We are excited to present this insightful episode of the Polestar Podcast by VELA Wealth, featuring Faramarz Bogzaran, the Managing Partner at F&M Management Ltd. and CE3C Management Ltd., just ahead of the highly anticipated CE3C Conference scheduled for January 24th and 25th, 2024. Faramarz’s expertise sheds light on critical aspects of mergers and acquisitions (M&A), setting the stage for enriching discussions at the upcoming conference.
Throughout the conversation, Faramarz provides key insights into the crucial role of M&A advisors in streamlining company sales, navigating the intricacies of valuing professional services firms, and understanding the significance of strategic planning for post-sale expectations in the environmental consulting and engineering sectors. These insights offer valuable guidance for business owners and executives navigating the complexities of M&A dynamics.
Key highlights of this episode:
- Delve into the mechanics of seamless company sales with a focus on the pivotal role of an M&A advisors.
- Explore the valuation methods for professional service firms, focusing on financial stability and managing working capital.
- Learn essential post-sale strategies: from strategic planning to adjusting to new ownership dynamics for a smooth transition.
- Gain insights into the factors influencing M&A in the Canadian landscape, shedding light on industry trends and future implications.
- Importance of strategically plan your exit beyond the sale to ensure a successful transition.
About the Guest- Faramarz Bogzaran
Faramarz Bogzaran, the founder and Managing Partner at F&M Management Ltd., brings over four decades of expertise to the forefront of Canada’s management consulting scene. Specializing in M&A and Corporate Advisory services, he has successfully navigated environmental consulting, waste management, and remedial contracting sectors. A seasoned M&A advisor, Faramarz is celebrated for his adept leadership in ownership transitions. He played a key role in founding CE3C Management Ltd., the driving force behind executive conferences uniting leaders in Canada’s environmental and engineering consulting sector. At F&M, he provides strategic advice on growth, financial management, buyouts, exit strategies (M&A), corporate governance, and project management. To read more, please visit the F&M Management Ltd. Website
About the Host – Jason Boudreau
Jason has built VELA Wealth into an established life and estate planning firm, guiding families as they make meaningful choices at the intersection of life and wealth. Jason’s areas of expertise include intergenerational wealth transfer and estate planning with a focus on advanced insurance-based solutions that incorporate philanthropy and legacy planning. Leveraging these specialties, Jason brings a fresh perspective and outside-the-box thinking to the strategic planning process. To read more, please visit the VELA team page.
The episode is also available on:
The Podcast Transcript:
Jason Boudreau:
Welcome, everyone, to the Polestar Podcast by VELA Wealth. It’s my pleasure to have Faramarz Bogzaran today. Faramarz is the Managing Partner at F&M Management Ltd. and the CE3C Management Ltd. companies. Hello Faramarz and welcome to the conversation today.
Faramarz Bogzaran:
Hi, Jason. Nice to be on your podcast. It’s the first time I’m doing it.
Jason Boudreau:
Could you please give us a bit of background about F&M and CE3C?
Faramarz Bogzaran:
Sure. So, I founded F&M in 2010 as a corporate advisory services company, specifically working in the environmental consulting and engineering sector. Over the past thirteen years, we’ve provided a range of services encompassing governance, mergers and acquisitions, effective project management, business optimization, and integration services. Our focus has remained on the environmental consulting and engineering side. In 2017, we decided to organize a conference that would bring the leaders of these companies together under one roof. So, we formed a company called CE3C Management Ltd. and started doing a pilot test in 2017, which led to their first conference in 2018. We had around 40 CEOs, Presidents, and Vice Presidents of innovative consulting and engineering firms attending the Conference for a two-day collaborative conference by organizing panel sessions and discussing some of the challenges and opportunities for these leaders in this sector or this industry.
So, we’ve been organizing these conferences since 2018. The upcoming 2024 conference is on January 24th and 25th. We are very excited about holding the 5th Conference. One of the reasons we decided to do this was that a lot of the work that we do as corporate advisors under F&M Management comes from these leaders attending the conference. It seemed to be a mutual benefit to F&M Management and at the same time, we are trying to create a platform where all the CEOs or Executives of these companies get together. We are the only organization that creates that kind of platform for these leaders to get together and talk to each other rather than compete. It is kind of a genesis of how F&M came about in 2010 and how the CE3C Management bring us closer together.
