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Welcome back to the freelance podcast with Blair and column today. Blair, good to have you back. It's been a while hasn't it?
Well, it's been a few weeks anyways, a few weeks. Yeah, but no, it's good to be back.
It's always nicer to look at your face. And Greg's you know, I say that as if he was here.
He'll hear it later.
Yeah, that's right. The last few weeks, Greg and I have been spending time talking about investment fundamentals, which is always a good thing to do, in my view anyways. But this week, we're going to spend some time talking about the other side of the business, not the stock ownership, perhaps the actual ownership of a business. And for that we have a guest speaker today. We've got Chris younger joining us. Chris is the CEO and co founder of class six partners. And Chris works with business owners to integrate personal and business planning, taking a holistic view of the entrepreneurs journey, which sounds pretty cool. So Chris, welcome to the freelance podcast.
Colin, thanks so much for having me. Good to be here.
Baby. Before we get started, you could let everybody know where you're joining us from today.
I am in Denver, Colorado. Hot Denver, Colorado right now. So
hot. Well, I guess it's hot because it's summer, right?
Yeah, it's particularly hot today, like 95 degrees. So we're closer to the sun here. So
right right. Now we've got to do the conversion to centigrade. So 95 is was at minus 30 divided by 230. Celsius. Yeah,
we'll say sir. That's
just hot. Yeah. All right. Yeah, that's hot. Yeah. Good. Good. Well, well, we appreciate you taking the time to join us. And I know Blair's gonna kick us off by peppering you with some questions. So why don't we do that?
Yeah, there'll be pretty tough to Chris. So hang on, right. Yeah, I actually the first thing, Chris is just to kind of get to know you a little better. So once you tell us your story, and how you ended up where you are today.
Well, how long do we have? You got three minutes, three minutes, we'll make it quick. Well, I kind of took a circuitous route, my wife likes to say I've got career add. So I started out as an attorney, about Silicon Valley, and then ended up doing a roll up in the communication sector. And then ended up sold that company to a via that's where I got a lot of my acquisition experience we did. That was the deal guy. And so we did about 27 deals over the course of a couple of years, acquiring mid market businesses, and then one big division of Lucent Technologies. And then I ended up taking over the president role of that business in the CEO role. So I went from being the to guy telling the operating guys that I'm not sure what they did to screw up the business that I sent him. But it was good when I closed it, to having to eat my own dog food, right and deal with all the integration challenges, systems challenges, and so forth. So we worked on integrating those businesses. And then we sold that to a via I say that I tried to retire for about a year and a half, I wanted to stay married, my wife decided that I needed to find a hobby. So we started our investment bank, myself and David Tolson, my business partner, but 20 years ago, and it's been a great ride. Since then, we've got 50 People today and kind of three pieces to the business, we've got the investment bank, which manages the transactions, we've got a group called Pathfinder, which helps get businesses ready, prior to a transaction, and then we've got a multifamily office where we help about 80 families manage, and we advise on about two and a half billion dollars for them. And so it's been a lot of fun. I get to work with entrepreneurs every day, which it just doesn't get much better than that. So have enjoyed it. Yeah, that's quite the resume. Either that, like I said, are good evidence of ADD. Right. So yeah,
exactly. So yeah, just for our listeners. So really, your company is really helping small business medium business owners to sell their business.
Well, that's one part of the company, right?
Yeah, yeah, that's really the kind of that first and second part are, are getting the businesses ready. And then our investment bank manages the actual deal itself.
Okay. Well, kind of on that topic, you know, what, what are some of the most common, I guess, valued detractors to small to midsize businesses?
