[EP 051] M&A across the sea with Joey Walters (A Canadian Perspective)

Canadian mid-market M&A landscape

Joey: Usually, I deal within the middle market here in Canada, in the industrial side both on the supply and contracting side. The deal sizes are anywhere from 2 million in sales to 100 million dollars in sales all across Canada. These are usually privately owned companies with some having partners or family trusts involved.

Each year in Canada 130,000 new businesses start. However, only 35 percent of those businesses last past five years. And as you know, back in 2009 there was a big economic downturn in North America, primarily out of the U.S. but also into Canada a bit. We have this aging population and a lot of people were expected to exit and sell at that time. However, the economic climate wasn’t appetite therefore these stayed on because you just don’t want to get rid of these organisations.

But the next five years look very promising. We’re looking at about 41% of all owners in Canada looking to exit or sell their business.

These stats came from Economic Canada. I attended a conference back in the beginning of May and talked about the economic outlook in Canada and what’s going to be happening. One of the gentlemen that was speaking there was talking about this so I’ve taken some of that information because I found that quite astonishing that that many people would probably be looking to sell.

People are looking to sell but they’re not educated to sell at times and so that’s where I come in and try to help them out. A lot of times these owners are very emotionally attached to their businesses. They want to sell because they need to pay for their children’s school or they need to sell because they feel this is how much money they need to retire. But they really need an M&A adviser or specialist or a business broker to help them out with that process, to really sit down with them and build out how to get most for your company and what’s realistic to sell and who you’re going to sell it to and what is your role after.

Key drivers behind this wave of exiting businesses

Joey: Fifty-nine percent of business owners right now in the United States and in Canada or over the age or at the age of 50. As much as we have new entrepreneurs coming in, we still have that aging population generation that are still active in the market, still trying to grow their businesses or keep them stable and profitable and the next generation in the family isn’t always keen to take over the business. They want to go off and do something else and so these people are going to be looking to potentially exit and sell.

What buyers are looking for

Joey: A lot of people have a misconception that they think buyers are looking for companies that are turn around companies and companies that are not doing well financially and that they’re going to come in and swoop them up and turn them around. But that’s actually opposite. Buyers are looking for stable, profitable companies or growing profitable companies. They’re looking for companies that they can bolt on or add revenue of capital or new products or talent and really grow those companies along with some of the other businesses or the business that they have.

Joanna: There’s obviously businesses that are, in some sense, out in the market looking for a good deal, where they feel like they can make a strategic purchase because they’re looking to expand in certain ways where it doesn’t bother them how the business has been run before say for example, if they want access to assets like their customer list or whatever the case may be.

But generally speaking, I think you’re absolutely right in that buyers are looking generally for businesses that have been run well, that they can then take over and that it can continue to run often without the business owner if the business owner is selling in order for them to exit quickly themselves. But they still want to feel that there’s value there that they can grow into the business. They’re looking for a business that’s not completely tapped out in terms of growth and expansion and future potential value. But certainly generally something that’s running fairly well.

But of course, there’s always the buyer out there. We just completed one last week where the particular deal was very low price because it was a really poorly run business. But the buyer coming in was really only interested in having the staff and the customer base so they didn’t care how business was run. They thought it was an advantage that the business had been run poorly because they thought they could run it better themselves. So there’s always that combination.

But of course, if you want top dollar, you’re not going to get top dollar unless you have assets that are strategically important to a buyer. You’re not going to get that top dollar unless you have a business that’s running well and you can show good systems, something that will hand over well to the buyer and good profit, all of those sorts of things. So I think we’re aligned here between Australia and Canada from that perspective.

Merging recruitment and M&A

Joey: I find sometimes a lot of owners have the structure where they still hold all of the cards to the company. They haven’t run the company out enough that the company can run without them there every single day. And as you know, depending on who the buyer is, it’s very attractive if the business can run without necessarily having that owner or owners there every single day and having to be part of their every single decision. So I help them with how to structure and I accompany that with the other part of my business stream that I do which is recruiting, helping them find that succession whether it be internally within your organization and developing that or we need to go externally.

