Summary

In this conversation, Jon Stoddard interviews Mark Borkowski, an experienced M&A intermediary, who shares his journey from engineering to the world of mergers and acquisitions. Mark discusses the importance of generating deal flow, the dynamics of private equity, and current trends in the M&A landscape, particularly in the HVAC and elevator industries. He emphasizes the value of repatriating manufacturing and the demand for value-added manufacturing jobs in North America. Mark also highlights the significance of writing and media presence in attracting business opportunities. In this conversation, Jon Stoddard discusses the evolving landscape of mergers and acquisitions (M&A), highlighting the influence of prominent figures like Charlie Munger and the rise of search funders. He emphasizes the importance of building relationships, the need for regulation in the M&A industry, and the intricacies of the valuation process. Stoddard also shares insights on managing client expectations and the future opportunities within the M&A field.

Takeaways

Mark transitioned from engineering to M&A after finding corporate life unappealing.
Generating deal flow is crucial in the M&A business.
Private equity firms are always looking for new deals.
HVAC and elevator industries are currently in high demand.
Repatriating manufacturing can significantly impact the economy.
Value-added manufacturing jobs create multiple additional jobs.
M&A activity is at an all-time high due to available capital.
Writing articles helps attract attention and generate leads.
Media presence is important for M&A professionals.
Networking at trade shows can lead to valuable connections. Charlie Munger's proactive approach to investments is legendary.
Search funders are emerging from MBA programs to find deals.
The best M&A deals are secured by those with capital.
Building relationships is crucial for successful M&A transactions.
There is a lack of regulation in the M&A industry.
Trust is essential when working with clients in M&A.
Valuation processes must be transparent and collaborative.
Managing client expectations is key to successful deals.
The M&A market is booming, creating new career opportunities.
Understanding the motivations of sellers is vital in M&A.

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Transcript:

Jon Stoddard (00:01.208)
This episode was brought to you by the LinkedIn Deal Flow System, the ultimate LinkedIn training for unstoppable acquisition growth. Get it at dealflowsystem.net. Welcome to the top &A entrepreneurs. Today I have a guest is Mark Gorbowski from Toronto, Canada. He's been in the &A business for quite some times, but he's also got a story how he started before that. And Mark, tell me.

The story you and I were talking a little bit about the engineering and everybody else in your family was engineering. So how did that start? Right. I, you know, typical Toronto guy grew up in a family of engineers, grandfather, father. I was accepted in engineering, did an electrical engineering degree. I did not like it. Everyone in my family are engineers. I was the outsider. So I did an MBA at the university of Toronto and was hired by Hewlett Packard.

Unlike many engineers, I was a sales engineer, very successful. Unfortunately, corporate life really didn't appeal to me. So I put a business plan together in my last year at HP and with three other engineers who had been given a world mandate to develop software, we left. We formed a company called SimTech Automation Systems and the company grew very rapidly. Company went public 36 years ago. I left and decided that I would eat

buy a business. never wanted to start something again, but didn't find anything of great interest. But I put two clients together and I learned the intermediary side of the world. And so I've been doing mergers and acquisitions for the past 35 years. As an &A intermediary, as an investment banker, call it whatever you want. In our business, it's all about deal flow. you know, there people who sit and wait for the phones to ring.

there is an incredible amount of people looking for deal flow. The whole world is looking for their next deal. So I discovered that writing articles was the way to attract attention. So I've been published probably over 2000 times in various trade magazines. had columns for 31 years in Canadian electronics. I had columns in metals magazines, food magazines, the popular media, popular press.

Jon Stoddard (02:22.829)
So as many of my colleagues were sitting waiting for the phone to ring, I would get responses from all kinds of CEOs and presidents of industrial companies. I went to all their conferences. And in order to keep generating deal flow, I would attend trade shows. technically you're not allowed to solicit people at trade shows, but in a big major- Who said that? Who said that? That's the rules of shows. I thought that's what trade shows are for.

Well, you're not supposed to try to sell them something. They're supposed to sell you something. So long story, I would go to a trade show, take 130, 140 business cards, take a junior associate, either a young lawyer or a young accountant with me, go to a trade show on President's Day, and would approach the booth, stand in line to meet the president or the CEO or CFO, hand him a business card and give him an elevator pitch and say, currently working with a large private equity firm or strategic

player in your industry looking to make acquisitions, are you approachable? Or are you currently asking if they were approachable? Approachable to consider a possible sale. Okay, okay. So and if the president wasn't there, you talk to some of the senior salespeople. So you'd hand out your business card and you'd say, Hey guys, you're calling on companies in this segment of the metals industry or the food industry.

maybe one of your clients is contemplating a possible sale. Reciprocity will be respected. In other words, they get a finder's fee. So I'd hand out all these cards, spend a whole day at the show, sit back, and then let the phone ring. Yeah, so on that reciprocity, I mean, if they're a corporation and that's salesperson, I mean, they can't really take a finder's fee or... Many of these people are agents or independent agents, people who are with corporations.

