Page 4 - TACC 2023 Program

4 HOUSTON BUSINESS JOURNAL FEBRUARY 24 - MARCH 2, 2023 FEBRUARY 24 - MARCH 2, 2023 HOUSTON BUSINESS JOURNAL 5

19th ANNUAL ACG CAPITAL CONNECTION SPONSORED CONTENT SPONSORED CONTENT 19th ANNUAL ACG CAPITAL CONNECTION

Family-Owned Businesses and Succession Planning: You Want to Leave a Legacy...Can You? Darryl Mazow, Partner, Gordon Slower pace of private equity-backed M&A expected to continue Dylan Thomas, Private Equity Reporter,
S&P Global Market Intelligence
Arata Montgomery Barnett

Family-owned businesses are the stays within the business, including client relationships, strategic plan includes components such as new product Smaller-sized transactions and pandemic have large businesses around the globe planning large M&A deals remain difficult to finance.
lifeblood of our economy. Whether skillsets, institutional knowledge, best practices, standard development, new services, geographic location or market, carve-outs are the types of deals to jettison noncore assets. Sector expertise will be a key Still, private equity firms are having conversations with
small or large, first generation or operating procedures, branding, and the value of your the competitive landscape, financial planning, and allocation most likely to make it across the differentiator among the firms vying to buy up spin-offs and companies looking to sell a stake in their businesses, possibly
fourth generation, they all face the service or product. of resources. finish line as a slowdown in private divestments, he said. alongside an agreement to sell the rest at a later date. Wolff
same question. When the time “Professionalize” your business. By implementing Outline your desires for giving back to the community equity-backed M&A activity extends Scott Wolff, managing director of middle-market private said these smaller deals are easier to finance and generate
comes to hand the business over sound corporate governance, establishing clear policies and and charitable intent. Without a doubt, family-owned into 2023. equity firm American Securities LLC, said buyers of all types some liquidity for the business owners.
to the next generation and preserve procedures, and developing a strategic plan, you are setting businesses have an impact on the community they serve. Inflation, high interest rates and are behaving more conservatively in the current environment, Firms with deep sector expertise are at an advantage in
a legacy that has been built over the business up for long-term success. Instilling this belief and establishing the family brand within the risk of recession are expected modeling a global economic downturn or possible recession this environment, said David Dunstan, a managing director
Darryl Mazow, time…can you? A family-owned Create formal system of corporate governance by the community for future generations by including charitable Dylan Thomas, Private to weigh on PE dealmaking through into performance expectations for any potential acquisitions. at Citizens Capital Markets Inc. and head of the M&A advisory
Partner, Gordon Arata business can take years, decades, establishing a board of directors or board of advisors that causes and re-investing in the community as part of your Equity Reporter, at least the first half of the year, Those factors suggest lower valuations for acquisition group’s industrial practice. It takes knowledge and confidence
Montgomery Barnett S&P Global Market
even generations to become includes non-family members or “independent directors” plan will help strengthen the legacy you leave behind. Intelligence said Andrea Guerzoni, global vice targets, but sellers may not be on the same page, and that to look beyond the uncertainty of the next 12 to 18 months
successful, but without proper who can act objectively and hold management accountable. Engage the next generation. It’s important to spend chair of strategy and transactions disconnect is largely responsible for the ongoing standoff in and envision a path to the end of a typical three- to five-year
succession planning, that business could collapse in the Management and directors will establish rules, processes, time and get the next generation involved, regardless of for professional services firm EY. M&A markets. private equity investment cycle.
blink of an eye. practices, and procedures that direct and control how the their desire to run the business. This exercise allows you Those same macroeconomic headwinds factored in a 32% But for large corporations looking to unload noncore “The opportunities, I think, are significant, and those that
One of the most common themes I hear in my practice business is run. These guidelines can help mitigate risk in to see who may want to take over management of the year-over-year decline in the value of private equity exits in assets, selling at a time of low valuations may not be as much are really deep in the sector are going to be able to visualize
when working with families is the desire to leave the areas such as HR, a safe work environment, financial and business as you seek to pass it down. Educating them as 2022 and a nearly 39% year-over-year drop in the value of of a concern, Wolff suggested, especially if a deal generates that better than, say, a generalist,” Dunstan said.
business as a legacy for future generations. But what does accounting controls, and operations. to what the business has provided to the family and how private equity entries. cash the company can reinvest in core strategies. Wolff said a private equity firm’s sector expertise can be
that mean? Let’s address a few critical concepts that may Proper governance serves multiple purposes. It ensures its purpose, values, beliefs, and reputation are embodied in “Private equity continues to have, actually, a quite “They’re still likely to move forward with some of those leveraged to find a price that “incents a seller to sell.” A price
provide some clarity and help you achieve that goal. that decisions made are in the best interest of the business that business and the importance of continuing along that interesting pipeline, but the pace in which these deals are exits even if it’s not at sort of the max dollars because it’s the that represents value for the private equity firm and the seller
Often, the business is the most significant family asset and all its stakeholders, not just the owners, whose path for generations to come. Leaving a family business as analyzed and executed that has slowed down significantly right thing for them to do strategically,” he said, adding that is a narrow target that requires experience to hit.
and provides cash flow and jobs for family members. It can needs, particularly in the short-term, may conflict. Proper a legacy does not necessarily mean the next generation has on the back of this situation,” Guerzoni said. his firm is continuing to field carve-out queries, even amid “It might not be exactly what they expected to get a year
embody family values, beliefs, traditions, identity, and a governance facilitates communication and accountability to to run the company. Engaging the next generation will teach On the other hand, those same economic headwinds are the broader M&A slowdown. ago, but it might be above what they could get in a broader
reputation that creates a lasting impact on the family, future all stakeholders, including employees, customers, suppliers, them responsibilities as owners so that they can continue creating potential buying opportunities for private equity Guerzoni expected credit markets to loosen over the auction because we have some angle, we have some insights
generations, and the community it serves. So planning is and family members who may be less active in the company. the legacy themselves. firms. coming two to three quarters as inflation and interest rates that others don’t have,” Wolff said.
integral for a successful transition. Another way to professionalize your business is to develop By formalizing elements of your family business and Guerzoni said geopolitical uncertainty and an ongoing cool and the market develops a better sense of fair valuation
Ensure the business can survive without the owners. a strategic plan. A plan helps set clear goals, both long-and passing the knowledge, experience, success, beliefs, and effort to rethink global supply chains amid the Covid-19 multiples. Until then, big private equity buyouts and other
Long-term sustainability of a business occurs when the short-term, aligns the efforts of all the stakeholders in values down to future generations, you are creating a better
most important assets don’t walk out the door at the end achieving those goals, and is independent of who happens chance for longevity and ensuring your legacy lives on.
Worrying about AI Run Amok? It Needs a Human in the Loop Jonathan Dodson, Software Engineering,
of the workday. Be sure the inherent value of the business to be running the company at any one time. A good
Data Science & Operations, SourceScrub

