Announcer: You're listening to Wealthview, the podcast where we share philosophy, strategy and insights from some of Canada's top financial professionals.

Announcer: Hosted by Dean Colling, senior Wealth Advisor and Portfolio Manager at CIBC Private Wealth. Edited and produced by the Colling Group. And now on to the show.

Dean Colling: Welcome to Wealthview. I'm your host, Dean Colling. On this edition of Wealthview, we discuss how small and medium sized business owners can navigate the complex process of selling their business. Joining me today is Christian Davis, a managing director in CIBC's Mid-Market Investment Banking group, which provides M&A advisory services to private mid-market companies. Christian has over 18 years of experience working with shareholders as they grow their businesses, make acquisitions and ultimately sell or monetise their investment. Christian, welcome to Wealthview.

Christian Davis: Thanks, Dean. Thanks for having me.

Dean Colling: It's a pleasure. And, you know, you and I have known each other for a few years now and have worked on some client cases together. So it's been a pleasure and a long time overdue to have you on the, on the program. So, but before we get into the meat of mid-market private M&A, tell us a little bit about yourself and a little bit about the background of your group and what you do here at CIBC.

Christian Davis: Yeah. So I mean, I guess for myself personally, originally an engineer. Engineer as a, I did that for a number of years, and then have made my way into investment banking after doing an MBA and really landed in CIBC about 18 years ago now. And I landed in our Mid-Market Investment Banking Group, right. So this this team really is focused on providing advisory services to private companies and their owners. So ultimately we help owners, companies acquire other businesses, raise outside capital, so equity capital, growth capital, and ultimately help them sell their business. And that's really where we spend most of our time, is helping owners, shareholders, management plan for and ultimately execute on the sale of a company, that could be the full sale or a partial sale of the business.

Dean Colling: So how big is the group now?

Christian Davis: So our team is about 24 people across the country, five offices. We've really grown over the years. When I joined, I think we were probably closer to ten folks across the country and we'd be one of the most active teams in Canada. So in the mid-market space, and for us, that's transactions sort of 10 to 200, were we're doing sort of 12 to 15 transactions a year. So that does equate to being one of the most active groups in the country.

Dean Colling: And, you know, obviously you're an important part of our overall service offering to our clients, as a number of them are obviously private business owners. It's a large asset. It's an asset they've built with blood, sweat and tears over the years and have a significant amount of wealth locked up there. And, you know, as I alluded to earlier when we began the discussion, you know, you and I have been involved in a couple of transactions for clients where we helped unlock that value over time. And so it's a huge value add service that we bring to the table. And we thank you for that partnership, you know, that we've had with you guys over the long term. So, you know, the premise of today's discussion though, I want to go sort of high level and then bring it down to some more granular, you know, details about the anatomy of deals and what kind of things get done. But, you know, you mentioned recently your sort of 10 to 15 deals a year. Is that a normal amount? You're kind of giving us the average. And if have you seen that in the last couple of years or as we've come through Covid, did it get pretty anaemic? And then now it's starting to heat back up again? Give us the lay of the land and what's going on now overall.

Christian Davis: Mid-market private company M&A tends to be fairly stable, right? More stable than the public markets. If we kind of look at the last I'll say ten years or so, it's been a pretty great run for private company M&A. So volumes have come up over that time. Valuations have come up over that time. That's not a not a straight line. Certainly as we got into Covid we've run through a period where frankly deals stopped when Covid hit. Deals kind of all went went on pause. Then we saw '21 through '22, you know they accelerated, right. Lots of capital in the system, deals got done. And then sort of '23, '24 it was a bit of a return to normal right. So there was uncertainty in the system after Covid. And now we're back to what I would call a more normal deal environment. Right. So generally still a positive seller friendly deal environment. There's a lot of capital out there. I mean, we've seen that again over the last ten, even twenty years. A lot of capital in the markets are being moved towards private capital and private markets. And so you have a number of different types of buyers. And we'll probably chat about this, but private equity, family offices, a lot of capital here is chasing deals. But the volume of deals has gone up as well as you see baby boomers looking to sell and exit their business, overall remains a very positive market. As I said over the last ten years, is has been generally a trend upwards.