Jason Boudreau:
So, what does the CE3C stand for?
Faramarz Bogzaran:
CE3C stands for Canadian Environmental Engineering Executive Conference.
We wanted to have a name for it that sticks. So, we thought about it a lot, and I believe it was my idea – I said, “We’re going to have a lot of the executives coming here. So that’s an E. We will be dealing with a lot of engineers and the environment. So that’s another two “E”s. It’s Canadian, we have three “E”s and the last “C” stands for the “Conference”. So that’s how the name was created.
Jason Boudreau:
Very well. Thanks for sharing this, Faramarz. It sounds like it’ll be an exciting conference this year. I know that Rob, my business partner, and I were there last year and we like what you’re doing in the space. It’s great and very niche and unique.
One of the things that I thought we’d start with is what is the key role that an M&A advisor plays for executives, and business owners, whether it’s in the environmental and engineering space or outside. You’ve had decades of experience in the sector. What do you believe the key role of an M&A advisor is?
Faramarz Bogzaran:
That’s a very good question. In my opinion, the number one reason why people or companies hire an Advisor is when they decide to entertain the possibility of selling their company. You want to call them an advisor or corporate advisor. I say it is the main reason because a good M&A advisor helps you streamline the process. There is a process to have your company organized or prepared to go into the market and go through the process of obtaining interested parties in what you offer as a business owner or as a shareholder, and bring it home at the end and signing a sales purchase agreement that is acceptable to the shareholders or to the owners of the company that the M&A advisor represents. One of the things that good M&A advisors do is, as far as they’ve done their homework, they create a lot less disruption in the process where people still have to do their jobs. You need to have somebody to come and help you, to guide you through this process because it can be anywhere between three to six months before you complete the transaction. During this process of three to six months, you don’t want to be distracted from your ongoing business because you don’t want to harm the business by wanting to sell the business. If you end up doing that you’re going to be at a disadvantage to sell the company because the people that are trying to buy you, they’ll monitor you while you’re going through this process. So, one advantage of having an M&A advisor is to lessen the disruption. I’m not suggesting that there will be no disruption, but lessening it and also going through the process of educating the shareholders, managing expectations, and obtaining letters of intent that are conducive to the process and are acceptable by the owners who are trying to sell their company and finally help with other advisors such as legal and accounting work together as a team to bring it home. It’s a team effort. It’s not wise for one advisor to do the whole thing.
Jason Boudreau:
It sounds like the M&A advisor plays that quarterback role to help tie it all together.
Faramarz Bogzaran:
Absolutely yes. We found ourselves in most cases as the catalyst in the process. At the beginning, we start representing our client who’s trying to sell their company. As we move forward, we end up working with the lawyers, and accountants, and we end up dealing with a lot with the potential buyers and the final buyer. We found ourselves that we become almost the gel or a catalyst to make sure that things went smoothly. At the end of the day, there has to be a willing seller and a willing buyer. And I’ve seen one too many transactions, that have gone through the process, but unfortunately, that catalyst did not really gel things together and things fell apart.
Jason Boudreau:
I see. How would one assess the need to retain maybe an external M&A advisor versus trying to manage that process internally? What are the pros and cons or maybe just some considerations around that?
Faramarz Bogzaran:
I have a perfect answer for this. I was the President and CEO of a company called Secore Environmental for about 8-9 years. I joined the company and then orchestrated a management buyout of that company shortly after. Once we owned the company, we decided to put the journey of five years ahead of us to grow the business and sell the company in five years. It just happened that we bought the company in 2002 and we sold the company in 2007. So, I have done a lot of M&A work and have been involved in a lot of mergers and acquisitions before that. Also, I acquired the company while we were growing Secore, before selling it. However, when we decided to sell the company and I was President and CEO of the company, my board asked me “You’ve got the experience, why don’t we do this internally. Why do we go externally?”. My recommendation to them was “No, that’s not what we want to do”. I would still do a lot of the heavy lifting, but we need to have an advisor. At the minimum have an advisor that creates competition there. At least the picture of competition. So, the people who are interested in the company don’t think “Ok, these guys are just selling the company, so we can just do everything ourselves” or “They don’t know what the process is”. So, even though I had the experience, I ended up hiring an advisor. In that process, I did most of the heavy lifting, but I had that advisor working with me throughout the process to the successful sale of the company in 2007.