They can take a gift and they can certainly come to a steak dinner. And in many cases, these people will clear it with their corporations. for those that say, I can't accept any reciprocity, but I'd still like you to meet a client of mine. I take him to two hockey games a year. He's 71 years of age. We're very close. And he's confided in me that he's trying to sell his companies. They're 200 employees. He's very concerned. And I'd like to introduce you.

Jon Stoddard (04:46.615)
bam, let's go to a steak dinner, meet this guy, and now all of a sudden you have a potential client. So in our business, it's all about generating deal flow. Deal flow. Now let me ask you about that. Do you already have a relationship with the private equity firm, the buyer, with a very strong legal document that they can't go around or circumvent you? I have, without soliciting, I have about 22.

agreements with large private equity firms saying, if you can bring us a deal, you can bring us a deal, we will, we will compensate you based on the Lehman scale. still the Lehman scale, huh? Yeah. So, I mean, so on a transaction of two, a $10 million transaction, it's a $200,000 fee. Now, John, in our, our previous sort of exchanges, I think I mentioned that, I presented an opportunity that fit the criteria, one of these large groups and they said, Mark, thank you.

Fantastic. Set up the call. Do one follow-up call and please step aside. Let us take it from here. I think it was about six months or seven months later, they wrote me a check for $200,000. Yeah, that's amazing. For what? 15 minutes of work? Maybe 18, maybe 20, maybe max. And I got thank yous from the client who sold his company, believing he got a premium. He took me to a large dinner and gave me very large gift. How many clubs?

Let me ask you how, you know, lot of private equity firms already have a prospecting group working for them and they'll say, hey, we got 4,000 people in our database. Like I know a guy that does roll ups of HVAC companies and they've got a team of people rolling out there. And if I said, hey, you need to go talk to these guys, they're doing 25 million in Tucson. goes, yeah, that's already in the database. It's already in the database. That's fine. So generally speaking,

to be successful in our business, we want the seller mandate. So working with buyers, I mean, there's a sea of buyers. On a daily basis, John, we will get 10 to 12, 15 inquiries from private equity groups, family offices, strategic buyers. We heard from PepsiCo this morning saying, again, here's our criteria looking for companies of this quality. Bring us a deal. My approach is,

Jon Stoddard (07:11.725)
If I've got the mandate, I've got the seller, I'm in control. I then use our PitchBook license, which is probably the finest database anywhere in the world. And we have a license with Prequin, very expensive. I know PitchBook, what's the other Prequin is probably a PitchBook's quality and size, but they only focus on what they refer to as sponsored deals. So every institution...

every major private equity firm, any of the, again, sophisticated investor groups that have invested in a company, they list all of the companies that they have investments in. So you know that if you're dealing with a frequent list, you're gonna be talking to people who say private equity group out of Atlanta that owns a company in San Francisco. So.

you know you're going to be dealing not with the company in San Francisco, but you're to be dealing with the private equity firm. We love to deal with private equity firms because they're very sophisticated. They respond very quickly. They'll sign an NDA within two days. You'll send them the confidential information memorandum and you're on a Zoom call within the first four or five days. And because you reached out to them, say, hey, I've got great deal flow. Would you be interested? Something like that. Actually, the way we would contact, so we've got the mandate. We put a SIM together, confidential information memorandum.

We've put a teaser together. We've now assembled our list. And generally speaking, it can be either target shot where we know that companies that do exactly this is probably 12, 15, maybe organizations that would fit. We will contact them. But if we don't have something that we have any specificity, we'll take the pitch book list. And on average, that'd be about 400 to 500 companies. Very selectively, we'll pick out those that we think make sense.

We'll blast out our teaser. It's a blind teaser. Doesn't provide any name. Just simply says, here's all the details, two pages. I mean, I can send you samples of teasers and off it goes. And the origination people at the PE firms respond. The strategic's are slow. Usually that's something like, you know, intern or something, isn't it? Somebody younger. And that's the problem. mean, private equity industry.

Jon Stoddard (09:33.549)
beyond being the most arrogant professionals of any industry in the world, more than dentists or doctors. They usually have these young kids, B-school graduates, some MBA from Yale, know, who's sitting there on the phone who doesn't have many interpersonal skills trying to deal with someone like me, you know, following up. Very, very few of the the firms, the PE firms have proactive origination, but many do, where they're reaching out, sending out letters,

sending out responses, the vast majority of them sit and wait for these teasers to come in or inquiries. Really? So the bigger PE firms on average will probably see between a thousand and maybe 1200, 1200 teasers. In a week or a month or what? A year. a year. Okay. And this includes everybody. There'll be startups that will contact them. There'll be people with crazy inquiries, but they will generally log.

I would say upwards of a thousand to 1200 deals on average. So, I mean, for those that are not, you know, they're not very, very defined, they're very selective. So they'll have their origination team study. They'll come back to you with feedback within a matter of days. I mean, that's what they're trained to do because in this marketplace, I mean, if you send out a number of these inquiries, you get response very quickly. He who has the deal is in control.

