BBP+EP+08

 

00:00:01

Welcome to the business brothers podcast. My name is Purdeep Sangha

 

00:00:04

And I'm Harjeet Sangha.

 

00:00:06

And we're going to try this again. We are the business brothers. Every time we do that, it's a little bit corny, but we got to do it for this podcast. Hey, harsh. How's it going?

 

00:00:16

Not too bad. You know, seeing a little bit of a preview from the horrendous weather we've been having here, NBC so nice to see some sunshine today, finally.

 

00:00:25

Yeah. For those of you who do not know we are from Canada. Part is on the west coast, close he's in Vancouver, actually. And I'm more of the east side or more central. You can say central, Eastern, just outside of Toronto. So the west coast has been hit hard and some very big logistical challenges. And I think a lot of businesses are suffering. We know that here, the east harsh a lot, I was at home Depot the other day because we're doing renovations. And some, a lot of the flooring is actually out of stock because they're not getting the shipments.

 

00:00:55

Yeah. And there's two announcements today out of Vancouver where some companies are just going to shut down some of their operations just cause they can't get the railways to, to move their products. So it's just very unfortunate. Of course, mother nature has its own plan and we have to navigate around that.

 

00:01:11

Yeah. We'll see how it goes. So maybe some people are going to be taken Christmas break a little bit early here. So for those of you who out, out there listening today's episode is really around, okay. Why buy a business? Why expand by actually buying a business, acquiring a business or mergers and acquisitions. You can say that that's a space that Harvard and I are very passionate about. And we're going to talk about that today. So hards, what are your thoughts on, in terms of why someone would want to expand by buying another business?

 

00:01:41

Yeah, I think really in any kind of market or kind of business environment, really, there's some strategic ways to increase the value of your company. You can look at organically growing. I mean, right now it's quite expensive to, to kind of find new operations or purchase new real estate to kind of grow, grow your revenue base. Another one certainly for public companies is they may actually buy back some of their own stock and actually increase their earnings per share. From that perspective. Third is if you can't do either the other two, you may look to choir another company and grow inorganically and, and debt is certainly cheap. It's been at record lows for a while here, you know, with risks of, of some normalization going up. But for the most part that is, is pretty, pretty accessible and it's fairly low interest rates and that may provide a good avenue for a company or an organization to grow their revenues. Just acquire another, another company.

 

00:02:36

So I'm going to pull your strings a little bit because I'm your brother and I'm allowed to for the everyday average person who doesn't have that finance background, what the heck were you just saying?

 

00:02:46

Well, so simply put a pretty big, it's buying an organization that's already been tested and trued and, and has set revenue and a client base or customer base. So rather than trying to develop that yourself and go through all the trials and tribulations and the pain of, of, you know, working your way up from the bottom, you can look to acquire maybe a competitor or one of your suppliers. It's just a different different avenue of acquiring more business.

 

00:03:15

And do you think that's kind of sexy because I have my take on it, but I want to get yours because I see certain things happening in the, and, and for those of you who aren't familiar, people typically call this the MNA space, mergers and acquisitions when you're buying and selling long story, short people call it M and a, but I see some really interesting perceptions or perspectives when it comes to M and a mainly around people like to do it because it's sexy.

 

00:03:44

Yeah. It certainly is one of those areas of finance that has that alert. I mean, there's been some Hollywood movies built around. It certainly has that, that annotation, that that is a very sleek and sexy career for sure. And one that, you know, a lot of these deals that you're working on or, or can be very highly complex and you have to complete the duration of that work in a very short period of time. You know, these negotiations can be pretty stressful depending on each party's willingness to kind of come together for a mutual consensus. And sometimes they don't. I mean, sometimes you'll walk away from deals just because you, you just weren't able to close on it. So it's one that has certainly a lot of complexity, but a lot of alert to it as well.