Jason Boudreau:
So, you’ve been through it in the CEO seat as well and seen the value of having that external advisor working with you and the internal team supporting the process.
Faramarz Bogzaran:
Correct. You have a very good point. If you’re a CEO, I can assure you that you can’t pull the whole thing out of yourself. You are going to work in a team setting internally, you may have to seek help from your CFO, and get some help from your human resources or IT departments, as long as these people are inside the “nest”. What I mean by that is, as long as they’re shareholders, they know what’s going on because there is confidentiality involved, and keeping everything confidential is an utmost importance.
Jason Boudreau:
In terms of preparing for the sale, as you mentioned earlier in our conversation about the timeline being sort of a three-to-six-month window before you transact, how much time is usually spent leading up to that three-to-six-month window on average where a company is preparing for some sort of M&A activity?
Faramarz Bogzaran:
That’s another very good question. Well, I can tell you this. Over the past 13 years, I do not have the exact number but we probably had at least five or six companies that reached out to us to become their M&A advisor. The first thing we do is look at the company’s performance, we look at the whole picture of what this company is all about. And in all those instances we came to conclude that they’re not ready. What we meant by “not ready” is that when you’re trying to position your company for potential sale, whether it’s a professional service or anything else, one of the things that potential buyers look at, in particular, if they’re buying the shares of the company, at what sort of consistency you have had over the years based on financial performance. If you have had a lot of ups and downs in financial performance over the years that is not a very good sign. You’d want to have a nice trajectory of really healthy growth followed by a very nice earning, the bottom-line performance. So if your growth and earnings are not stable, what we normally do before we take the company to market, we look at it and see what we can do to optimize the business to get it to a level where it is working consistently, generating reasonable growth top line and also reasonable bottom line performance.
The rule of thumb as far as we are concerned from the M&A side, is that you need to have anywhere between two to three years of good consistent top-line and bottom-line growth. And if you don’t, we would like to work with you to get you to that level to make sure you are prepared to do that. Otherwise, a lot of the buyers in the market see inconsistency, and since it is not consistent, you’re going to subject them to some onerous earnout provisions. So those are the things that we try to avoid. We prepare some of these companies before we take them to the market.
Jason Boudreau:
So, that’s obviously about trying to maximize the value. Could we talk a little bit about the valuation particularly in your area of expertise as professional services companies? How complicated is the process of valuing professional services companies?
Faramarz Bogzaran:
It is not really that complicated. A lot of companies out there are professional companies that are certified valuators to value your company. Now you’re talking about professional services, let’s say engineering company or environmental consulting company as an example or even let’s assume they are accounting or legal professional services. For the most part, the value of these companies hinges on the earning capacity of these companies. What I mean by earning capacity is that you look at it and see what your performance bottom line is, not the net income. In our industry earning capacity is captured under EBITDA which stands for earnings before, interest, taxes, depreciation, and amortization. When you factor those out, you’re talking about the true earning capacity of the company. Then you look at that and apply multiple. So, EBITDA multiple 4,5,6,7 or 8. Now, EBITDA is based on the performance of the company that we try to make consistent so the EBITDA number is showing a nice upward trajectory. However, one that kind of complicates it – is that multiple because that multiple is not fixed and it varies from the size of the company, If the size of the company is X, multiple might be different; the services that the company provides; their management; even the age of the shareholders, the people that hold the key to the vault in terms of the clientele base; reputation and so on. So, there’s a variety of different geography and factors that may influence that multiple.
So, if you have a company X with let’s say EBITDA of $5,000,000 and an advisor like us goes to market, we may end up getting letters of intent with the multiple of what $5,000,000 is, as long as it is a true reflection of what that earning is, fully normalized and all things equal. So, what is going to happen, is that we may end up getting letters of intent that may vary from one to another based on that multiple. Some may apply 4 multiple, some may apply more. However, these multiples also can be influenced by the buyers’ interest in the company. If they’re looking for a boutique, niche-oriented company that they don’t believe they can find anywhere else, they’re prepared to throw in another multiple on it, so you end up getting it. For the most part, based on at least historical numbers that we see in the professional services in the engineering consulting side, the multiples range anywhere from as low as 3. I’ve seen as high as 10 and slightly high, but as for the medium – the majority of them happen between multiples of 4 to 7.
