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Effects of Inflation on M&A Deals

Posted: July 19th, 2022

Tags: M&A

Long-lasting inflation is always a top concern because it decreases the value of currency and weakens the purchasing power of the American dollar. Since 2021, inflationary rates in the United States have increased at a much faster rate than predicted and central banks across the globe are reacting by raising interest rates.[1] Simultaneously, supply chain risks and production prices are increasing.[2] It may be obvious, but these consequences of influence M&A deals and the valuations of target companies. If you are debating on whether to initiate a sale, merger, acquisition, or other similar transaction, or if you have already decided to move forward and are currently in the midst of negotiating a deal, it’s important to understand the various effects that inflation has on M&A deals.

Common Effects on M&A Deals

As inflation continues to rise, buyers and sellers should expect to see more heavily negotiated purchase prices, alternative payment methods, and longer exclusivity periods.[3]

Lower Purchase Prices: The cost of operating a business will increase with inflation and, if buyers cannot mitigate the impact of these costs, then they may begin to offer lower purchase prices.[4] This was evident in February 2022, when the M&A deal value declined by 74.4%.[5] Buyers may be aware of this trend and use it as a negotiation tactic. Sellers should work closely with their attorneys to discuss these tactics and factor in a purchase price buffer to account for such negotiations.
Alternative Payment Methods: Inflation also increases the costs of interest rates, causing buyers to propose alternative payment structures. In times of inflation, a buyer is less willing to pay cash at the time of closing. In these situations, sellers should work closely with their attorneys to negotiate alternative payment methods such as installment payments, promissory notes, earnout/revenue milestone payouts, rollover equity and/or payment via other equitable assets.[6] In many cases, sellers’ attorneys will condition the deal on buyer’s ability to obtain satisfactory financing.[7]
Exclusivity Periods: Buyers always want to understand the company’s pricing arrangements with its suppliers and the contracting parties’ ability to amend the terms of the agreement; however, this becomes even more critical during times of inflation. Therefore, sellers may start to notice buyers requesting longer exclusivity periods to give the buyers time to perform a more detailed due diligence review.[8]

How to Avoid the Negative Side Effects of Inflation

Inflation may deter buyers from offering higher purchase prices because they may worry that the ultimate payout won’t be as good as it would be in a non-inflationary scenario. However, in many cases, sellers can work with their accounting and legal advisors to demonstrate that their rate of profit growth will outpace the rate of inflation.[9] Sellers may choose to provide that data in terms of units sold and/or the dollar value. [10]

Ultimately, inflation matters in deals, especially when inflation rates are high and the duration of the inflationary period is long term. Inflation may be a concern when it comes to deal discussions; however, it should not derail the sale process. Buyers and sellers should work closely with attorneys to understand the potential implications of inflation on their M&A deals and to make sure they are negotiating the proper purchase price.

Thank you to Kimberly Lee for her research and writing assistance on this article.

[1] Tom Manion, Principal, Valuation & Capital Market Analysis, BDO (May 2022), https://www.bdo.com/insights/industries/technology/how-interest-rates,-inflation,-and-geopolitical-un

[2] Id.

[3] Ana Calves, The Potential Impact of Inflation on M&A, Mergers & Acquisitions (June 7, 2022), https://www.themiddlemarket.com/opinion/the-potential-impact-of-inflation-on-ma

[4] Calves, supra note 3.

[5] Brian Scheid, Peter Brennan, & Annie Sabater, Inflation Puts Dent in M&A After White-Hot 2021, SPA Global (Apr. 4, 2022) https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/inflation-puts-dent-in-m-a-after-white-hot-2021-69551549.

[6] Calves, supra note 3.

[7] Id.

[8] Id.

[9] Michael Collins, How Does Inflation Affect an M&A Deal, ProSales (Apr. 5, 2021) https://www.prosalesmagazine.com/business/how-does-inflation-affect-an-m-a-deal_o

[10] Id.