Yeah, it's a great question. Not sure how long we have, but I'll give you some of the top ones that we see. When a business small to medium sized businesses scaling. One of the biggest challenges for that entrepreneur is how did they he build that business beyond them. And we see in almost all the businesses that we work with, that the level of dependency on the owner itself, him or herself, is usually pretty significant. And if you're an investor, that's going to detract value for your it's going to reduce your expected value for that business is because it's a lot more risky. If you've got a big chunk of your sales tied up in that person, or they're responsible for most of the product development, or they oversee all the operations or, you know, the major interface to customers, all that's going to pose risk, obviously, when you write a check to that owner, and they have quite different incentives, post closing than they did pre closing. And so that's probably one of the biggest value detractors that we see is it, the entrepreneur just hasn't built a scalable team, which means they haven't built a scalable business, and that investor or buyer is really looking to grow that company. And if that business isn't scalable, over time, you know, they'll lose value. The other thing we see quite frequently is just, you've got too much of the revenues tied up in a single customer or small group of customers. For the same reason, it's pretty risky. If, after closing, one of those customers decides to switch providers, that becomes a big challenge, we developed a health assessment we call co pilot that identifies about 95 different risks. And those two float to the top, the other set of common risks that we see is just a lack of financial controls. And that not only has a negative impact on value, but it generally is just indicates a maybe the set of controls and and operating controls in that business are not in order. And that just causes buyers to do a lot more due diligence, which elongates the time for the transaction. And, you know, we'd like to save time kills deals. So having that kind of getting your house in order is really important, mostly just to deliver the right impression to a buyer when they're taking a look at the business.
You had 95 different risks in your co pilot scenario, what I'm just curious, what are some of the more common risks? And what are some of the more obscure risks that you've identified?
The way we put that to URL was we went back to the last couple 100 deals that we had done, and just listed everything that surprised us or got in the way of a deal or degraded value. And then we developed a set of questions just to try to issue spot for those risks. And the business being too dependent on the owner or customer relationships being too dependent on the owner pops up quite a bit. Those are in terms of common risks, that customer concentration is a common risk. We talked about financial controls, on the more obscure risks, Pe is there a right of first refusal for the business, right? Meaning if the business wanted to go out and sell Is there somebody that they've got to present that final offer to before they can actually complete the sale, I mean, that generally will kill a deal faster than almost anything. A lot of times businesses have unknown environmental risks or unknown litigation risks, unknown employee risks that will pop up just by asking the right types of questions. But, you know, we've just haven't done this a long time. We always get surprised, I guess. But we've done our best to try to develop a tool that helps us issue spot quickly, and dive a little bit deeper into those areas of the business where we think we might have exposure, some pretty
interesting stuff, kind of going with what Colin was asking about how far in advance can owners? Or would you come in in terms of maximizing the value of the sale? Would it be, you know, the owners are ready sell within a few months or a year?
Look, we have obviously a lot of business owners that show up and are ready to go to market, which is fine. That's the way that a traditional investment banking process works. What we've learned as having done this a bunch of times is if we can get in there a year, two years, three years, even five years ahead of time, we're going to be able to have a much deeper and more significant impact on value to that business, mostly because we can anticipate the different issues that a buyer is potentially going to have and address those ahead of time. It's like seeing that test ahead of time and being able to plan for that I always tried to draw the analogy is if you're selling to a big account, right, it's a really important sale for you. And as you're preparing your presentation and putting your materials together, you could have that buyer in the room telling you what they liked and didn't like, and what's going to sway them one way or the other, you know, how valuable would that be? That's really what we try to be is the voice of the buyer or the perspective of the buyer in the room, giving that business owner when you're out talking to buyers and and when you're trying to sell your company, here's what you're going to hear, hear the things that they're going to like here are the things that they're not going to like and here's our suggestions for how to address those ahead of time then put a plan together to take care of that. It's funny I was meeting with a guy who He runs a roofing company. And he asked, well tell me why this preparation is so important. And I said, Well, you know, if I gave you three days to install the roof on my house, you know, how would that process go compared to if I gave you three months to plan for it, get the materials, think through the different logistical issues, he said, Well, three months would be a lot better. And I said, Well, that's the same is true, quite frankly, in any business process. And this one, just given the stakes are so high, is even more important to spend some time planning. And so the earlier we get it, the better the impact we can have. We recently did a deal in the pet supplement space of all industries. And we had worked with that owner for about seven years, and it had a pretty good outcome for him.
I got a question about that. So you work with these entrepreneurs who have spent their time their human capital, building up a successful business, and then they decide to sell or where a buyer comes in unexpected whatever? Do you find that those entrepreneurs then struggle after the closing of that sale? If all of their purpose was tied up in building that entity out?