So deals have He who has the deal is in control. Correct. So if you have the deal, you have the mandate, you've been retained to put a book together, a sim together, a teaser, you're controlling the deal, you're sitting back after you've done this big distribution or very targeted distribution, you're gonna get response. Yeah, and you get that filtering qualifications like, hey, I got an HBAC company doing 50 million in a large city and-

I'm only gonna send it to private equity firms that are buying HVAC companies. Absolutely, and by the way, I'm glad you brought HVAC, yeah, exactly correct. HVAC at the moment is probably in greater demand than pharmaceutical companies, insurance brokerages. is a mass campaign going on with search funds. People who do mergers and acquisitions, they only do search. So they are...

Jon Stoddard (11:56.693)
making all the outgoing calls to these companies. Heating, ventilating, and air conditioning is a hot market to be in. So there's a lot of people looking. And not a lot of deals. a lot of these companies, those HVAC companies are smaller for the most part, run by some guy that was an air conditioner. He was an installer before, and he just moved up or left the company and did his own, right? He bought a truck, he hired a helper, and bingo,

got busy, hired a second truck, and now he's got seven or eight, 10, 15, 20 trucks, and he's got a business, the service they provide is in great demand. The other area right now, because there's a great shortage of people that do elevator mechanical work. If you can find people that can understand how to repair and service elevators or other lifts or escalators, there is a severe shortage North America wide for these professionals.

So in my building, have an auto. wait, wait. So you have a seller, a buyer mandate for elevator companies? Probably. I would probably say I have about 12 or 15 inquiries saying, bring us a deal. Mark, we'll protect you. Just bring us a deal of this size. What's the size? I've got, you know, this is there's not a lot of elevators in Phoenix, but I know an elevator company that's been around for 20 years. Well, I to college with them. OK, so let's.

Reciprocity will be respected. Let's work on the deal together. mean, virtually, virtually no shortage of companies seeking companies in that niche without question because they're. So what's the what's the attraction toward it? Is it the reoccurring revenue? Is it what is it like the multiples that are happening? It's what is the cash flow on its recurring revenues? I mean, if you've got a contract repair elevators, you know, you've got

you've got obviously an ongoing stream of income. Number two, there is a shortage of people who do this mechanical work. It's not like being an auto mechanic or a technician of some sort. The big organizations, the big elevator companies, Otis being a perfect example, when all the big boom in big buildings stopped in the 1980s and early 90s, they didn't train these people. I mean, you have to apprentice.

Jon Stoddard (14:19.565)
You go through a video. you have to go is a licensed bonded apprentice program. there isn't there isn't Canada. I you're talking to me here in Toronto. So they have to go through an apprenticeship program. They get licensed and off they go. So in my building, this goes back about five or six weeks ago, elevator mechanic that you could tell that this was a gentleman easily in his 80s. And I mean, I've seen him there many times. I started to chat with him.

And he said, look, I'm a consultant to the major elevator company. I won't name them. He's 84. He says they pay me $200 an hour. I'm on call. So I can come and fix the elevator and get travel time and back. And I can make six or $800 a day. he's still doing physical work at 84. He's doing physical work. He's a tiny little guy, but he's on contract.

And I say, well, why are you still doing this? He says, because my company can't find qualified people. He should raise his rates to 300 or $400. I mean, he's happy at 200. I mean, when they have an emergency, it's not what's he going to spend the money on? Skydiving? I don't know. He's going to take it with him, maybe. Maybe he'll just leave it to his kids, you know, buy another set of golf clubs. Yeah, whatever it is, there is a great demand for these types of these types of professionals. HVAC is the same.

The other hot market at the moment is anybody, anybody, anybody in insurance. Insurance brokerages, there are the big insurance brokerages have exactly what you're saying, John. They have origination people who are out calling. So there's probably not a real estate, but rather insurance brokerage in Canada that hasn't had at least four or five inquiries a month. Sell us your business. Sell us your book of business. Yeah, yeah, yeah. It's reoccurring. That's lovely. Reoccurring revenue.

I mean, you're with an insurance company and also in great demand at the moment are wealth managers. Wealth managers? The big banks are acquiring wealth managers, people that manage money. Also hot in North America is anything in value added manufacture. If you're manufacturing anything. So tell me about that value added. What's the difference between a manufacturer and I mean, you've got people who do commodity manufacturing. So let's pick a food company. They blend the powders.

Jon Stoddard (16:44.033)
and they make a pancake mix. So they put one powder in with another powder. A value added manufacturer has some technology and they add some kind of specific value to the product that they're manufacturing. Those companies are rare or rare in North America because most of these organizations went to China 20 years ago. And now they're repatriating the bath. So we're now starting to see

We're now- that's in Canada and US too, right? Absolutely in the US as much as Canada. Believe it or not, right now with all of these companies that are repatriating their manufacturing here, they're estimating that the salary levels or wage levels with exception of benefits is between 15 and maybe 20 % of Chinese wages. Chinese wages have gone very high and they've become very difficult to deal with.

Canadians and Americans are saying, why don't we repatriate these manufacturing facilities and start doing again in... Why did Chinese prices go up 15, 20 %? Hey, they were working for, I there's a middle class in China now. They're not happy to work for $8 or $7 an hour. So their wages have jumped. Probably in the last year, even during COVID, some of the manufacturing facilities there, you've seen wages grow by 20%.