Worrying about AI Run Amok? It up SourceScrub’s database don’t
Expectations of the M&A climate for the next 6-12 months Bryan C. Frederickson, Managing Director, Needs a Human in the Loop exist in a static universe. They’re
subject to economic and business
Scientists already are fretting about
GulfStar Group Investment Bankers
the prospect that out-of-control trends, innovation, world events
artificial intelligence (AI) systems and many more unpredictable
Ignore the headlines. Ample capital that choose to transact are a self-selecting group of balance sheets. could end up wiping out humankind. occurrences. If models aren’t
remains available and there are still high-performing businesses. Meanwhile, the multi-year So what is the punchline? Company owners and Let’s pause for a reality check. retrained to ‘learn’ from current,
deals to be had among performing surge in buyout activity by private equity groups drives management teams are not waiting for outside input AI today has problems, but they’re real-world data, unprecedented
middle market companies. a necessary cycle of subsequent exits. to tell them whether their markets are softening. much less existential than the kind or anomalous events can cause
While much of the world awaits There is no question the increase in the cost of debt is Middle market companies are almost by definition Jonathan Dodson,
Software Engineering,
the Federal Reserve announcing beginning to impact valuations, both by putting upward niche businesses, and every situation is unique. Where Data Science & Operations, of future catastrophe that these predictions to become flawed.
scholars are brooding about. The
whether or not the U.S. economy pressure on the overall cost of funds and decreasing are you located? Who are your customers? What are SourceScrub immediate problem is that AI models Deployment is Only a Milestone first place. That happens when human beings update the
is in a recession, dealmaking in lending capacity due to the effect of interest expense your competitive advantages? What are your current dataset that the machine-learning process draws on as
Bryan C. Frederickson, the middle market soldiers on. on total fixed charges. But historically low interest financial trends? Companies with good answers to these that fail to incorporate reasoning and The big risk of having a ML-based artificial intelligence it retrains itself and refines the model. Our skilled team
Managing Director, Although there is no denying the rates were never going to last forever, and the current questions remain attractive acquisition candidates, and logic from human beings simply aren’t that smart. model running without human in loop supervision, is that members also can spot any degradation that does occur,
GulfStar Group Investment When it comes to building a software program that includes the original model prediction will begin to drift, becoming
Bankers slowdown relative to 2021, that environment looks more like a return to long-term norms for them, capital remains available. Anecdotal evidence exactly the kind of data that private equity investors and other biased and outdated. For instance, a model that only knows and take action to figure out what might have changed
is hardly a fair yardstick given than a full market retreat. In a reversal of fortune, smaller so far in 2023 supports this contention, both within dealmakers yearn for as they develop their acquisition target what happened in the past won’t be able to update itself in that isn’t captured by the data on which the model relies.
the unprecedented surge in deals that can be done with one or a small club of banks GulfStar and according to other market participants. We’re constantly monitoring a model’s output and trying
transaction volume following the COVID-induced pause are easier to finance than larger ones that require access Current economic uncertainty also seems to have lists, the ideal outcome is the result of the best that both AI a timely manner, and without getting the right new training to identify ways to help it do even better.
and humans bring to the table.
data, won’t update itself to reflect a new reality. A case in
in activity. The subsequent jump made up for the lack of to the syndicated loan market. The major national banks improved the quality of companies coming to market That’s why we have combined human logic with artificial point: the COVID-19 pandemic dramatically reshaped the But our approach goes further than that. “Human in the
action in 2020 and then some. But the through line from are likewise currently the most cautious, providing after an 18-month stretch, where seemingly anything intelligence and machine learning processes in building mergers and acquisitions landscape in ways that even the Loop” allows us to look at specific data sets in which the