Yermash Discusses Commercial Lease Agreements with Stony Brook Small Business Development Center

Event Date: September 7th, 2022

Join Arthur Yermash, Partner and Corporate Counsel at CMM, in conjunction with the Stony Brook Small Business Development Center, as he presents a discussion on ways to renegotiate your commercial lease agreement in these rising inflation times. At CMM, Arthur leads our robust commercial leasing practice, where he developed the strategy for the renegotiation of nearly 1,000 commercial leases nationwide for a major retailer at breakneck speed.

In this presentation, Arthur will discuss rent escalation provisions in your commercial lease agreement, preemptively minimizing disputes and non-payment for commercial landlords and business risk for commercial tenants. He will also address the four common commercial lease rent structures, which are important to think about these in the context of periods of high inflation:

Fixed Increases
Pass-Through Escalation
Direct Operating Cost Escalation
Indexed/Variable Escalation

Event Date: September 7, 2022

Time: 9am to 10:30am

Place: Zoom

CMM Represents Market Leader Softheon in its Acquisition of NextHealth Technologies

Posted: July 11th, 2022

Deal Marks Softheon’s Expansion to Artificial Intelligence in Care Management for Health Plans

Campolo, Middleton & McCormick is pleased to have represented Softheon, a leading cloud-based eligibility, enrollment, and billing provider for health plans and government agencies, in its acquisition of NextHealth Technologies, an AI-powered SaaS-based healthcare analytics platform. With the acquisition, Softheon will be better able to help health plans sell and deliver efficient, high-quality care through synergies in the companies’ respective products and solutions.

Joe Campolo led the deal team, which included CMM’s Vincent Costa and Katharine Campolo, as well as Alan Sasserath and George Batas of Sasserath & Co. CPAs.

View the full press release below or here.

Softheon Expands to Artificial Intelligence in Care Management for Health Plans through Acquisition of NextHealth Technologies

June 30, 2022

Softheon, a leading cloud-based eligibility, enrollment, and billing provider for health plans and government agencies, has acquired NextHealth Technologies, an AI-powered SaaS-based healthcare analytics platform. With the acquisition, Softheon will be better able to help health plans sell and deliver efficient, high-quality care through synergies in the companies’ respective products and solutions. Health plans can save tens or even hundreds of millions of dollars on medical and operational costs through Softheon’s growing suite of solutions.

The acquisition significantly enhances Softheon’s talent density, enhancing go-to-market strategies, engineering processes, and leadership. The overall speed and capability of NextHealth’s AI solutions will increase through Softheon’s propriety technology.

Softheon CEO, Eugene Sayan, will continue to lead the company. Eric Grossman, NextHealth’s founder, has become the combined organization’s Chief Commercial Officer, supporting Sayan’s vision and the company’s growth objectives.

Sayan shared, “Artificial Intelligence in healthcare is here, and we are seeing the incredible impact it can have on both members and carriers. Our goal has been to make healthcare more affordable, accessible, and plentiful, and we see AI as a clear path forward to bring efficiencies to our carrier partners. This acquisition is a testament to Softheon’s commitment to helping health plans tackle some of their biggest challenges, such as population health and the movement toward consumerism in healthcare.”

NextHealth Technologies, founded in 2013, offers a cloud-based platform that utilizes rigorous methodologies and standardized processes to enable health plan customers to identify impactable populations, measure which clinical initiatives work best for whom, and integrate data-driven decisions into the workflow in real-time to derive the highest ROI from their analytics investments.

“We are thrilled to be part of Softheon’s continued growth and expansion,” shared Grossman. “This is an incredible opportunity for our respective teams. NextHealth’s technical and service staff will continue to build and support cutting-edge applications of AI for carrier member populations with the support and resources of a larger company. We see a bright future for our health plan partners as we bring those tools to bear to deliver significant value and reduced costs.”

Softheon’s purchase of NextHealth is expected to bring economies of scale and operating leverage to the combined company. NextHealth investors, Norwest Venture Partners and TT Capital Partners, will become investors in Softheon and expressed excitement on the prospects of the transaction.