Gone? It's a great question. One of the things we test for when we're doing all that prep work, which is, is the entrepreneur running to something or are they running away from something, if they're just running away from something, it's highly predictable, that they're going to have that challenge post closing, most of our clients are type a very driven, purpose oriented, they wake up and they want to run. And having experienced this personally, when we sold our business, the communications company, it's a very unsettling feeling to wake up and not have something that you're driving towards. And so we spend a lot of time with clients just trying to understand that because I like to say transactions are a very blunt instrument, and you want to be pretty judicious in using them with business owners, because if you're not careful, yes, you can put a lot more cash in the owners bank account. But if their life after closing is a lot worse than it was before closing them, we've really, we haven't done them a service at all. So, you know, there's lots of different reasons why an owner, I have a mentor of mine, who always asks, What is this transaction going to do? Tomorrow? That's different from what you can do today? And it's a really good question, you know, what does it make possible to try to dive in because for a lot of our owners, they already have enough cash, they already have enough wealth that they've amassed from the business. So a lot of times, it just comes down to hey, maybe they believe that a different owner is going to be better for their team and better for the business because they've reached a certain stage where they've outstripped their capabilities, or they've got a health issue, or, Hey, they are nearing that age when they want to spend more time traveling or with their grandkids or doing something different. But you want to explore that in detail. Because otherwise, again, you could close a transaction and make the owner less happy than they were before they went into the transaction, which is that's nobody's goal.
So yeah, it sounds like yeah, you're really kind of working on the psychology part of the transaction.
We have a chart in our office that on the x axis is the time for you know, during the deal on the y axis is the amount of counseling that we're doing with the client, and it kind of goes asymptotically up to the right. So we do a lot of counseling. Yeah.
Well, what kind of timeframe? Would you talk to the owner about that they might have to stay around with a company after it's sold and what that would look like?
Yeah, great question. And it'll be different for different types of owners, an owner who has successfully exited the day to day operations, and maybe even exited most operations, and is mostly just an overseer, they should be able to exit fairly quickly. We've had several owners in our advisory practice who've, you know, they've built their team, they've got their successor in place, they're just providing some guidance, you know, they're not as critical to a buyer post closing, as an owner, who hasn't done that would be. And so we always tell our clients that you, you should expect to want to stick around for two to three years. And the reason I say want to stick around is because most of our clients care a great deal about their team, about their reputation about their firm's reputation about their customers. And the best way to ensure that that transition to a new owner goes smoothly, is to be a part of it. And so to stick around and help lead that whether it's integration into another business or working with a private equity firm, you want to be a part of that solution. And that's your best chance to really reduce the risk of post closing but also to, to really maximize the outcome for your team and for your customers and for your brand. I think it also just gives buyers a higher degree of confidence and security to know, hey, the person who has been making stuff happen in this business is still going to be around to help us after closing, that just having a flash cut where that person was there before closing and is gone after closing is very dangerous and very risky to the business. And so that, if that's the owner's intent, that'll definitely erode value in the eyes of a buyer.
I got a question for you. And that is that you've been doing this you say 20 or so years or rates 20 plus years?
Yeah, firms been around 20 years, I've been doing it probably 30. Okay,
so in that 30 years, then you must have seen some really good and really bad transitions, exit stories. Can you maybe share a few of the good ones and the bad ones? Sure. I won't use names to protect the innocent, but just rhyme just rhyme? You know, you don't? Yeah, we'll name Exactly, yeah.
We've watched business owners who have really been intentional, done the planning ahead of time, and just achieve remarkable results. And we've also watched owners who somebody called them out of the blue, they're reacting to it. And you know, end up with a train wreck, it's hard to help a business owner, if you're a business owner, and you get a call out of the blue from somebody who, obviously they sound credible, that's their job is to be an effective salesperson. And they're saying they're interested in buying your business. At one level, it's pretty flattering, right? somebody's interested in your company. And typically, they're going to float a pretty nice number in front of you. And they're going to tell you that they can get the deal done quickly, hey, we can get this deal done in 30 to 45 days, which I just know from experience for a business owner who's not prepared and hasn't really put all their materials together and scrubbed them and gone through potential issues. That diligence process will take at least 90 days, if not longer. And the stories that we've you know, we've got one in particular where, you know, a business owner, they went through that process. And if you think about it, those deals are really, really challenging, because when the business owner takes that call, they're going to present their business in the best light possible, the investor likely knows that they're sophisticated, they do this for a living, you know, they're going to put together a really compelling offer. And, you know, after they signed that letter of intent, with the really nice offer, we're going to close in 30 to 45 days, as they start to uncover the rest of the warts in the business, that diligence process is going to extend the valuation is going to come down, that's going to upset the business owner, the fact that the business owner may not have been completely candid when they were describing the business of fraud is probably going to upset the investor. And you've got a recipe where you've got trust erosion on both sides, that's going to hurt the chances for the deal. And we've we've watched that movie, unfortunately, a few times. And it's really, although it seems compelling to the business owner, and it seems like it'd be a great idea. Usually it doesn't end well. Either. The deal busts, which is the most likely scenario, or, you know, the valuation is not nearly what it could be if you've done it the right way. Contrast that with we've had several business owners, they come to us two or three or four years ahead of time, and they go do the work, they build their team, diversify their customer base, build the right product strategy, build the right brand strategy. And then when they are ready to go to market, they're fully prepped. They were talking to multiple bidders, you know, they generally are the businesses that get those really high premium valuations and high, high degree of certainty that their deals gonna get closed. And so and like I said, it kills us to watch a business owner who spent 20 or 30 years building a really nice business just lose so much at the table. Because they don't want to invest a year or two more of time to really optimize and get things ready and do things the right way. Just like I said, it upsets us yes. Because we have such high regard for those entrepreneurs and what they put on the table.