Same story, skilled workers are hard to find worldwide. So any of these manufacturers that have to have somebody who's got some technical capability to work on a machine or a lathe or anything, they've got to have some skill. Well, the Chinese are going through, as much as the population is grand, they have a lot of unskilled labor. know, people that can take sacks on their back and, you know, carry out to the truck. They're going through the same issue.

So wages have gone up. They're within striking distance of North American wages. my God, so I thought 100 % makes sense to bring manufacturing, repatriate manufacturing. Repatriate manufacturing. You know why? Every value added manufacturing job in North America rates four more. mean, manufacturing drives the economy. That's the secret to a complete country turnaround for North America, for Canada and the US.

Jon Stoddard (19:05.451)
So we talk about, had like $1.8 billion of investment here in Toronto making movies. It's great, wonderful, an impact to the economy. Every entertainment job creates one job. They pay their groceries, they pay their bills, they pay their rent. There's no other residual spinoff. There is a manufacturer. It's just not as sexy, right? You know, they'll go to the visitor's convention bureau and get money from the city to bring in a film crew.

and finance like, hey, you could shut that road down for three days and then the cops cost $40 an hour overtime. Exactly. Well, it's more than 40. It's more than 40, but exactly correct. There's not a lot of impact with the exception of the initial investment. They're not creating any more jobs. So yes, we love moviemaking. We love the television productions that are here in Canada because all these tax incentives, we've stripped it away from the Americans.

I mean, Hollywood has come to Canada. Montreal at the moment has got crews all over the city. I think they've got something like 23 or 24 TV shows being filmed there at the moment and 11 major, you know, movie productions in Montreal. No different in Toronto, but it impacts the economy, no doubt, but not as much as manufacturing. Not as many. Yeah. So manufacturing companies in North America are in great demand. The private equity groups are acquiring them. Strategics are acquiring them.

&A in my 35 years in the mergers and acquisitions business has never been as hot. It's because there's so much money to spend. So how many total deals would you say you've been involved with over 35 years? So I've I have not scaled up. I discovered after having been in, you know, when I left Trulia Packard, we formed SimTech Company went public. I had a declaration that there would be no more partnerships, no sinking ships.

So I've kept our group very small with myself. that's your no partnerships, no sinking ships. That's Well, that's same thing. They're the same thing. So I did not have a good relationship with my partners. It did not end well. Leave it at that. Did not end well. A lot of lawyers fees and a lot of aggravation and a lot of tension. So over the course of 35 years, we have consummated our 194th transaction this past January. 194th.

Jon Stoddard (21:28.653)
You're almost six away from 200. Well, just a few away. So we focus on companies that have EBITDA profit earnings before interest taxes and depreciation, call it cash flow, net income normalized between 2 million to 10 million. That's 2 million to 10 million. The US is the lower mid-market. The moment you move into the mid-market, now you've got all the big banks, the big insurance companies, the big...

the big accounting firms, KPMG, Deloitte, EY, PWC, they all have huge &A departments. They're focusing on companies that are a little bit larger. They've got big cost bases. Yeah, so you're talking about, you could be talking about somebody in the 10 million EBITDA, with a 10 % EBITDA of sales could be a $100 million company. Exactly correct. So to get those kinds of mandates,

Generally speaking, those are sophisticated companies. mean, anyone doing $10 million of EBITDA profit is probably, as you say, going to be doing 90 or a hundred million dollars. They're going to have some good advice. So for me to get a mandate of that size is a little bit more challenging, but the bulk of the market in North America are companies that make under, it $5 million of EBITDA. So it's two and five. And then there's all the organizations that do a million dollars or less. Those companies are very difficult to sell.

because private equity are looking for a minimum of two. I would say that 90 % of the PE firms in North America, and there's 42,000 of them, about 5,000 of them in the US and Canada have at least half a billion dollars of capital under management, at least. So there's an incredible amount of money looking for very, very few good deals. Yeah, yeah. Hey, I wanna ask you about, you talk about 2000 times

these articles and trade magazines and Wall Street Journal, what are you writing? Are you writing kind of the same thing a thousand different ways or is it new stuff each time? You're absolutely correct. mean, I've written, I think I've had some of the articles have been published as many as 30 or 35 times. Same article. move that with the changes. So I changed it from food processing to metal bashing.

Jon Stoddard (23:52.843)
you just go to a different niche and just replace the name like manufacturing to yeah, well, all of a sudden now you've had in one month, you've had seven trade magazines, publish it. But it's been specific to them because you've changed the paragraph for a few words, bingo, same article. So I've been writing on why sell your business, how to sell your business, how to do evaluation of your business and everything, everything under be an entrepreneur.

And then of course, as you start to run out of these subjects in order to stay relevant, you've got to constantly writing. So I would interview people in different industries. Tell us about the, the corrugated box business, interview a president of a corrugated box company. And lo and behold, he gives you all the issues in his industry. So you make this very interesting interview of this guy. You get it published in some of the business publications, but because you've interviewed a key guy in that industry, the corrugated box.