Joanna: This is an interesting part of your business model, merging recruitment and HR consulting with M&A. I’ve never heard that done in Australia. It sounds like an interesting combination. Maybe you can talk a bit about how that works together, what the reasoning behind it is.

Joey: The reasoning behind it and how it works together is that they have access to somebody that’s been in industry before, has been through a lot of merger acquisitions in industry. I’ve also done a lot of recruiting and know what to look for so I accompany that with my experience on the M&A side because as you all know, the sale and the process to get to the sale is one component of M&A. But after the sale transacts and happens, it’s really assimilation and how this business transitions from people to how you do business with customers and vendors and everything outside that, especially talent, depending on what size of companies are buying other companies. So I come in and try to advise the buyer what are things that they’re going to have to look for after, what actually is their role after and really look at the recruiting aspects.

Joanna: And so this business model that you run, the combination of a recruitment and HR consulting with M&A, is that a common business model in Canada?

Joey: Not that I know of. Every time I talk somebody they’re like “Wow, I never knew you can do mesh that with that.” For me it’s really about life changes. People are leaving a job to go to another job so that’s a life change. Selling your business obviously is a life change or buying a business is a life change. I just look at them like life transitions and helping people through that.

I’m very passionate about giving gratitude and helping and educating my clients or candidates. My slogan is “Your success is my passion.” I’m really interested in building long term relationships with people and it’s working. It takes time, it works and so for me it’s working on two or three deals at a time and working with these people over the long haul and getting them through the sale and getting top dollar by structuring their company to get top dollar.

Biggest HR issues during integration and transition

Joey: Obviously, (1) pay – how people are paid in different organizations and the philosophy around that, (2) benefits – everything from car allowances to health benefits and how expenses are handled, (3) retirement pension plans – that’s big as well. Those are some of the big things that I find. (4) Structure too, how things are structured, incentive plans, how bonus plans are paid out, what has been guaranteed.

I’ve been involved in deals where there’s been no offer letters put into place and so everything’s been on a handshake. This is when I was in industry and that gets very messy and not so nice perspective to put it down because now you have somebody trying to sign an offer letter which they never had before.

You have to give them compensation to sign something if they have a termination agreement that’s put in there that wasn’t there before. It gets very sticky as well as I’ve seen non-solicits, non-competes. People in the company don’t want to sign those things that they never had before, how are you compensating them for that. It can be very messy and sticky depending on the size and how things flow.

Joanna: How do you generally approach dealing with these issues? And I guess from an organizational perspective it makes sense to, at some stage, bring all of the payments and the benefits into alignment in the terms of employment across the pool of employees. But of course, it needs a considered approach. What’s the approach that you generally suggest? How do people start?

Joey: My approach is to really understand the different philosophies within the organization. How is this going to happen after due diligence, how can you handle it and really communicate that up front. Honestly, I’ve seen too many times where things are promised to employees and then over a period of time things change and then they go back and they resonate on the time that they were told that things were going to change and everything’s going to run the same and so forth.

It is just better to be upfront and call the people in and explain to them. People won’t want to hear that at times because it might affect them. But they will like the honesty in the long term. If you go and say we’re not going to do anything and you make a change in three months and then in another nine months you make another change and another change. People stop believing you.

Joanna: It’s really about understanding how you’re going to be operating that organization moving forward, how you’re going to deal with the transition issues from the beginning. I think part of these issues come when number one, the strategies haven’t been thought through properly right from the beginning. It’s a drip change approach as issues occur, tackling them rather than there being a strategy from the beginning that is communicated and understood by employees.

Joey: I find that everybody gets excited to go M&A and they think it’s sexy. Yet when you get down to the grunt of it, when you’re going through negotiations, it gets very emotional especially for the business owner at selling. It can be very emotional because they take it or the partners, they take it very personally. But then after the fact, it is very emotional for employees so you’re trying to make things as smooth as possible.

But to your point, if a company is never bought out another company and they don’t have a strategy on how they’re going to handle taking two cultures and merging it together and having different philosophies, you’re not going to win in the long haul. It’s really going in and understanding how you’re going to do that and getting your expertise to do that because it can be very messy after the fact.

Get in touch with Joey

Joey: If anybody’s interested in getting a hold of me, you can find me at www.hrpreneur.ca or my e-mail is [email protected]