Dean Colling: Yeah, that's interesting that you say that it's you know, that it's a seller's market. And that's great news for business owners who want to sell. Um, the interesting question I want to have is obviously there's this, uh, push and pull with available capital that's out there and demographics. And, you know, I'd love you to talk to the audience about sort of the demographic play here because we all we know, ageing population, business owners are getting older. More and more business owners are looking to exit their businesses as part of a retirement plan. Have you seen sort of a supply demand mix as a result of that, or is it still sort of capital is superseding the supply side because of demographics?

Christian Davis: Interestingly, it feels as though I would say capital coming into the mid-market in particular, as well as the volume and has kind of been in balance to a certain degree. Right. So I would say there's probably more capital than volume. So valuations have tended upwards over the last ten years. But certainly the money is not silly money. So people are constrained in terms of investment as I think I mentioned here, valuations remain relatively stable, especially as it compares to the public markets.

Dean Colling: In comparison to the public markets, you know, we're talking about now a pivot in interest rate policy out to 2022. Very aggressive tightening stance. You know we've got you know 4 or 500 basis points of increases there. That's obviously a pretty big impact on valuation. Now we're coming down the other side of that. Have you started to see a significant, you say it's fairly steady, but have you seen any lifts in valuation as a result of lower interest rates, sort of lower discount rates?

Christian Davis: Yeah. So in the mid-market, again, I feel when interest rates started tightening, going up, we certainly saw an impact on financing. Right. And so that is going to have a direct impact on valuation, mid-market companies are not overly levered. So the impact is a bit muted. What I would say is the benefit here from you know, decreasing interest rate environment is the certainty of the environment. The outlook and the certainty that we're seeing now is positive to the dealmaking environment. People have a good feeling about, well, what's next year going to look like. Inflation is down under control. And that really helps to kind of align views on value between buyers and sellers.

Dean Colling: In that world. Are there any particular sectors that are bigger benefits or benefactors of that type of, you know, again, a lower inflation, lower interest rate environment over others?

Christian Davis: Certainly there is a couple sectors where they would use leverage heavily to roll up certain businesses, right, and so you've seen that in the dental sector. You've seen that in the vet practice where there was a lot of leverage used to make a number of acquisitions. That is one where I think we'll see activity pick up again as interest rates come down. Anything, any sector where you're making a lot of acquisitions and you're looking to really sort of use leverage, right.

Dean Colling: Cost of capital up. That's a big headwind for these guys in valuation. But obviously the environment is loosening up for that going forward. Tell us a little about, everybody, about the way you source deals. Obviously you're part of a big institution and your partners of ours. And you know, these are some obvious places. But walk through the wide spectrum of kind of where you guys source a lot of those deals from.

Christian Davis: So in CIBC, we really sit within our commercial bank, within commercial banking. We're partners with the wealth side of the business. So our deal sourcing is an internal warm referral network. It is a very long sales pipeline. We are getting to know business owners. We're getting to know the shareholders, trying to understand their objectives, really working with them to find out what the right path forward would be. And so the referral network for us is working with our wealth partners like yourself, private bankers and the commercial bankers to get to know the business owners, as I said, understand what they're looking for. No two transactions are the same. This is not a cookie cutter business. We'll run a process, we'll unearth options for shareholders, but we'll do it very distinct to what their objectives are. And so that's going to be a long sales pipeline. And that could be you know, we get to know people over two, five, ten or more years as they think about what the potential future of the business will be. Right.

Dean Colling: Yeah. And I can say, you know, from our experience, there were sort of 2 to 3 year time frames from start to wrap up. So yep, that's you know, that's a great service though, that's patient advisory being a part of this. This is a big, big transaction. And you know you can't do it without looking at all the details and taking your time. And that's a good way to do things. So let's actually go to the process itself. You know, in a case like, like our group where we have business owners who are looking to exit the business, we come to you, give you a call and say, hey, guys, um, Christian and team here's the case that I want you to take a look at, let me introduce you. Walk us through the anatomy of a deal. Maybe not to the deal part yet, but to the introduction to engagement, to preparation for sale, at least to that part.