Trade Magazine, which I forget the name of it right now, they'll publish that article. So suddenly now the whole corrugated box industry in North America or Canada reads this article said, well, we know Bob, Bob runs this big corrugated company. Mark must know something about corrugated because he wrote the article. Sit back, phone rings. Yeah. Now out of the five or ten publishing content, look at that. It attracts audience. It attracts audience. You've got to be writing.

The other thing to do is there's so many radio programs, so many television programs that if you just inquire, they constantly have like a business show and they want to do something interesting. Well, they've interviewed all the stockbrokers, they've interviewed real estate agents, they've interviewed wealth managers, all kinds of other professional lawyers, accountants, but there's some kind of an appeal, which I still can't understand. They want to talk to people in the mergers and acquisitions business. It has some kind of a

a sexy appeal. They all refer to that movie, what was it, Pretty Lady? Well, it's what Warren Buffett does. And he built a hundred billion dollar fortune after just acquiring companies and working above it. Yeah. Exactly correct. And by the way, they are a perfect example. in particular, who gets on the phone and calls companies directly. Would you hold for Mr. Warren Buffett? No, is this a joke? Is this April 1st? They got it right 40 years ago.

Jon Stoddard (26:16.363)
He's been doing this for 40, I mean, he's, I'm he a hundred million times smaller where you're pro-acting. They pro-acted 40 years ago calling on these companies that they've acquired or investments that they've made directly. Warren would get on the phone like a sales guy and solicit. at the- Charlie Munger turned 98 just recently. a great American. I mean, a philanthropist, he is smart.

I follow him. I've read. Did you buy his book? What's that called? The talks about Charlie Munger, the big fat book that's like, yes, yes. I mean, he's a brilliant man. He's 98. He's still vibrant. And we hope well, I'm not a shareholder of of of I used to own class B shares a long time ago. Well, you you held on. I said I sold them because I thought my startup was a better investment.

Okay, I hope that's not true. It is not true. Yeah. Okay. Well, I mean, they've done very, very well. So there's examples of organizations that it took a very proactive view. There's lots and lots of money that'll support people to acquire a business. So what do you have in the marketplace today, John? And this is important. Today, we are overwhelmed with what we call search funders. these are you've seen search funder.org, right?

absolutely. I received it. So these are these are these are kids who sit in MBA schools with professors saying go out and find a deal. Do my dirty work. my dirty work. Yeah. Bring us a deal. they so they go out and all the majors, including, by the way, Bill Gates, he'll have 20 or 25 people that he will say, I will follow you during the course of this year. You've left your MBA. Go find a deal. Bring it to me.

So they're search funders. Yeah. Then they're okay. So I mean, Bill Gates will sit back and there'd be a flow of deals come in his former partner, late partner. Mr. Allen used to have exactly that arrangement. He would support all these kids. He'd speak at universities and say, go bring me a deal. So these very enthusiastic kids would try to bring them a deal and he'd sit there. He would look at probably, he looked at at least 2,500 according to in the last year that he was alive.

Jon Stoddard (28:41.217)
Yeah, it's incredible creating a whole network of bird dogs. Exactly. It's a good way to put bird dogs. And these kids would say, well, I want to run this company. Well, we don't know about that. You're just out of school. So they are search funders and they can be anybody. There are something called independent sponsors. So these are people who claim they have a backer. Yeah, we have a backer. So we have an investor who's prepared to back me.

to buy a company and I'm gonna run it. Well, you have to look at the qualifications of the individual. But I stay away from those. I generally refer to that whole community as LBO, Leveraged Buyout Dreamers, because they're dreaming. They don't have much money. They're hoping that the seller is going to sell the company at a lower multiple, is gonna take a big vendor take back note, take back note, and usually an earn out. Well, if we earn it, you'll get it. Today, company sellers,

pretty astute. They know that there's people knocking on their doors. So the best deals go to groups that have captive capital. Yeah. Have you ever been enticed to be one of those and say, Hey, God, this is like a great deal. I want to own this because I could grow it. You know what? Regularly. However, you're either an intermediary and a broker or you're an operator. I was an operator. So a lot of my colleagues that get enticed into that

Now you're spending 20, 30 hours a week on your investment managing or co-managing the company. And the same thing applies with being a director on a board of directors. I have not accepted in all these years from the countless of invitations, please sit on our board. We want an &A guy to sit on our board. Well, now you're giving 10 or 12, 15 hours a week to board work. People get paid to be board members. People live to be board members.

I focus exclusively on sell side work. Yeah. And you create and the model is by your celebrity and your following and your content that you put out in front of these manufacturing companies or wealth managers, insurance brokers or HVAC companies, they come to you and say, well, I'm 78, I need help selling.

Jon Stoddard (31:04.973)
Can you help me find a buyer where I can have a life changing exit? And you know what? To get people to call you is a big track. It's a big deal. That's a big deal. That takes a long time to create that. by everybody. They're getting contacts. Like an average week, a company that's doing say $10 million in an average month, they may get two inquiries. I'll you an example. I got a buddy that owns some oil rigs. He's got like 120 of those. I I get calls five times a week with FU money.