That’s one aspect of putting a value on the company – giving somebody a value for your income statement, which is using the EBITDA number. You take the EBITDA number, multiply it by a factor, then you have to bring the balance sheet into the equation to come up with the market value of your company. Another element that becomes extremely important in any M&A transaction is working capital adjustments driven from your balance sheet, not from your income statement. For a company to go into the market, it has to have a healthy EBITDA as well as a healthy working capital. Otherwise, buyers are not going to come and buy the company and write a big fat check for you on your income statement performance when you have very little working capital because if you do not have adequate working capital, you have to put more money into it.
Therefore, we bring the EBITDA together with the working capital adjustment as long as the advisor manages to negotiate a good working capital adjustment. When you look at the letter of intent the buyers always indicate that it is a debt-free, cash-free transaction which means that they’re not taking on any of the debt because it got subtracted from the value and they don’t want to buy your cash. Why they are paying you dollar for dollar, right? They want to have adequate working capital in there at closing when they buy the company. That’s how it works.
Jason Boudreau:
Got it. So, it will impact the valuation then, right? One of the things that I see with a lot of business owners that we work with is considerations around post-sale expectations from the buyers. I’d love to hear about your experience what do you see out there? Are the trends whether it’s been in the past year or two or even over your entire career which you see going forward in terms of expectations of keeping key people management in place for a certain amount of time? What dictates that and maybe a couple of examples that you’ve seen where the buyer said they don’t need you to stay on versus they need you to stay on and both transactions happen but there’s a different impact to the leadership group post-sale. Just curious if you could share a little bit about that with us.
Faramarz Bogzaran:
It’s an integral part of the process. I’ve seen many letters of intent that clearly say they have the provision or a clause in the letter of intent where they have identified who exactly needs to be signing and non-compete, non-solicitation or whether they have to stay with the company, post-closure or post transaction for a period time. At the end of the day what professional services are they buying? They’re not buying desks and computers. They’re buying people. The people are the ones that are turning the wheels in all these companies. So, if they’re buying the people who are generating the capital and they’re willing to pay high multiples for that value, they don’t want to lose these people. Because if they go, if they leave especially, it gets worse if they are tightly attached to clients or accounts. So, usually, it is customary to see that there’s a provision for retention for those individuals, in particular, senior shareholders.
I don’t know if you remember last year, I held the M&A panel session at the CE3C as a preamble to the panelists, I asked everybody the question, “How many of you do planning or budget or strategic planning for your company?”. Just about everybody raised their hand, right? And I asked, “Within that strategic planning, how many of you have exit strategy planning?”. Not a lot of people have raised their hands, because “why would I put an exit strategy in there? I’m not prepared to sell my company.” Nobody’s asking you to sell the company. But at some point, you’re going to retire. So, you should be putting exit strategies that show how you are going to sell your shares to your colleague who works for the company. If that doesn’t exist, it doesn’t present itself. Then you have a problem.
The second thing that I always tell people is if you’re trying to sell your company, don’t wait until you are in your 60s and 70s. Especially if you’re a single shareholder. It gets worse if you get older and the majority of the clients are with you – you get a problem. It will have a diminishing factor impact on your value because the buyers are going to say, “Well, wait a minute, he’s 70 years old, doesn’t have much fuel left in the tank, so he’s gonna retire the next day. And all these coins are going to go away. So what did I buy?” So, people must think about when should they enter the market. I always recommend that if you want to think about the possibility of selling your company and retiring, tell me when you want to retire first.
Jason Boudreau:
Right, and work backward.
Faramarz Bogzaran:
Somebody says they want to retire at the age of 60 and they are at 59 at this time, my answer would be “I think you’re going to retire at the age of 63 maybe because whoever is going to come up to buy you is going to put handcuffs on you for a minimum two to three years.” It is an integral part of the process that people have to understand. There is an expectation that you’re going to stay with the company for some time. That time sometimes is a year, from two to three or sometimes five years, but usually around three years.
I’ve seen transactions or letters of intent saying “no retention at all”. However, if you want to leave, you can leave. You don’t want people who don’t want to be part of the company – they can just leave tomorrow. So that’s to me a little bit riskier from a buyer’s point of view.