Christian Davis: Yeah. There's many meetings, right, as you get to meet and understand what business owners are looking for. So often we're coming in to have a conversation with business owners to learn about the business, learn about where they're at in their ownership of the business. Learn about what is the future of the business. We, along with you, like to understand about family, about, you know, are their kids in the business? Are their brothers and sisters are their, you know, what is the history of the business and what is the legacy they're looking to leave with that business, if the path is really where there's a little bit of a potential for an exit, then we'll get into the meat and potatoes of what does the process look like.

Christian Davis: We'll help them think about what are the options on the table, what is best given their considerations. And we'll help them think about and understand what that could look like and partner with you to help them, the shareholders, think about what the the wealth side looks like, right. So it is really important to, from my perspective, for business owners to get their house in order. And that's both on the personal side and then also on the business side. So on the personal side, I think that's really where you come in to figure out, okay, we need to do an estate plan. What does it look like? Do I have any kind of philanthropic goals? What do I need to do to kind of button down my personal view on wealth. And then we're there to help, okay, what do you need to do to maximise value of the business if that's the right outcome for you?

Dean Colling: So you would imagine that most business owners typically would know at least a few options of who would be a buyer. Strategics, you know, competitors, maybe to a lesser degree a financial buyer. This is where obviously you, you and your team have a lot of access to sort of the private equity funds, et cetera out there that could come in and be interested with that. Do you find that from a business owner's perspective, when you meet them, that they are surprised by how much more you open up the potential buyer network to them, like more than they would have imagined would be interested?

Christian Davis: Most business owners think like, as you as you expect, a business owner running the business day to day. And so they think about who's competitive in their space, who do they see at the trade shows? Most business owners aren't thinking like a seller. I would say that's, I'm never really surprised when we ask them, well, who do you think will buy the business? They come up with a few names, but it's a very short list, and in some cases that's correct. There's probably only a few buyers for a business, but they are typically surprised when we can come up with a list of 30, 40, 50 strategic buyers for a business. And again, not getting into private equity, or a financial buyer that are kind of reputable buyers. And I think this is key, right. It's about being buyer who can, you know, has the capital to do it, has the wherewithal to do it, to do a transaction, has maybe done it before, you know, these are the things that are going to help you get to a successful close. Whereas often business owners are thinking about, well, who do I see at trade shows? And maybe it's another private company that looks a bit like them. It's usually not the right buyer for the business. It's going to be someone who's larger, maybe public, maybe has some equity behind them and has a strategic imperative to make acquisitions because that's going to be a key factor in them being the ultimate buyer.

Dean Colling: How important are the soft factors of a deal? Obviously everybody wants to maximise value. So that's an important, probably the, obviously it will always be the first and number one piece of the deal. But you know in a competitive bid process where price is going to be there, how much does the others like fit and culture and you know, uh, you know, anything else softer on the outside, how much does that matter?

Christian Davis: Soft factors matter in every single deal, i would say to a varying degree, right. And everyone will say, yes, let's get price down first and then let's figure out the soft components. I would say nine times out of ten, the business owner has been with the employees for a long time, It's family. Again, nine times out of ten, ensuring that buyer has nothing but sort of growth in mind and it's going to be positive to the business is very important. Ensuring culture is a fit is very important. We tend to try to push these a little bit further down the road in terms of process. We don't want to assume too many things in the process before you get bids on the table. So where we're really trying to figure out is it a fit, is in the middle of the process, right? So we've had conversations with them. We've an ability to interact in two ways and interview the buyers and understand what they're looking for, because we've definitely found that shareholders tend to have an assumption around potential buyers and what they might do with the business, how they would treat it. But in reality, they find that once they get to know them and kind of hear their vision for the business, often that can be quite helpful. But nine times out of ten, yes, price is important, but I would say they'll take a, you know, a lower price if it's a better fit. Yeah.

