period of time, and compare performance from month to month, and year to year.  You can use a program like Excel or Google Sheets for this purpose. There are also many professional tools out there to help with tracking, such as CRM systems like Salesforce.

How you set up your matrix will depend on what your specific goals and action items are, meaning that your matrix is unique and should be customized according to your personal business development plan. The matrix will appear different depending on what it is that you are trying to track. If you are tracking a business development funnel, each step of the funnel should appear in the tracking matrix:

Contact Follow-up Meeting Continue Followup Becomes Client
Mickey Mouse X X X X
Donald Duck X X X
Cinderella X X
Barack Obama X
Warren Buffett

You might also track something like finances: For example, if one of your goals was to increase your revenues by X% over the course of a year, each month you can actually see what the percentage of increase is. You might need to engage an accountant to help you track your finances, or you can use an accounting software with reporting tools.

This wraps up our series on creating your Personal Business Development Plan. You now have the tools you need in order to build your own. But your efforts shouldn’t stop there, as there are many other tricks and tools that you can use in order to optimize performance of your personal plan.  Next time, we will take a closer look at how other accountability systems can help you succeed in your business development efforts.


Lou Sokolovskiy
Founder/CEO, Opus Connect

Lights, Camera, Action!

by Lou Sokolovskiy (10/12)

Step five in creating your personal business development strategy is to create an over-inclusive list of all possible action items that can help you achieve your objectives. Then, in step six, you can whittle down those objectives to those that are reasonable and most efficient.


Mastering the Art of Business Development Blog Series
Article Ten: Lights, Camera, Action!

Over the past couple of months, I have been going through the steps that you should take in order to build your own Personal Business Development Plan:

  1. Perceive Yourself as a Business of One
  2. Create a Mission Statement
  3. Perform a SWOT Analysis
  4. Develop a Personal Brand Strategy
  5. Determine Action Items
  6. Create a Time Budget
  7. Track Your Progress

Step Five: Determine Action Items

Steps One-Four should have given you a pretty clear picture of what your goals are (short term and long term), as well as what your assets and deficits are. In Step Five, you need to synthesize that information into action items. In other words, what are some specific things that you can do in order to achieve the goals you’ve identified? Think about how you can use your strengths and opportunities, and possibly improve upon your weaknesses and threats. Consider what you need to accomplish in order to build your personal brand. Keep your mission statement in mind and ensure that your action items fall in line with that purpose.

You should begin by being overinclusive. Write down all action items that come to mind, regardless of how easy they will be to accomplish or whether they are reasonable right now. Be as clear and specific as possible and make sure your items are measurable by converting them into weekly or monthly deliverables. You should also include things like quantity or the specific type of audience you are trying to engage.

To illustrate this Step, let’s go back to our example of Jackie, the corporate lawyer who eventually wants to go in-house at a tech start-up. Please note: this is not a complete list of possible action items (that would simply take up too much space) but this should give you the idea of how to do this step. Here are some things we know about Jackie:

  • She works at one of the top firms in Los Angeles in corporate law
  • She is shy and has a hard time meeting new people
  • She has a good network of existing contacts from Cornell and UCLA.
  • She is a wine connoisseur.
  • She recently got into art and frequently visits the LA County Museum of Art (LACMA)

Some of Jackie’s action items could include:

  • Join the Los Angeles County Bar Association’s tech division and attend two events or meetings per month.
  • Join the Young Professional Board of LACMA and attend monthly board meetings.
  • Create a monthly newsletter for best values on wines and send to a “club” of relevant contacts, including college and law school friends as well as business relations.
  • Create Business Development Real Estate™ in the form of a quarterly wine tasting event, hosted in one of the nicer conference rooms at the firm, and invite colleagues from the firm, law school friends and firm clients.
  • Sign up for a bi-weekly public speaking coach.

Step Six: Create a Time Budget

Step Five should produce a list of all possible action items you could take to achieve your goals, and in Step Six you need to create an executable plan by whittling down that list to those items that are reasonable and beneficial for you to engage in at present. In other words, just because you can do something doesn’t mean that right now you should. Your time is precious and limited, and a time budget will ensure that you are using it for the most impactful items on your list. You can always re-evaluate your list in the future, and should plan to do this at least annually, if not more often.

So how do you determine which items you should focus on now? You need to assess the cost-benefit ratio of each item. Think about things like monetary expense, opportunity cost, how much time you actually have to spend on business development and still complete your job, and your personal happiness. You should ideally be looking for the low hanging fruit – the action items that will cost you the least but yield the highest results.

Let’s say that Jackie decides to spend 10 hours per month on business development. While she could do all of the things on her action item list above, that’s quite a lot to perform all at once and frankly, would be difficult to accomplish with her 10-hour time budget. Perhaps she might start out with the two networking events per month and the monthly newsletter. The former is likely to yield relevant results quickly, whereas the latter is easy to accomplish, involves Jackie’s hobby, and is a great way to test the waters before jumping into creating Business Development Real Estate, which is a much larger time commitment and expense.

Another example of creating time budgets might include honing the number of leads you want to add to your sales pipeline or the number of networking events you want to attend. Jackie could attend two meetings of the LA County Bar Association’s Tech Division each month, with a goal of meeting at least ten new contacts at each of those events. If she sees that she is unable to meet twenty new contacts in the course of only two events, she could consider adding another event to her time budget or finding a different action item to make up the difference so that she still gets to twenty new contacts per month.

Spend some time creating your action item list and time budget. In the next article, we will discuss how you can track these action items so that you can ensure maximum success.

Lou Sokolovskiy
Founder/CEO, Opus Connect