Another thing that I should say is once you sell your company set the expectation wise. I always use this analogy, especially if you’re the single owner or you’re the President of the company and you have majority control of the company. As soon as you sell the company, you’re not the King anymore. So don’t behave like you’re still the King or the Queen. You’re going to have to adapt to the new regime, new criteria, new process, new administration of the buyer. And while you’re in that period of retention of two to three years, I always tell my close friends that come to me asking what they should do after the sale – I say, “Never swim against the water”. All you’re going to do is frustrate yourself. It’s not your company anymore – it is somebody else’s company now. They have protocols, systems, procedures, objectives, and goals that may or may not meet what you want. So, you saying “Oh no, I disagree” – that’s not going to work that way. All you’re going to do is you’re going to be very frustrated for the next three years.
Jason Boudreau:
That’s an interesting perspective. It would probably be a very emotional journey as well for these people, right?
Faramarz Bogzaran:
That is one of the parts where we go beyond what most M&As usually do. You become close to people, you get to know them. All of these companies that people have built over 30-40 years, become their babies. You just can’t let go. You know what I mean? It’s tough to let go. I’ve been in that position twice. It was excruciating to let go. But you have to let go. Because that’s the process. If you don’t let go, all you do is frustrate yourself.
Jason Boudreau:
That’s such an interesting perspective. Faramarz, thanks so much for sharing that.
We’re in this really interesting time, where interest rates have shot up, I know there’s still quite a lot of M&A activity going on out there, but obviously multiples and expectations have shifted. Curious to hear what are some recent activities in the sector and then maybe a trend or two that you’re seeing for the year ahead.
Faramarz Bogzaran:
Speaking from our own experience, as F&M advisors we recently completed 2 transactions in the environmental consulting and engineering and contracting industry. Right now we are in the process of completing three more. We see a lot of letters of intent coming in with very varying degrees of multiples and valuation in there.
You’re right, there are kind of interesting economic dynamics if you want to call it, the high-interest rates… Even though there are some indications that it is softening and it’s possibly stabilizing. US interest rates seem to be going down and all the indications are. So the Canadian market and the economy have a very strong influence on the way people get into the M&A market, especially it has an impact on that multiple that I told you about. If there is not enough capital for buyers or cheap capital for the buyers to acquire companies it may have an impact. However, there are some big publicly traded companies out there that are willing to pay the high multiples. For instance, I’m sure you’ve heard of a company called WSP [WSP Global Inc.]. They acquired a company called Golder Associates and they paid a high multiple, I think they paid roughly around 10.5 times the multiple of earnings which is the highest I’ve seen in years. There are several reasons they paid for that. I believe one of the reasons is that they didn’t have a very strong footprint in the environmental sector where they wanted to strengthen their presence. That brought somewhere around 5,700 professionals into that mix. Right after that, you are on the map with a very strong company. It was a strategic acquisition. Another thing is the market cap of the company. As soon as the announcement went out, the market value went crazy. So, there are a lot of factors that come into play depending on who the buyers are.
What we see, based on the transaction that you’re involved in and based on the transactions that have happened over the past 12 to 18 months -usually the multiples range anywhere between four to seven times more, but people tend to gravitate towards thinking that their company is worth 8 or 9 or 10 just because another company was sold at 8 or 9 multiple. That’s another responsibility of the advisor to control expectations, try to provide adequate information, and try to put some rationale as to why the norm is hovering between 4 to 6 to 7 to 8. Anything above that is really out of the norm. In the end, the market does what the market does -, people want to buy, they will go sometimes and provide some outlandish multiples for a variety of different reasons. But the reality is that we cannot compare company X with company Y and expect the same results in terms of value, multiples, and expectations. The economy and politics have a lot to do with that.
In the upcoming conference on January 24th and 25th, amongst all the excellent speakers, we teamed up a renowned economist, Michael Campbell, with Nick Nanos, who’s a nationally recognized pollster. I would like to know what the economists are saying and what the pollsters saying about politics that we’re going to go through elections in about two years in Canada. I would like to know how these two intertwine to impact or influence the M&A activity because they do influence it.
Jason Boudreau:
Right. Totally. That would be a fascinating conversation to hear.
Well, thanks so much, Faramarz. I appreciate you being here today. It’s been an incredibly interesting conversation. I’ve certainly learned a lot. Appreciate your time.
Faramarz Bogzaran:
Well, thank you, Jason. I appreciate it. And I thank you and your partners and VELA Wealth for this opportunity.
Jason Boudreau:
All right. Take care. Thanks so much.