Dean Colling: And I imagine again, as you said earlier, it's family. This is a legacy that they've created. You know, they want to see it continue and shine after they've departed the business itself. So I can imagine that is very important when we talk about the process itself. Before we get to sort of valuation, I think we'll talk about that in a minute, in terms of the types of valuations you see, the type of deal structures you see, payouts and earnouts and all that thing. How surprising is it to business owners when maybe they engage a professional group like yours to say, okay guys, here's what you need to do to get ready.

Dean Colling: Is that a big deal for most clients or most business owners? Are they, oh my goodness, I can't believe how much cleanup and dress up and shine up I have to do to this business to get it to that point. And then maybe on a follow up to that, you know, is that some value add that you bring to the table and saying, hey, not only are we going to help you clean up, but this effort will create additional value for the business itself. Maybe talk about that process and how that works.

Christian Davis: Yeah, I mean, as you as you can as you can imagine, every business owner is different, right? 100%. This is where we say the value is derived in having processes in place and then documentation in place in order to drive a quick and efficient process. Right. And so that's part of it. One is, is just making sure that you've got all your I's dotted and your t's crossed. You wouldn't believe how many business owners where they tell you everything's fine and then you're in kind of final diligence documentation. And most of their contracts aren't signed, right. And they can't find their lease or it's, you know, signed by one party, not the other. So I would say, incredibly important to to get your ducks in a row.

Christian Davis: And if you want to rewind even further, I mean, I think it's not only making sure your documentation is in place, it is helping to ensure you are measuring and have the systems in place to help garner the data that a buyer will want, right? A business owner often will react to the business kind of on instinct or on on kind of gut feel. They know the business day in and day out. But I think where we come in is we help them think about what does the third party want to see? How can you prove to another party that you've got either consistency of sales or the repeatability of sales, and that is going to help drive value ultimately. And so rewind a bit further and we're there to help them try to think about what can they do now to drive value ahead of a sale.

Dean Colling: So in going a little bit deeper on the process itself, and obviously, as you mentioned, sort of getting all that data in place so that the buyer can see and have confidence in the fact that the lease is, as it says, or there's contracts, as they say, with all the transactions you've done over the years, you probably have come up with this. You know, common mistakes list that most business owners either have done prior to the lead up to a transaction, or doing during the preparation process. What are some if you got that list, what is what are some of the key mistakes that the business owners may run into?

Christian Davis: Yeah, yeah, there's definitely a list and there's definitely a few things on the list, but the one that I tend to see quite often is business owners, shareholders, not sort of empowering their management teams early on in the process. You know, they'll try to do a lot themselves and leave their management team out of it. And so twofold. One is really you get a better view on the business and you get a better forecast and story out of the management team, but then they feel like they're inside the tent rather than outside the tent. And I think that is crucial. I think everyone wants to ensure that there's no talk around the office, and it's confidential. Time and time again, where you try to leave your management team out until the last minute. Does you a disservice. And it's never been a bad thing.

Christian Davis: Every time you tell the management team, you have to position it appropriately. But it's always been a positive. So I'd say, I would say that's certainly one. The other is really not leaving enough growth for the buyer. Right. And again this is about maybe trying to figure out the right time to sell a business, but ensuring that you're leaving meat on the bone and you've got the right story in place for the buyer. Maybe I'll add the biggest, I guess the biggest issue through a process is often around the business performing through the process. And it might go back to the management team. But if you're trying to do everything yourself and you're not involving everyone, often you can take your eye off the ball and that's when performance might suffer through a process.

Dean Colling: Yeah. And that's that's a good lead in into sort of transaction structures and valuation, let's talk a little bit about that. Because obviously these are not just single dollar figures. Somebody cuts a check, everybody shakes hands and leaves. There's transition periods. There's earnout and performance incentives. I'm sure in that transition, management's got to stick around for a while or if not forever. And you know as an owner leaves. So let's walk through that. Let's say you get through the process and you get to this kind of valuation level, walk through maybe for us what a typical deal might look like. Do these things change over time? Do they change industry wise? And then maybe what the back end of these deals typically look like.