But he goes, just like, it. Yeah. come on, come on. Listen, there are people who entertain these people. So I wrote, I wrote a really, really good article on on the, on the metal industry and changes, emerges in acquisition. So I get a call from this gentleman who has a bit, about 42, $43 million in revenue company making over $5 million EBITDA, a high net worth guy, grade eight education started as a, as a millwright. Anyway, he invites me in.

And I said, well, why did you invite me in after 20 minutes of introducing ourselves? He said, well, because you know the industry, you're right for our trade magazine. You must know something about the industry. said, I do. So I said, well, have you been contacted? So he pulls out a file. He says, every time I get an inquiry, I keep it in this file. hands me the file. I start flipping through competitors, private equity groups. Can we have a meeting? We'll fly to Toronto.

all kinds of competitors of mine looking through this file. I couldn't get through, I couldn't get through 20 % of the file after sitting there for 10 minutes while he was on the phone, just flipping through. And I said, how many inquiries do you get on a monthly basis? He said two to three. From competitors, from other organizations, the bigger organizations get those inquiries regularly. Smaller organizations, not as appealing, but they receive them as well. Lots and lots and lots of money, very little required.

Yeah, let me let me ask you about the sometime notorious attitudes of PE firms where they'll come in and say, I love your company, I will give you a 5x multiple, but lock them in and then kind of go, I don't like that. I don't like that furniture scratch up that furniture scrap job. And then it's one x multiple lower by the time they say, well, we'll give you this money for it. That's that is that is common with some of the firms. Those firms that

Jon Stoddard (33:29.709)
play that game, generally speaking, are well known to the community, to my community. I was the chapter president of the Association for Corporate Growth. That is the organization that linked all the &A, corporate finance, private equity groups, the lawyers, the accountants, the due deals, ACG, been around since the 1950s. I forget how many chapters there are in North America. They have regular meetings every month. If you're interested in

anything to do with &A and you want to meet the whole community. An average one of these dinners has like 200 people. In Chicago, it's more like 400. You network with people in our business. We exchange ideas. We have publications. And I mean, you just pay for dinner. You can go as a guest. And the other factor, of course, is that in North America, unknown to most people, there's nothing that regulates &A people. I mean, at one time in Canada,

they had something called the Business Brokers Act. Well, I'm not a business broker. Business brokers sell variety stores, laundromats, but they required people that were selling companies to become a real estate broker. It was the same in the US and they scrapped everything. So there's not been any regulatory body. You've got to be regulated as a wealth manager. You've got to go through all kinds of exams. You've got to go through all kinds of registrations to be an accountant, to be a lawyer.

anybody and everybody can say I'm an &A guy. Yeah. Do you think that's important to have a regulation? I mean, the reason I bring this up is I just, you know, having FINRA and SEC, I said FINRA is working on climate change. Like, well, why would FINRA be SEC be working on climate change? Yeah. Who knows? Who knows? I think it is important. I'll tell you the other side of our business are what people that do corporate finance, the race capital. Today,

you've got to be what's referred to in Canada as a limited market dealer, which means you've got to post a bond. You've got to go through a qualification. So people that raise capital need to be certified, need to be under a regulatory body. So if you're raising money, you're under the guise of the securities commissions in North America. We're not. So on an average year, I will guarantee you every year get at least 25 or 30 calls from people saying, hey, I've left, I've left.

Jon Stoddard (35:54.893)
Bank of America, got a package, I'm gonna be doing &A. Great, fantastic, okay, go ahead. The 24, 25, the contact, maybe one remain. They can't find a deal. So they'll say to me, Mark, can I work on your deals? No, thank you. I mean, I'll bring you a buyer. We don't need your buyers. We're overwhelmed with buyers. So then I say to them, look,

If you really want to sort of make a profession out of this, go find a deal, bring me a deal and I will mentor you to do it. Most never find an opportunity approach. Yeah, no, deal flow is tough. I mean, it's one of the toughest parts of the &A game is being, finding somebody that actually is motivated to sell and trust you. And I invest, look, I've been talking to people for 12 years. mean, sizable companies.

family businesses, started talking to the guy when he was 60. Today he's 72 and we've been exchanging emails. Occasionally I'll go out and see them. They'll come and see me, but it's a long process. It's rare that you'll get a call out of the blue saying, I want to sell my business. Long relationship building process.

The first time you see somebody and you ask them, would you like to get married on the first date? It's gonna be involved. No, it doesn't happen. It rarely, rarely happens. So the very best opportunities are referrals. Yeah, referrals. the referrals and the articles. So you get a referral from a known lawyer or a known accountant or a business entrepreneur. And I had one.

So let me ask you about that. Are you cultivating relationships with CPAs or the legal attorneys that do &A? Absolutely. Yeah. And how do you do that? Write articles. Write articles. In their publications or in the publications? In their publications. Look, I'll give you another example. Because I discovered that writing articles made my phone ring. And I told many colleagues and I went,

Jon Stoddard (38:12.811)
I spoke, think, at conferences on &A and private equity. I gave away the secret, my view. So I was looking at all the publications in Canada, every trade magazine, and many turn you down. So I come across a publication called Barber Magazine. It goes to barbers. What the heck? I changed a few words. I sent it to Canadian Barber Magazine. Did you have a relationship with the editor?