 

00:04:32

So you're talking about from an advisor's perspective, right? So what we're we're talking about here is the kind of like the Wolf of wall street type of approach. We talked about investment bankers on in Canada bay street in the U S it's wall street, but there's a reason why investment bankers make a lot of money right there. They're taking a good cut of some pretty big transactions. And so what I see quite often is that, and from my experience, when it comes to mergers and acquisitions is that it is a sexy thing. And a lot of times people go through with it, even when they shouldn't. And I think that's one of the things that I want to express here. And today's episode is it may sound like a great idea, but it may not be the best thing for your business longterm because buying a business, if you've done it before, you know it might've gone smoothly, and you may be thinking about buying another one, thinking that it's going to go ask movie, but I can tell you having gone through a number of mergers, M and A's, it doesn't always go smoothly.

 

00:05:35

And that one challenge can be the biggest nightmare that you've ever faced. I'm not telling you not to do it, but it's like having rental properties hard. Right. You can have some great tenants and then you have the one nightmare tenant that makes you regret having rental properties at all and want to sell them. All right.

 

00:05:51

Yeah. I mean, there, there's a lot of variables that go into it and certainly kind of looking at, from a top down is, is there a cultural fit? And when you're acquiring another company, you have to look at the fabric that your company was built on versus the organization that you're looking to acquire. And they have to mesh. I mean, if those fabrics aren't meshing, you're going to have some, or there may be some opportunity for conflict, or you have to make sure at the very end of the day that any amalgamation of two organizations, I mean, there could be some severances people could be laid off. I mean, you really, one of the driving perspectives of a synergy in an acquisition is cost-cutting essentially what you're trying to do is maximize profits. So even though top-down, it looks great, you know, below the surface, there's a lot of contentious items that need to be dealt with.

 

00:06:39

So, you know, it's not always a, you know, a, a positive story or a glorified, anyone phenomenon, and sometimes they don't work out and sometimes companies will go through the due diligence and find out, you know, what, we're just not able to make this work. It's, you know, we don't want to force this deal to grow and they're looking at different avenues, right. So you really have to make sure and do your due diligence, you know, have the right experts in place, both internally and externally, that it makes sense for your company. And actually, and you reach your strategic goal that you're looking to at the start of all this.

 

00:07:10

And that's important because harder I call you kind of like the straightest arrow on the block, and you have very strong ethics when it comes to that. And I can trust that when you say, Hey, look, this transaction doesn't look good. You know, people shouldn't pursue it because you're giving your honest opinion. And even though for example, as professionals that we're in this space, and we get a percentage of a deal that actually successfully closes, for example, Hey, a big, good chunk. We have to be strong with our ethics and say, okay, this is not a good deal, right? This does not make sense. And I can't say that I've experienced this all the time, because there's a lot of people out there I've spoken to many executives where the business case did not make sense originally, but then they were slightly modified to make sense. So what's your thought about that? How do you, what do you, how do you feel about changing the financials to make it look good?

 

00:08:03

You know, the first part of the due diligence process of looking at an MNA, you have to kind of look at your own balance sheet and your own income statement to see if it does make sense that really should be the driver before you start negotiate into a conversation and seeing what opportunities afterwards may be present. So you kind of want to first set yourself up and say, well, does this make sense for a company, both from a cultural fit, from a cashflow, from a debt perspective, and then looking at the potential players out there for acquisition, once you're there and looking at the other players, really the strongest point after the other, or the really the most important point is how has that due diligence process going to be put to place and how are you going to measure if any, the synergistic benefits from it.

 

00:08:48

So if you're making numbers magically work, I mean, going back to that driving force of why you're interested in an M and a really will come out about, because that's usually where a failed MNA will work when you're, you know, you're overestimating what the profitable revenue can be or underestimating the cost. So you have to really do your due diligence process. And I'd say that's probably the heavy lifting of all that. I mean, there's probably what, 11 to 14 different steps in categories of how to successfully integrate a mergers and acquisition. But really when you're looking at the first part of it is will it make sense for your company? And then once you get to the diligence process that we'll quickly fish out, if it's, if it makes sense or it doesn't make sense.