Christian Davis: Maybe I'll start with valuation. I think in their, valuation, I would say in our industry, mid-market is, tends to be focused on earnings, right, in some form. So a buyer is really buying the future earnings of a business, the future cash flow of the business. And that's true whether it's a private equity group or a strategic. And they'll have different control over what those earnings are going forward. But they're really buying the earnings of the business going forward. And we're looking at that as EBITDA. Right. Cash flow is, you know, in some form the same as earnings before interest tax and depreciation, it's not, but that's the metric, the rule of thumb that we kind of look at. So when we think about valuation we're typically looking at a multiple of EBITDA in certain industries, yes, multiple of sales. That's more technology software where really the cost structure is limited, sometimes in high growth consumer goods. But for the most part you're looking at a multiple of of EBITDA. And so maybe quickly, you know what drives that multiple, it can change by industry. But really again you're looking at the cash flow. And so you're looking at okay, how good is that cash flow, how repeatable is that cash flow.

Christian Davis: That's one piece. How fast is it growing, right, that's sort of another piece. And then how big is the cash flow, how big is the business? A business that's with $1 million in EBITDA and a business with $10 million in EBITDA, all else being equal, the larger is going to be valued higher. And again, that's about systems and kind of de-risking that business. So valuation is typically a multiple of EBITDA. You know the bigger the bid-ask spread between a buyer and a seller, right, that's where you get into structure. So maybe I'm going to touch a little bit on on structure. And I would say most deals as you said, the seller would love to have 100% cash on closing. And that's not that's certainly not unheard of. And lots of transactions that can happen. I'd say there's hold backs and escrow but essentially it's sort of 100% cash on closing, where there is significant growth in the business, or you want to get paid for some upside in the business, that's where you'll you'll tend to see some earnouts or deferred contingent consideration. And so that's where there's an earn out. If you hit these numbers then we'll pay-

Dean Colling: That's seller initiated to say, hey, I'm selling you a growthy business here, I want to give it to you, but I also want to share in the next couple of years of growth if we hit our targets. Is that-

Christian Davis: Yep, yep. That's accurate. It tends to come out after a couple discussions on purchase price. So you sort of ask for a purchase price and everyone gives you a number. And then through diligence either you're as a seller pushing the buyer to give you more, and we'll share in that risk to kind of get the upside or it's here's the number that we've got on the table. And the purchaser is saying, well, as I dig under the hood, I'm a little less certain around the, your forecast here. So why don't we take a portion of this purchase price and make it contingent so that, I mean, it's usually one or the other. And again, that's driven off of a bid-ask spread, usually in higher growth businesses as you moved, I would say down market and the smaller businesses, often it's not an earn out, but there's a vendor take back or a vendor note. It's really vendor financing that you often see in the smaller transactions. And that's because the buyer will, they don't have a really big balance sheet, they may not have enough capital. And so there's a bit of a gap in the cap structure. And that will typically come as a vendor note.

Dean Colling: Okay, and that makes sense. If we look at sort of these deals long term in terms of payouts, and I want to actually talk about just a nuance that maybe a lot of listeners wouldn't necessarily know when these negotiations are happening. And you get to that point where, you know, you've narrowed it down to, you know, one or a couple of buyers that are very interested and ready to put a deal together, or maybe even just one in this case, is it often that you're in the same room as the buyer buyer team and there's a live negotiation going on? Or is this usually a back and forth over the course of, you know, a few weeks, you know, and negotiating via email.

Christian Davis: Good question. It's, so, it used to be we were live and you would have full deal teams together, and you'd have breakout rooms and side sessions and try to get to a to a deal, a final deal in one day. And I'll say this is after a lot of diligence, this is after, you know, a lot of meetings. But when you're down to the short strokes that used to happen and I would say that's probably pre-COVID thing and maybe, maybe it's just our team. We haven't really had that live kind of single day, we're not leaving here until we've got a deal. You know, maybe it's the advent of of more virtual meetings, but I haven't I haven't seen that in a little while. So I mean, if it makes sense, I'll kind of just go quickly over kind of the process and how you even get to that point. Right. So really, I'll kind of give a sort of a quick and dirty in terms of what a typical sell side process with multiple buyers looks like. You know, it's going to be a 6 to 12 month process from start to finish. There's a preparation phase before you go out to market. That's a few months depending on how prepared the business is. But we're putting together marketing materials to go and solicit interest.