Or just I sent him the article and only by the way, editors rarely return phone calls, return emails. You've to be persistent to get published. You've got to be. So he calls me the same day. He said, I saw your article. And of course I had all the references to barbers and whatnot. Take this out, take this out. He calls and he says, I want to publish your article. I said, great. So it got published in the next month. One phone call, one phone call. And I can't name the guy.

227 franchise hair cutting spots in Canada. He said, you must know something about barbers. I said, well, not much. get my hair cut. I've got my hair cut for 66 years. occasions, my barber gives me a shave. He said, come in and see me. Bang. Five months later, we sold the business. you, do you, you know, how long before you ask them to sign agreement where you'll help them sell it? So that's a very good question, John. I'm glad you asked that.

Everything with me starts with, give everybody a non-disclosure document and everything is going to be kept incredibly private and confidential because they're going to be opening up a lot of personal information and financial information. It all starts with, for me, I will do evaluation at no cost, no obligation. Do a normalization of income after I've got all the information. because people are very uncomfortable in you taking away your financial statements, I insist we do it in their office.

So I'll say, let's meet Saturday morning. We're gonna start at eight o'clock. We'll be done by 12 or later. Bring your accountant, bring your wife, bring your partner, bring anybody. We sit down and we do something that's pretty damn simple. And you can go to my website, a normalization of income. So we take all the ad backs. So this guy takes seven trips to Florida. He's in New York or he's in Toronto and he puts everything through the company. Well, that's technically income.

Jon Stoddard (40:36.909)
So we do all the add backs, all the take backs and we sort of, that'll come down. Well, if he went to a trade show though, in Florida. And that's a business expense. he's got four kids, all of them have a car, all of them have cell phones. That's In a normal situation, three of those cars will not, or four of those cars will not exist. So you add back the value of the cars, the insurance, the gas, personal insurance policies, personal expenses. So.

private companies use their companies as a piggy bank. Yeah, look at that's not illegal. If they keep the company, they could do what he wants with his company and his money. So it's not illegal. It's just that when you sell it. Yeah, some of them, you know, some of them do things that are obviously not completely good for tax purposes. But so you come up with a normalized number. So I will get at that Saturday, we've had coffee, we've been to the washroom a few times, we hit noon.

I've got all my notes in front of me, his financial statements. I take my one page summary and everything back and I say, my view on value is, and I write it down in pencil and I hand it over to him and he'll say, or she, she, that's not what I was thinking. Or how did you arrive at that? I said, we arrived at it together, your numbers, your inputs, my interpretation. You have an idea of what multiples are.

and values in your industry, your business, here you go. And you're just using cops from the industry like PitchBook or whatever or somebody else like that. Yeah. mean, you could, doing a normalization of income is not a complex process. No. So I've done thousands of these. And at the end of that process, I will leave them with that information and say, take this away, digest it. Let's talk next week. And this is, these are cards you hold in your chest because if you put,

this 200 franchises in front of a PE firm, they're going to come up with their own. Of course. And it'd be higher or lower right on, whatever. But before I take on a mandate, if I say your business is worth X and the owner says, no, no, no, no, no, no, I'm looking for two times X, I will say, thank you for your time. Let's stay in touch. Maybe you should talk to some other people. Maybe I can give you the names of other professionals in the industry. Go and talk to others.

Jon Stoddard (43:01.665)
Let's revisit this in three months. How did you arrive at that? You know, you don't, guess you're not even arguing with them. You're just waiting for them to deflate. They'll tell you that, you know, their business is going to grow dramatically in the next three years and they want to get paid for all the futures. And, you know, if they made these following adjustments to their company or some people will say, well, I can't live on those kinds of proceeds. I can't live on $7 million or $10 million. You can't sell a house with an imaginary pool. Exactly.

So when somebody lists their house for $200,000 above current market, people will come and look, they'll make offers, but you know, people that are fixated on a value and certain terms and conditions. Some people will say, look, I want to go right away. Well, no such thing. There's got to be a transition. It's usually a year. They'll say, I want a hundred percent cash on closing. Well, there's very, very, very few companies that'll engage that. They want some kind of buffer. So

They'll set all the terms and conditions up front and the value. I'll give you an example. I went to see a gentleman, again, pretty substantial company, and we went through this whole process. His accountant was there. He had a son there. It was a very intense meeting, very conservative guy, very uptight. I gave him the numbers. The accountant looked at it, kind of smirked, nodded his head. His son had no idea. Handed him the paper and he said, please leave the building now.

I said, did I say, he said no. Yeah, you insulted him with the low multiple. But I didn't give him a low multiple. gave him a range of what he, I would stand behind of what he would expect for a player in his market. So I left. I kind of grabbed my coat, my note, my portfolio and I scrambled out. Do you try to?

rationalize, like say, hey, look, the comps are, let's say it's 5X for your industry for this size of revenue for this tries a profit. And this is what they're buying it at. I mean, you're not going to get a 10X. No, exactly. I can give and I will come prepared to say in your industry size of your business, this is kind of the value range that you can expect. It might be higher. It might be lower, but you're in this value range. Yeah. This guy was absolutely insulted.