 

00:09:28

Yeah. That's a really good point hearts because here's, here's a big point here. If you're buying a business the first step, and it's not always the biggest step is making the deal. Right. And people think that once they've made the deal that they've signed, the dotted line money has been transferred. They actually own the business while things are great. No, that's when it actually starts because the bigger challenge, and this is where a lot of organizations are struggling when it comes to buying a business is trying to capture that value from the business, right. Trying to execute on what you were trying to originally achieve those goals in the first place. And like you said, at the beginning, if your culture is not there, for example, you can acquire a business and think that the management team is going to stay on board and then they start dropping like flies, right. They're taken off and you're going to be sitting there thinking, okay, how do I run this business that I really don't know? You might be in the same sector industry, but you don't know the ins and outs of that business in terms of how that business is run. That can be very scary. So the bigger job, right, I'm going to say the bigger risk, but also the bigger reward is once a deal is signed and actually getting to that, that stage of capturing that value of making that business work for you.

 

01:10:45

Yeah. And, you know, kind of going back to the negotiation process, and I would say the more intimate details and probably equally important as the numbers and some of the figures there is the negotiation process itself. I mean, each side has a set value or minimum floor that they want to negotiate on and go up from there. And each wants to capture as much value as possible. So pretty bad. I'd really lean on your expertise there in the negotiation side of kind of, from your experience where, what skills are required there and that's down. But because, you know, we can make the numbers work, Martha, but entering a conversation. That's when things start to expand a little bit and you may need to go back to your original numbers and adjust and see if you can, if you can fit some of those concessions.

 

01:11:31

Yeah. I think the big thing here is everybody's looking for a good deal and everybody's looking for their side to win. But I think going into this, just like anything else is it should be a win-win win scenario, meaning that you should win. The other party should win. And then everybody that's involved in this, in this, you can say approach or deal should win as well. So that's how you in with that mindset and understanding that negotiation is really just balancing risk and capturing value. That's really what it comes down to because the seller wants to balance more risk or give more risk to the buyer side. And the buyer wants to transition a lot of that risk on the seller side. And both parties have to understand where that fits. And then there's the, there's the small itty bitty things like obviously price is the biggest thing, right?

 

01:12:18

Then there's a terms in terms of how you're going to be paid, but then there's the, the other components, which is okay, how are you going to treat staff, right? Are you going to fire them? Because some of these family businesses, for example, have had employees there for 30 plus years and they don't want to see these people just, you know, giving a pink slip and saying, and told, see you later, these are all elements. But I think going in with genuine understanding of what you're looking for as a person, whether you're a buyer or seller and what, and opening your eyes to what the other party might want and knowing that you're never going to get everything you want. If you're looking for that, you probably shouldn't start negotiating in the first place because very rarely are there good deals out there that are captured. You don't find a good deal until you actually get into the due diligence process. And you find something like an unseen opportunity or an unrealized asset that you can say, Hey, I can leverage this and actually, you know, take this business to a different level or whatever it might be, but that comes earlier. Or you can say it in the later stages of due diligence, but to sum it up hard, it's really going in there with good intentions where both parties went.

 

01:13:28

Yeah. And, you know, throughout that process is, you know, a hard job of trying to keep everything confidential post between each business and employees and the, you know, the internal and external stakeholders as well. So it's a very delicate process. And if done, right, I mean, both parties can win if done poorly, you can have some disgruntled professionals. For sure.

 

01:13:48

Yeah. So we're going to leave you with this for this episode. This is going to be part one when it comes to buying or selling. If you're looking to acquire a business, because there's a lot more to be said about this, I think this is actually going to be a series here hard. This is the first step. And what we basically to sum it up here is, is we're talking about the reasons as to why you should look at buying a business, but some of the intricacies that are involved and harder. And I are going to talk more about the strategic elements point by point in the next few episodes. So I want to thank you for tuning in, I don't know if you want to say anything to our listeners before we head out here,

 

01:14:24

I'd say, stay tuned for the next episodes. They're going to be very, or equally as valuable as this one.

 

01:14:30

Yeah. So there you go. Stay tuned. Thank you for joining us and we'll see you next time. Take care, everybody.