“Together, NextHealth and Softheon can provide better care at lower medical and administrative costs while advancing the application of AI in healthcare.” said Casper de Clercq, General Partner at Norwest Venture Partners.

“The acquisition of NextHealth will enhance Softheon’s AI capabilities for health plans,” said Ryan Engle, partner at TT Capital Partners, “Member data spanning shopping and enrollment through claims creates opportunities for proprietary methodologies to shape member behavior and create value for plans.”

Softheon has continued its growth and expansion, having completed more than 20 million enrollments since the inception of the Affordable Care Act, through public and private exchange technology. The acquisition comes after the company introduced its first foray into AI by creating a machine learning algorithm that predicts which members are at risk of letting their insurance coverage lapse, as featured in Bloomberg Law.

CMM Scores Significant Settlement for Client in Faithless Servant Case Against Ex-Employee

Posted: July 11th, 2022

In New York, all employees owe a common law duty of loyalty to their employers, even if the employment is at-will and the employee has no employment agreement. The duty of loyalty requires employees to exercise the utmost good faith and loyalty in the performance of their duties and prohibits employees from acting in any manner that violates the trust an employer places in its employees. An employee who breaches the duty of loyalty to an employer can be liable under what is known as the “faithless servant” doctrine. If an employee is found liable under the faithless servant doctrine, an employer is able to recoup, among other things, all compensation paid to that employee during the period of disloyalty to the company.

In a recent case that exemplified the faithless servant doctrine, CMM successfully represented its client, a family-owned Long Island business, that had a long-tenured employee of nearly 20 years who, unbeknownst to the client, was operating a competing business in secret for nearly five years. When the scheme was ultimately discovered, the employee was promptly terminated. During the period of disloyalty, the former employee stole the company’s customers and hundreds of thousands of dollars in annual business, used the company’s suppliers and vendors for his competing business, and deceived the owners of the company who had known him for nearly two decades, all while collecting a regular paycheck from the company.

Shortly after the employee’s termination, CMM commenced a lawsuit against the former employee and his competing business, alleging claims for breach of the duty of loyalty (faithless servant) and other related claims. CMM’s Jeffrey Basso was able to strategically litigate the case to obtain necessary discovery to learn the extent of the damage caused by the former employee and position the case for mediation. At mediation, CMM was able to obtain a significant monetary settlement for the client, bringing this nightmarish saga for the client to a satisfying end.

To learn more about our litigation practice and whether alternative dispute resolution is the right path for your business, please contact us.

CMM Closes Multi-Million Dollar Sale of Engineering, Architecture, and Land Surveying WBE

Posted: July 5th, 2022

Every M&A deal presents its own challenges, and a recent deal for our client – a certified WBE (women-owned business enterprise) corporation providing engineering, architecture, and land surveying services to NYS and NYC agencies – was no exception. The buyer in the multimillion-dollar deal was a New Jersey company that was looking to expand its service offerings in New York. In addition to the typical challenges that arise in every deal, this transaction was further complicated by the need to assign over 100 active work contracts from the seller to the buyer, all of which required obtaining consent from the public agencies. CMM’s team, led by Donald Rassiger with critical support from paralegal Katharine Campolo, was up to the task.

This transaction showcased CMM’s depth of knowledge in the M&A and construction space. The seller’s CFO commented after closing that working with the CMM team was a pleasure – the type of relationship that makes all the difference when buying or selling your largest asset. Learn more about our M&A and construction practices.

Firm Highlights & Legal Updates

Posted: June 28th, 2022

Navigating Your Commercial Lease Agreement During Inflation

Posted: June 22nd, 2022

By: Arthur Yermash, Esq. email

Tags: commercial litigation, landlord-tenant

Updated July 21, 2022, as published in Law360
https://www.law360.com/real-estate-authority/articles/1512083/negotiating-a-commercial-lease-agreement-during-inflation

Rising inflation is influencing virtually every aspect of life. For commercial landlords and tenants alike, it is more important than ever to focus on rent escalation provisions in your commercial lease agreement.