Christian Davis: Right. And so once that's prepared and we've agreed on the buyer list because that's very much a bespoke buyer list, then we go out on behalf of the company to solicit interest. And so we're having those conversations getting them to tell the shareholders what their view on value is. And that's an initial range. Typically it's between X and Y depending on a bunch of factors. And once we get those initial bids, those expressions of interest, we then will narrow the list and figure out who's going to come through and actually meet the management team or the ownership team, because that's really where you get to see each other face to face. The buyer gets to understand the business a little bit better, you know, directly from the seller and probably go on a management tour as well. So they get to kind of really get their fingers dirty a little bit, the nails dirty. Once they do some more diligence, then they're going to come in with the LOI. And this is really the bid, right? This is the bid where they say we've done diligence. We're confident that we can close in a deal that looks like this, So here's the purchase price, Here's the deal structure, here are the terms, here's what what's important to us.

Christian Davis: And if you give us the green light we're going to finalise diligence and get to the finish. And so the negotiation really is around that LOI. And kind of as you talk about like, can we get to a deal term that makes sense, so the negotiation is there. That's where we've got the power as a seller to kind of usually push one one buyer against another. And hopefully then you can kind of move then towards close, the rubber hits the road when you get into the purchase agreement. Right. So it's all great, the LOI is, you know, a fairly small document. It kind of lays out some terms, but it's not everything. So then when all the lawyers get involved and you're really parsing sort of the legal aspects of representations and warranties you're giving. What, how long are those going to survive? How much does your your escrow and your hold back? And there's quite a bit of nuance in there, but that's where you're down to a list of, you know, ten issues, right? There's an issues list. And that's where you're doing mostly on virtual calls these days, but that's when you kind of trading these issues at the very last minute to kind of agree, the final deal.

Dean Colling: Once you get an LOI, what's the conversion rate to done deal?

Christian Davis: Typically, yeah I would say, I would typically say, I mean you're kind of 80%, 90%, something has to go wrong typically once you're signed LOI, right. And so that it could be that something is uncovered, right. What was told wasn't what was discovered or some net new information comes to light. Or more typically if the business really doesn't perform. But it's for the most part, you know, it's something that you can get to close, right.

Dean Colling: Yeah. And I and I was curious to know your team's responsibility on behalf of the seller to vet the short list of potential candidates. Obviously, you know, there's always a lot of tire kickers that can come out there. And in just terms of efficiency, use of time, you know, how much of that do you guys do at the initial stages to say, you know, are in a real possibility? We're not going to bother or, you know, just shorting, shortening something that's, you know, much larger down to something that's manageable.

Christian Davis: Part of it is experience. I mean, again, every buyer list is going to be different, but private companies don't tend to buy private companies. So we need to make sure that the buyers have done this before. They have capital. They have the wherewithal to do something. Now granted, that's not always going to be bullet-proof. What drives them to kind of certainty is making them spend money, right? So working a process so that the buyer is spending money on third party advisors to due diligence, that shows that they're serious. They're looking to to close, also ensuring that they've got the capital. Maybe we can we can hear from their lenders and other kind of equity providers as well.

Dean Colling: You know we've talked about strategic or competitive buyers. That's probably a very narrow list, it's got to be a good fit. But let's talk more about the financial buyer. So public company or a private equity firm. One of the deals you and I did was with a a private company being acquired by a public company. Let's talk about that first because it's an interesting thing that listeners might be, might find valuable is to see sort of the delta or the difference between public company valuations or a dollar of earnings in a sector or an industry that's public versus that same business that's private. Talk about that, and maybe how the sort of the arbitrage goes on in a public to private acquisition, typically.

