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COLORADO: An Introduction to Corporate/M&A


Peter Moore

Steve Segal

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Robinson Waters & O’Dorisio, P.C.
By Betty Arkell, Steve Segal, Peter Moore

Colorado, with its variety of industries, population growth, strong employment, and highly educated and tech-oriented workforce, is an attractive state for both emerging growth and established companies to flourish. A number of major corporations from other regions, primarily California, have relocated their corporate headquarters or established significant secondary headquarters in the last few years. Smaller companies from the coasts are also part of the in-migration trend. Through job-creation tax credits and other incentives, the Colorado Office of Economic Development and International Trade has been aggressive in luring out-of-state companies to relocate to Colorado and encouraging local companies to continue their growth in the state.

In April of 2021, Denver was recognized in a report by JLL Capital Markets as one of the top eight “rising star” or “growth cities” in the U.S. By the end of 2021, Colorado had “shattered previous records,” as reported recently by the Colorado Office of Economic Development and International Trade and Access Ventures, with $6.8 billion of VC funding, 583 venture deals and $4.5 billion in exits. Colorado ranked 7th in the U.S. for the total number of VC deals and the total amount of capital invested in those deals. The same comprehensive report demonstrated that 2021 marked a vast improvement in venture financing for female-led startups, with female co-founded companies raising $1.02 billion in 2021 compared to $146 million in 2020. Broken down by stage of funding, grants and pre-seed or incubator funding was 21% of all funding, angel and seed rounds were 38% of the funding, and early and late-stage funding was the balance of 41% of the funding. Denver is increasingly challenging gateway cities such as Los Angeles, San Francisco and New York for investment opportunities.

Growth has occurred across industries. The top five sectors were business products and services, healthcare and biotech, aerospace and defense, energy and natural resources, and financial software. Ten Colorado companies achieved “unicorn” status in 2021, according to the Denver Business Journal, joining several other Colorado private companies that had previously achieved the milestone.

Despite this impressive improvement over 2020 results, a major challenge for many early stage and growth companies in Colorado remains access to capital. Major investors have increased their minimum performance criteria for investment, which results in many “good” companies not obtaining investments that otherwise might have been made in a less competitive economy. Over two-thirds of the money invested in startup companies has come from out-of-state firms or individuals. As more Colorado companies achieve unicorn status and generate attractive returns for their investors, Colorado’s emerging companies hope to attract more locally based investment and an overall increase in access to capital.

On the M&A front, investors and lenders have significant capital to deploy. In 2021, driven in part by this access to capital and the potential increase of capital gains tax rates, M&A activity was robust in 2021. While the threat of an increase in capital gains rates has waned, M&A activity in Colorado is expected to remain robust through 2022 and beyond, despite expected increases in interest rates and inflation.

Sellers with strong EBITDA will benefit from a competitive marketplace. Private equity firms seeking to acquire companies will continue to make preemptive offers to take a seller out of a formal sales process, which likely will drive EBITDA multiples higher and beyond market expectations. As we emerge from the heights of the COVID pandemic, businesses that thrived during COVID will need to convince investors and buyers that performance will not lag as we return to a more normal business environment. Businesses that saw performance suffer must convince investors and buyers that things will improve and return to pre-COVID growth trajectories. This market process will be complicated by increasing inflation, supply chain issues, and potentially increasing interest rates.

For 2022, we believe that investment will continue to be strong in Colorado’s key industry sectors of business products and services, healthcare and biotech, consumer products and services, aerospace and defense, energy and natural resources, and financial software.

The startup and emerging growth company environment in Colorado continues to present attractive opportunities for lawyers. These companies require legal assistance throughout their life cycles, including formation, tax planning, intellectual property protection, employee incentive plans, financings, capital investment, commercial transactions, and, for the successful ones, M&A (on both the buy and sell side). Full-service law firms have the opportunity to develop long-term professional relationships with clients by acting as outside general counsel to help guide clients with their evolving legal needs in all stages of their growth from formation to exit.

The growth of Colorado’s business climate has led to an increase in the number of national and international law firms establishing branch offices in the Denver area, with many seeking to grow their corporate/M&A departments with established local practitioners. Another trend we have observed is the movement by some of these local practitioners from the big firms to mid-sized local and regional firms where they can offer their clients a full suite of services and customized fee arrangements.