The way you describe the first part sounded Blair lot. And I say this having been married for 22 years. I remember dating 25 years old here, Colin Yeah. But I remember, you know, you'd see somebody that you're attracted to them or whatever, and you'd sort of pursue and then you'd, as you say, you'd find the warts and you're like, as great as I thought it was gonna be. But maybe that's not a good analogy, but
no, no, keep going. No, I'm actually I'm just curious for you, Chris, of what is the current status of the m&a market? You know, it's
interesting, I just read a statistic this morning, that the level of PE exit activity, which is a big component of middle market, m&a activity, jumped up this last quarter. So hopefully that's a reasonable sign. I think, if I look Back deal volumes and valuations took a big hit in q4 of 22. We've been pretty fortunate we've closed a lot of deals this year. So we've been very, very active. And we've had really nice high quality companies to take to market, which has been helpful. And that's what we've seen. And we've seen this in prior recessions as well, that in times where you might have the threat of a recession, or be in a recession, or interest rates are going up, generally have a flight to quality, there's still a ton of private capital out there. I think the last statistic I read was 1,000,000,000,002 in private equity and about 800 billion in private credit, that all needs to find a home. And so deals are still happening, certainly at a slower pace. And we've seen valuations contract, it's hard to overemphasize how rare at least here in the US a zero interest rate environment was, you know, we hadn't seen it prior to that, I doubt we'll see it again, that has a big impact on equity valuations when debt is that cheap. And as the interest rates started to accelerate, and that was really q3 q4, that's when the deal volumes took a big hit, because most investors were, I think, sitting back taking stock of where they were, and really trying to understand what the new normal looks like, if you look historically, interest rates, at least here in the US at five, or five and a quarter, five and a half, wherever they are today. That's actually not that far off of where average interest rates have been for the last four or five decades. So I think what's happening in the market is investors are starting to come to terms and come to grips with the new normal, which is, hey, we'll probably have interest rates that are closer to our average than to, you know, absolute rock bottom. And that definitely has an impact on valuations. I think, particularly in some of the industries that are most aggressively valued SAS and consumer products, you're seeing a little bit of a return to probably more normal valuations. And, and quite frankly, that's probably good for the market. And so, you know, so far, I said, we've been fairly active as a firm and feel fortunate for that. And I think the markets starting to get more active as people are reconciling to, again, this new normal, which, quite frankly, isn't that new, it's just not as good as having 0% interest rates. So Well,
I mean, debt was free, for a few years ago, right? And it's not free anymore, it costs you something and I see it not just in business transactions, but like the housing market, and which is a little weird. I don't know how it is in Denver. But you know, in Canada, the Bank of Canada just raised interest rates today, again, another quarter of a point. So our new interest rate is something like 42%. Does that sound right? Learn 42%? No, no, no, I was gonna say a lot higher than it was two years ago, but the housing market doesn't seem to have slowed down, which is, is a little strange to me. So maybe that is that the consumers have accepted those new borrowing costs and demand is still high, because supply is the low. Do you feel like that's kind of the same thing in your space?