Christian Davis: You'll see the arbitrage by the public company is that they're going to pay you less than what they're trading for, right? So, you know, the hope is that they're going to get $100 of EBITDA for less than the market's paying them for it. You'll see certainly cases where they'll will pay more. The goal will ultimately be that through synergies there's going to be, you know, accretive to the business over time, right. So certainly public companies are looking for accretion to their kind of current trading multiple. The deal that we worked on together, it was interesting right. So just kind of touch on, we had public companies that were at the table, we had a lot of companies that were backed by private equity, right.

Christian Davis: So these are strategic sort of competitive players in the market. But they've got a large private equity group in behind them. And we had private equity groups that were just looking to buy the business, the company as a standalone platform. So we had sort of all three in the mix, and that was one where they were able to really compare and contrast. You know, strategic is important. We always like to say you want the buyers to see you as not only a nice to have, but gets you up to a need to have and then a have to have. And the have to have is really where they want to ensure the other people don't get you, right. So it's not only that they want you, but it's they want someone else not to have you. So that's really if you can do it where the value is created.

Dean Colling: Put it, just for the listeners as well, put the lenses of a private equity, you know this is a strictly financial buyer. They are just looking at the financial metrics of that business and the capital that they have. How do they approach something like this, like any well, any private business really.

Christian Davis: So private equity, I mean, it's really been a boon for, I guess, private shareholders, private company owners in Canada and North America, around the world in that business owners tend to, you know, they've built a great business. They're probably de-risking as they as they get older, they probably have a little bit more investment they could do. But yeah, they'd like to spend a bit more time away from the business as well. So there are opportunities in the business that that maybe haven't capitalised on. And so that could be growth opportunities. It could be different investments. It could be building out more governance, could be making acquisitions. And they didn't want to do that because, well, that's additional capital they'd have to outlay. So private equity typically is coming in to invest in a business. And they're looking to buy, say, 60 to 80% of that business, but have either the management team or the existing shareholder ownership group retain some equity. So they've got skin in the game. Private equity is not looking to run the business, but they're looking to partner with the the management team or the ownership team to drive that next stage of growth.

Christian Davis: And so they'll bring capital for that next stage of growth. So you're, as a business owner, you're able to kind of continue to run the business, grow the business, but de-risk your own capital. Again, private equity will bring to bear a little bit of governance, maybe some acquisitions, something that you wouldn't do as a standalone private equity group. If it's done correctly, they'll grow a business from two, five million of EBITDA to a business with ten, fifteen, twenty, and as I said before, the multiple on those businesses will be higher all else being equal. So private equity likes businesses that have built a long track record, a good kind of solid business with good customer relationships, probably diverse customer relationships, you know, a good reason to be in the market, like moat around the business. But there's still a lot of meat there. There's still things that can be done to really kind of take that business to the next level.

Dean Colling: And typically what have you seen in terms of life cycle of private equity involvement in these businesses? Obviously they've got their own investors to answer to, they have liquidity objectives, they need to sort of realise value. How long are you usually seeing private equity partners involved in a transaction or business, is it 5 to 10 years, is it any longer than that, they typically cycle out after that point?

Christian Davis: Yeah I mean I think I think that's about right. I would say private equity funds again, the typical one will have a bit of a ten year sort of lifespan. And that ten year lifespan will be for the equity group to make acquisitions, put money to work, grow those businesses and then sell it and realise on that capital and return it to their investors. So that's a ten year span. So people would typically say their investment period in a business will be three to seven years, I would say in Canada it's probably, yeah, four to seven yeah. It's probably been a bit longer through Covid right, I think everyone's seen those hold periods go up. You probably see in the US private equity world a little bit shorter. They tend to come in a bit more aggressive, make a lot of investments early on in the, in their hold period and will be opportunistic on that exit.

Christian Davis: I find it's probably a little bit longer in Canada. You know it's five to seven, can be ten years. The good news for business owners is there are more groups now that have a longer investment horizon. So it could be family offices. It could be groups that have a longer sort of fund life. And so we're seeing folks that have kind of fifteen, twenty, twenty five year investment horizons and they'll they'll come in and make acquisitions of businesses that have a lower growth. Right. They're okay to have one that's going to be around for twenty years. They want to make sure it's around for 20 years, but it doesn't need to be growing at kind of 20% a year. They can make the math work.