Jon Stoddard (45:26.545)
And I reached out to him. He didn't return calls. I finally got a phone call from his accountant apologizing saying, know, Jerry, you know, Jerry was insulted. he said, you know, his value is about three times your number. So good luck. Stay in touch. Call you in a year. Yeah. happens? Hey, listen, I don't mean to be disrespectful, but I've had many of these, these, these situations where you end up dealing with the widow. Yeah.

Yeah, yeah, because it's a lofty evaluation. don't even make sense. There are people today running their businesses in their 90s. Yeah, right. I can't name the company, but we had a client, a vascular surgeon who started a company in the medical device business who ran this company. 92 years of age, vibrant, used to walk five to six miles every day, would swim, healthy, healthy guy. We had a buyer from Switzerland, perfect fit. We were on the same wavelength.

He had cancer, we knew, but like in the last three weeks, he just slipped to nothing, 92 years of age gone. He'll fill off the table. You know, this is interesting because I went back to Netflix and I was watching Freakonomics about, their question was, you know, if a real estate broker tells you, you need to sell fast at this price, which is usually a price, or you're sitting back with your wife, should I hold on a little bit longer for a higher price?

And the numbers they ran were they should hold on for a little bit longer. The broker is incentivizing you to take a faster price because it helps them put money in their account faster. So I don't do that because it's a loss of credibility. Because I ask everybody after I've done that initial valuation, I say, I'd like you to go back and talk to other professionals. Go talk to my competitors.

Go talk to a valuator, spend a little bit of money and get a professional valuation done, because we're gonna be within 5%. The professional valuators know what the values are. Go and get another opinion. And particularly since you don't know me and there's a trust issue, I want on your side of the table, somebody that you trust that understands what I'm doing to constantly give you some counsel and advice. That's how deals get done.

Jon Stoddard (47:45.997)
Yeah, they now see your genius. Like you're not afraid of locking up the deal and losing it and, you know, moving a transaction through for the lowest price. Exactly. So we talked with somebody back in the fall and I gave him exactly that same advice. And he went out in the interview to two &A firms, Toronto based. And he came back and he said, wow, you know, their fee structure is very different than yours. I said, higher or lower. said,

double your fee, double the fee. I said, wow, okay. I said, I know those guys are out there. And he said, you know, they, sort of presented values that are much higher. Well, people do that just like real estate brokers. Well, your house is worth to get them locked up for a, their, yeah, their contract just to get a listing. But unfortunately that comes back to harm them because they then listed at that value and the house sits there in Phoenix or, or in, Salt Lake city.

it sits there for six or eight months where people have to adjust their expectations. You've got to get expectations fixed right up front. Otherwise there's going to be a lot of waste of time and a lot of wasted effort. Hey, you know, we're running out of time. That's what went by really fast, but I want to go back to the search funder because I was thinking about that when you're talking and I apologize for it. So it's like, I never really thought through this like, okay, these companies, these individuals that have a massive size of wealth are a

deploying these bird dogs who are right out of school and they find these deals and they say, yes, I'll fund you, but I want to run the company. That proposition sounds like it, like, why would I hire a guy right out of the Harvard Business School to run a company? But that's what the dream of these kids are. And I call them kids. They think they're going to get somebody that's going to buy. So what they end up getting, and they're dissatisfied if one of these

projects gets taken on, they get a finder's fee or they get a part of the fee or they might get employed by the company. So we've seen a number of those, but I have stayed clear of the search funders and the independent sponsors because at the end of the day, every one of their proposals says subject to finance. So now they've tied you up for 60 days and now they're going to go out and try to find the money in six, 58 days. say, guess what? Couldn't find it, but we've tied you up for 60 days.

Jon Stoddard (50:12.951)
So all the other prospects you were talking to have gone away or have lost interest or might come back. So there's too much money not to go to groups that have captive capital. Yeah. there's many more than the 5,000 that don't have half a billion dollars of capital under management. They have a hundred million dollars of capital under management or their family offices that own 16, 18, 20 companies that have the wherewithal to do a deal.

So why reach out to these dreamers? And I respect them. I was a dreamer at one point too, but we funded ourselves. Why go to the dreamers? Why take that risk? Companies that are selling today don't need to sell to people who don't have money. Unless they have a really lousy business and nobody else will buy it. that dreamer comes in and fixes the business. If they have the genius skill to do that, right? Yes. Yeah.

So, I mean, at the moment, I'd recommend to anybody who is contemplating a career, if they have contacts in industry, it's not a complicated business. mean, you you've got to have financial background and ability, obviously, to read financial statements and all the other skills. I mean, it's a great career. And a lot of the &A firms, since it is booming, are hiring people who are making career changes, bankers, accountants, lawyers. They're bringing people on. I mean, because...

the market's steaming clock. Yeah. So I have run out of time and our way by just like that. I just kind of like this market about skiing of work. You can tell merges and acquisitions, elevators, insurance brokers, managers, Now you've added manufacturers because there's a ton of money out there. Anything.

anything. John, thank you for your time. Thank you for interviewing. No, thank you. I mean, I swear I have fun. Yeah, let's do it again. Let's do it. Take care. Thank you. care. Have a good day. You too.