Yeah, I think it's, you know, a lot of private equity firms pulled their deals from the market, they're trying to sell portfolio companies. And so that volume for the last few years has been historically low. They call private equity exits. So that does create right, less supply in the market in terms of of deals. And so, and again, the demand appears to be still there. It's just valuations may have gotten adjusted a little bit. But we're relatively optimistic. And at least here in the US, I think this has been the longest talked about recession that hasn't quite started yet for. So I, you know, who knows where all that will land. But I think about the time that we think is not going to happen is probably when we'll get hit by the two by four. So
yeah, it is a friend of mine, who is a private equity fund manager says to me, he's got this great quote, it says fear is transitory and greed is part of the human soul. So, you know, we're coming out of fear and greed is maybe returning, right?
Yeah. Okay, said there's just a lot of capital that's got to get put to work, you know, otherwise, those funds are going to return some of that capital to their limited partners. And that's not what they want to do. So, you know, and then there's a lot of corporations with lots of cash on the balance sheet that still have growth plans and still want to execute on those and strategies that they want to execute on. And so we'll, I guess, said, knock knock on wood. Hopefully, things will be reasonably good here for the next quarter or two. And then we'll, we'll see what happens.
Later. We got any last questions to go through here?
No, I think we're, that was a lot of stuff, Chris. So
yeah, yeah. Chris, where can listeners find you? If they're looking?
Through our website, www dot class six Class V. I partners.com. And I'm Chris at class six partners.com as well who want to email and thanks for having me on the show. Oh, you know what you're doing for Wait a minute. Wait, as
we saw, we saw a speed. It's a quick one. You did all the heavy lifting. This is the easy part. So get that's good where you want to kick us off?
Sure. Chris, what do you do for fun when you're not working?
I love work. So it doesn't feel like work most days. But in the other time I do mountain bike I golf, I head up to the mountains quite a bit, do some trail running. Here in Colorado, it's easy to be outdoors. So love being outdoors.
Well, as we were seeing before we started recording, I believe Denver is a sister city to Calgary and we have a very similar topography. You know, we do also get out to the mountains and do all those things you said but but that's not what I wanted to ask you. The question I want to ask you was, it's a bit of a loaded question. Do you binge any shows as in like, Do you ever watch succession? And what do you think of those people?
I have watched succession. I think we got hooked on that must have been during COVID. When that started or right before right after, but have watched it and it's certainly entertaining. I wouldn't say it's reflective of our world. But it's certainly entertaining. Any books you're reading right now, Chris? What am I reading today? I was listening to a podcast with Marc Andreessen from Andreessen Horowitz. And he mentioned a couple of books, historical books about Lenin, just trying to understand a little bit more about what's going on in Russia and really understand the psyche of the country and how that relates to what's going on in Ukraine. So I'm in the middle of trying to tackle that it's definitely outside of my strike zone, and in terms of experience, and background and all that, but it's been pretty interesting. And then I'm listening to a book that Vano you know, the YouTube singer, wrote about his life and background, which has been also been pretty fascinating.
There's quite a diverse set of books that you're reading. Well, good.
I'm getting old. So I gotta keep the mind fertile, you know.
That's good. Well, Chris, we really appreciate you taking the time to be on the free lunch podcast today. And we wish you well with all of your upcoming success. And thanks again.
Yeah. Thanks, Chris. This was great.
Thanks for having me. Yeah, it's great to spend the time with the guys. All right. Till next time.
Thank you for listening to the free lunch podcast hosted by the CME Group at CIBC Wood Gundy. To subscribe to this podcast to get more realistic insight on investing or to connect with one of our talented partners, please head on over to markets dash work.com We'll see you next time on the free lunch podcast. CIBC logo and CIBC private wealth are registered trademarks of CIBC. If you are currently a CIBC Wood Gundy client, please contact your investment advisor CIBC private wealth consists of services provided by CIBC and certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. CIBC private wealth is a registered trademark of CIBC used under licence. Wood Gundy is a registered trademark of CIBC World Markets Inc. Colin Andrews and Greg Kaminski are Investment Advisors with CIBC Wood Gundy. This information including any opinion is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc. Their affiliates directors officers and employees may buy sell or hold position securities of a company mentioned herein its affiliates or subsidiaries and may also perform financial advisory services, investment banking or other services for or have lending or other credit relationships with the same CIBC World Markets Inc. and its representatives will receive sales commissions and or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above CIBC World Markets Inc 2023