Dean Colling: Fair enough, yeah. Um, so as we sort of wrap up here, I kind of want to get your view of maybe the next 12 to 24 months in terms of, you know, again, this lower rate environment, for the most part, a fairly solid economic footing here. Corporate earnings are decent. Um, you know, we may get some regulatory environment changes in the years ahead with various governments in both Canada and the US. Um, you know, what do you think the landscape for mergers and divestitures are in maybe the coming 12 to 14 months. Do you think this is going to ramp up, do you think valuations will be better, is it still a seller's market for the next couple of years?

Christian Davis: And volumes again are driven off of the baby boomers needing to exit, right? So that's a big piece of it. So the number of businesses that have a succession event coming in the next ten years, next probably five years is considerable. And most of those are not going to be internal, right. So we're seeing more and more business owners think about a third party exit. And we could get into all the reasons why. But it's complicated to transition a business from first to second to third generation. It's very complicated. And more and more it's, you know, a rational and reasonable decision to to bring in a third party. So I think the volume and the supply of businesses is going to be there. I think you made a great point, interest rate environment has come down. We're looking to see that growth doesn't stall too much. We still need to see a bit of growth. But the certainty and the outlook right now is pretty positive, and I think that is what's going to drive volume. Again, it's making sure that investors are comfortable with where the businesses are going, and I think that's going to be. I think we'll see an alignment between buyers and sellers in the next kind of 12, 18 to 24 months. So I think generally a positive time.

Dean Colling: That's good to know. You know, and I can tell, you know, the listeners from an experience that engaging, you know, professional groups like yours in a process, and we walk through it, a little bit earlier about just taking it from initial stages to getting ready for sale. That process in itself can add a ton of value, but then having a professional auction process and bringing in a broader range of potential buyers that the business owner may not have even thought of certainly just helps push that valuation up. And it's been really, really successful with all the ones that I know we've done. So if we leave it, you know, maybe one thing for the listeners and of those who are actually business owners, maybe one or two things that you would think are the most important things that they should think about with their business at least early stage. They're thinking of perhaps selling in the next couple of years. What are some of the two, like just one or two, you know, little nuggets that they can think about, this is what I need to start doing today.

Christian Davis: So it's key to start early. And I would say it's not one to two years, it's probably longer. Surround yourself by the right advisors. So it has to be a wealth advisor to figure out, get a plan for what does it look like. If you get a knock on the door, you're on your back foot. You need you need to be thinking about this ahead of time. Say a financial advisor, a wealth advisor. Think about tax. You have to be thinking about what is the post succession event look like, right? It's going to be a very different world. Most business owners have, I would say, most of their wealth wrapped up in a business. Right. And so it's illiquid and it's changing to kind of a liquid wealth that's going to change your kind of family's view, your family's kind of financial horizon, I guess. So number one is surround yourself by the proper advisors. But two is start early. And to think like a seller, you don't need to plan to sell your business, but you should think about the business as if it were going to be for sale. So you know that is about the documentation. It's about making sure it's a clean business. It's about perhaps getting your books audited instead of notice to reader or a review, but planning the business so that it's ready for a sale if and when one is going to happen. Because you never know when someone's going to knock on the door and you want to be able to move quickly, but it's probably going to be a better business if you think about your business as if it's potentially going to be for sale.

Dean Colling: Yeah, that's really good advice, Christian. Thank you for your time today. That was a good chat. And we're going to have to do this again sometime soon. We'll we'll do an update on kind of market conditions. And maybe in the next conversation we can talk a little bit, maybe some specific deal structures get a little bit more into the weeds for for the listeners. But I think this gave them a really good overview of, you know, high level down to how do you get why you should start engaging groups to take you to the process. What are the things you need to think about? What evaluations look like? And again, I think the key message you made at the end there is again is think like a seller and prepare. Thanks again for your time. Great to see you and we look forward to talking to everybody on the next episode of of Wealthview.

Christian Davis: Thanks, Dean. Really appreciate it.

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