Instead of fixed and consistent increases in rent, some commercial leases provide for rent to increase in line with certain economic metrics: for example, the consumer price index. This is especially relevant as it relates to tenant renewal options. Where inflation is especially notable, as has been the case this year, rent increase formulas that rely on economic metrics to calculate an increase in rent may yield unexpectedly high rent for a commercial tenant, and may result in an unexpected windfall for a commercial landlord. Since the commercial real estate market relies on certain market equilibrium, unexpected or unanticipated increases in formulaic rent may have unintended disruptive market consequences. Focusing on these issues now will help minimize disputes and non-payment for commercial landlords and business risk for commercial tenants.

Negotiating Your Commercial Lease Agreement

For commercial landlords, protecting property interests and maintaining consistent profitability are two focal points when drafting and negotiating a commercial lease agreement. For commercial tenants, managing risk and expense (as well as minimizing future rent increases) is a vital part of negotiating a commercial lease agreement. Inflation and rent escalation clauses that are tied to economic metrics go hand in hand – when inflation rises, rents rise along with it. While inflation is not a new economic concept, rising inflation at exceedingly high percentages creates unanticipated results for all involved.

Clarity on rent and rent increase is an integral part of any lease. Most commonly, commercial leases provide for annual rent increases at a fixed rate. Sometimes, these increases are not annual, but every few years. Where things become more complex is when increases are tied to economic metrics. As we address the four common commercial lease rent structures, it is important to think about these in the context of periods of high inflation.

Most commercial leases use a combination of methods to provide for escalation various rental components.

Common Forms of Rent Escalation

Fixed Increases (also known as Stepped or Percentage Increases) allow landlords to increase rent by a set amount at specific points in the duration of the lease agreement. This is one of the most commonly implemented for base rent and is a popular option because it is a relatively straightforward method. However, a landlord may feel cheated out of profits if costs have gone up and a tenant may feel like they lost out on potential savings if costs have gone down. This also does not account for the market environment that may be shifting throughout the lease term.
Pass Through Escalation is a form of rent escalation that is initiated only when the landlord experiences an increase in costs that have been specified in the commercial lease agreement. This is most commonly implemented in scenarios where a commercial tenant is responsible for compensating landlord for building operating expenses.
Direct Operating Cost Escalation is similar to the Pass-Through option, except here the escalation is based on the increases of all the operating costs such as utilities, security, and maintenance.
Indexed/Variable Escalation (Consumer Price Index or another inflation index) – This option allows landlords to increase rent in proportion to increases in established economic indexes. This method is commonly used when to establish rent after an initial term to adjust and align rent with the economic environment, for example, when tenant exercises a right to renew. This option may not be favorable to tenants because index increases can be very unpredictable and dramatic. In addition, while it may align with national economic trends, it may not represent local real estate economic trends.

Understanding the various rent escalation options is critical for commercial landlords and tenants negotiating new leases.

For existing leases that have rent escalations tied to inflation risk, it is critical to understand how the current economic environment will impact future rent. A common issue is whether a commercial tenant should exercise a right it may have in the lease to renew. Often, tenant renewal options provide for rent to be calculated using market metrics. Conceptually, this generally works well where the economic environment is stable, and inflation is low. In such cases, the formulaic rent escalations adjust the rent to where the market suggests it should be and mostly everyone is satisfied. However, in situations where the economic market is unstable and inflation is especially high, the formulaic rent escalations could adjust the rent to extreme amounts not expected by landlords or tenants. For tenants, this could create an increase in rental expenses beyond what may been budgeted or sustainable by the business. For landlords, this could create scenarios where multiple tenants are unable to afford the drastically increased rent, leading to higher rate of default.