the Before Times is still an upward trend, and there is openings for regional lenders, private direct lenders and not nailed down could transact. The middle market SourceScrub’s software. Our goal is to provide our clients best model based solely on AI/ML trained prior to the event model has only a low confidence level, and assess and
no reason to expect this to abate. While middle market business development companies. An interesting side might not see the outsized highs of 2021 again in the with a comprehensive view of the universe of founder-owned, couldn’t have imagined. label that as needed. And our team also can validate the
transaction dollar volume trended down each of the first note is that higher base rates and widening spreads have near future. However, measured optimism amidst a investable companies, and deliver more data and insights on Since any AI-based machine-learning system is only as model’s predictions and monitor how the model reacts to
three quarters of 2022, closed deal count ticked up in the made subordinated debt competitive again. Coupled return to a less frenetic pace of deal activity is not an those businesses. The machine learning process, as you can good as the data we train it with, over time the model will new labels and different data sets.
second half of the year and would have been a record in with its lack of scheduled amortization, the once-popular unappealing outlook. see illustrated below, is able to create a kind of virtuous cycle. become distorted and degraded. The results can become If we asked human beings to undertake the kind of
any period prior to the fourth quarter of 2020. structure of pairing mezzanine with inexpensive asset- Finally, given that you are likely reading this because The process starts by defining a business problem (in the case irrelevant or even misleading. challenges involved in building and maintaining the kind
We remain in the midst of the greatest transfer of based senior loans may come back into style. you are registered to attend the Texas ACG Capital of vast database that SourceScrub now offers its clients
private wealth that the market has ever experienced. For a second year in a row, private equity groups Connection, a shameless plug is in order. Bucking the of SourceScrub, the need to obtain and properly classify data Adding a Human to the Loop without the assistance of AI, even a workforce 10 times
that provides insight into these bootstrapped companies) and
Founder- and family-owned businesses dominate the invested more capital than they raised, which had not national trend, 2022 Texas M&A activity increased 17% describes what successfully solving it might look like. Machine Blending the best that both machine learning and the size our current team would struggle to keep up. But if
middle market landscape, and many of those owners happened since the financial crisis of the late 2000s. But over the previous year relative to a 30% decline across learning helps to refine the model that’s created as we pursue human logic and intellect bring to the party addresses this we left it all up to the machines and didn’t have our skilled
are aging out of the workforce. Willingness to initiate again, some historical perspective is in order. Fundraising the lesser 49. In-migration from other states continues those goals – and constantly refines that model as it ‘learns’ problem. At SourceScrub, we embrace a semi-supervised team supporting the loop, results down the road would
a sale process is driven as much by personal dynamics more than doubled between 2019 and 2021, and private unabated and middle market companies across the from what was right or wrong about earlier versions, until it machine learning strategy to constantly re-train our AI- get messy.
as optimal market conditions. The decision is made equity limited partner commitments still exceeded $1.25 economic spectrum are reaping the benefits of a delivers the best possible outcome. Feedback loops permit us based models with the input of trained experts at specific Relying on AI tools alone is a trap. Only by adding
easier when owners are answerable only to themselves trillion at year-end 2022 – a threshold not coincidently business-friendly climate. So feel free to leave some of to constantly improve and fine-tune the model. points in the loop. humans to the loop, with their ability to provide continuous
as opposed to public shareholders or limited partners. first surpassed in 2019. Strategic buyers likewise remain your capital here after the big show. Humans enter the loop once a model has been created feedback about a model’s strengths and weaknesses, is it
There are hundreds of thousands of U.S. companies active, seeking to supplement sluggish organic growth But the bootstrapped, founder-led companies that make and deployed to prevent that model from degrading in the possible to deliver a truly effective ML-based model that
that fall into the middle market category, and those via acquisition and supported by healthy corporate delivers exactly what dealmakers need.