Since the goal for most commercial tenants is to pay a fair market rent, while the goal for most commercial landlords is to ensure steady rent payments, the parties may be aligned in the interest of fairness. To that end, before a commercial tenant exercises any option where its rent would be significantly above market considering current market indicators, the first step would be to communicate concerns to the landlord. A reasonable commercial landlord would often welcome reasonable dialogue to find common ground to address the unintended and unexpected impact of present economic conditions. Often, a negotiated extension, while delaying exercising a right to automatically renew may be an appropriate alternative to economic index impact. Since a commercial lease has many components there are many intangibles that can be negotiated to equalize what each party may be giving up. These could include improvements to the space, longer term, and other aspects of the lease agreement. A commercial tenant may also, or as an alternative, explore other market opportunities to identify similar properties at more reasonable rent, considering buildout and moving costs.

For commercial leases being negotiated, instead of agreeing to standard provisions that directly use economic metrics to determine future rent, landlords and tenants may explore other options to mitigate against unintended results. One option is to provide for limits, or caps, on increases affected by unstable indices. Another option is to identify and use localized real estate market metrics as the basis for increasing future rent instead of using national economic metrics. By focusing more on the regional real estate market trends, the resulting rent is more likely to be better aligned with the real estate market instead of national economic trends. For multi-tenant commercial buildings, a close look at existing rents and escalations can also be a determinative metric for determining what a fair rent escalation could be. Occasionally, real estate professionals with knowledge of the local real estate environment may be used to help the parties determine the best approach. Ultimately, evaluating all aspects of lease terms to find reasonable alternative methods for determining future rent increases.

Please contact us to discuss options.

Thank you to Ashley Cohen, Esq. for her contributions to this article.

CMM Closes €11 Million Investment for Client in Belgian Company

Posted: June 20th, 2022

Successfully closing an investment deal can be a taxing endeavor as the process requires clarity of communication, transparency, and unwavering focus. Executing on this process in a transnational transaction is even more challenging. But as our client can attest, it’s possible with the right counsel, as our team just closed an €11 million investment for our client.

Through this investment, our client obtained a 10% equity interest in a Belgian company specializing in the development of axial flux motors for electric vehicles. CMM’s team – led by Donald Rassiger – served as lead counsel, with support from one of CMM’s partner law firms in Belgium. This was a strategic investment for our client, as the development of the investment target’s products is critical to the client’s other investments across the globe. Further, by closing this investment, CMM helped not only our client but also provided support for the growth and development of the burgeoning electric vehicle industry.

This transaction highlights CMM’s ability to close significant multinational transactions and bridge the various legal, language, and cultural gaps that exist in cross-border transactions. CMM has supported our client in over $100 million in investments around the world over the past two years. This investment closing is one of many that exemplifies CMM’s ability to close challenging deals and help clients achieve their goals.

To learn more about how we can help you, please contact us.

DeMaio Sworn in as Officer of the Suffolk Academy of Law

Posted: June 10th, 2022

Campolo, Middleton & McCormick is proud to announce that Senior Associate Richard DeMaio was recently sworn in as an Officer of the Suffolk County Bar Association’s Academy of Law. He was sworn in by the newly installed SCBA President Vincent J. Messina Jr. at the SCBA’s 114^th Annual Installation Dinner on June 1.

DeMaio has been extremely involved in the SCBA and has acted as an invaluable resource to the Academy of Law over the years. In addition to his new role as an Officer of the Academy, DeMaio also serves as a member of their Marketing Committee. Officers of the Academy serve four years on the board.

DeMaio is a litigation attorney that focuses on contract issues, business disputes, environmental matters, and municipal matters in state and federal court. His municipal work includes Article 78 proceedings, zoning/land use matters, and defending municipalities. He also focuses on commercial landlord-tenant cases and a variety of appeals. Richard works extensively on researching and drafting motions and appellate briefs in state and federal court. He has argued and won several appeals pertaining to land use/zoning, commercial, and general litigation.

We are pleased to congratulate DeMaio on his new role which will not only increase his involvement in the legal community but will also help the Suffolk Academy of Law build on their continuing legal education programs.