12 Concepts We Can Learn From MID Market M&A to Use on SMBs From How2Exit's Interview W/ John Carvalho - Watch Here
Here is what my team and I learned from this interview: (These are notes from team members, writers, sometimes AI, and even listeners who submitted what i learned loosely edited and shared here) - If it seems a bit unrefined, you're reading our notes, so. yeah. -Ron
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Key Takeaways:
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Focus is important in the mergers and acquisitions space to ensure the best outcomes.
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Hands-on experience in acquiring and selling businesses can make one a better advisor.
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Education and training for both sellers and buyers are crucial in the market.
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Corporate acquirers have advantages in terms of trust and the ability to execute acquisition strategies.
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Buyers should make fair offers and be proactive in their acquisition strategies.
The Story of The Episode-The Art of Mergers and Acquisitions: Insights from John Carvalho
In this article, we delve into the world of mergers and acquisitions with John Carvalho, President of Stone Oak Capital and co-founder of Divestopedia. Drawing from this podcast interview, we explore the key themes discussed and provide insights into the strategies and mindset required for successful M&A transactions.
Introduction: Navigating the Complex World of Mergers and Acquisitions
Mergers and acquisitions (M&A) have long been a driving force in the business world, enabling companies to expand their reach, diversify their offerings, and achieve growth. However, the process of buying or selling a business is complex and requires careful planning, analysis, and execution. In this thought leadership article, we explore the insights shared by John Carvalho, a seasoned M&A professional, to gain a deeper understanding of the strategies and mindset required for successful transactions.
The Importance of Focus and Learning from Experience
One of the key takeaways from John Carvalho's experience is the importance of focus. He emphasizes the need to avoid spreading oneself too thin and instead concentrate on building expertise in a specific area. This focus allows for a deeper understanding of the industry, the market dynamics, and the unique challenges and opportunities it presents. Carvalho's own journey from working at Deloitte to starting his own M&A advisory firm and co-founding Divestopedia is a testament to the power of focus and specialization.
Carvalho also highlights the value of hands-on experience in the M&A space. His own experiences of acquiring and winding down businesses have provided him with invaluable insights and a deeper understanding of the challenges faced by business owners. This firsthand knowledge has made him a better advisor, enabling him to empathize with his clients and guide them through the complexities of the M&A process.
The Role of Risk Assessment and Deal Structure
Another important aspect of successful M&A transactions is the ability to assess and manage risk effectively. Carvalho emphasizes the need for buyers to have a clear understanding of the risks involved and to develop strategies to mitigate them. This includes evaluating the deal structure, considering legal and operational factors, and identifying potential challenges that may arise during the integration process.
Carvalho also stresses the importance of fair and transparent deal-making. He encourages buyers to approach negotiations with a mindset of fairness and to put forth offers that reflect the true value of the business. This approach builds trust and fosters a positive relationship between the buyer and seller, increasing the likelihood of a successful transaction.
The Changing Landscape of M&A
Carvalho acknowledges that the M&A landscape is constantly evolving, with factors such as rising interest rates and geopolitical risks impacting the market. However, he believes that the demand for acquisitions will continue to grow as aging business owners seek to monetize their wealth and secure a successful succession plan. This presents an opportunity for corporate acquirers to play a significant role in the market.
Carvalho highlights the advantages that corporate acquirers have over other types of buyers, such as private equity firms or individual entrepreneurs. Their ability to offer a clear exit path and a smoother transition for the seller makes them an attractive option for business owners looking to retire or move on to their next venture. He encourages corporate acquirers to leverage their position and develop a systematic and programmatic approach to acquisitions, using their industry expertise and networks to identify and evaluate potential targets.
Conclusion: Navigating the Future of M&A
In conclusion, the world of mergers and acquisitions presents both challenges and opportunities for buyers and sellers alike. By focusing on specialization, learning from experience, and adopting a fair and transparent approach to deal-making, individuals and companies can navigate the complexities of the M&A landscape successfully. As the market continues to evolve, it is crucial for buyers to stay informed, adapt to changing conditions, and develop strategies that align with their long-term goals.
The insights shared by John Carvalho provide valuable guidance for those seeking to engage in M&A transactions. By embracing a mindset of continuous learning and growth, individuals and companies can position themselves for success in the dynamic world of mergers and acquisitions.
(57:31) Listen Here
Key Concepts We Can Learn From this Episode:
Concept 1: Valuable Resource For Learning Acquisitions
Divestopedia, a leading online educational resource for mid-market mergers and acquisitions, is a valuable resource for learning acquisitions. The podcast highlights the importance and usefulness of Divestipedia in providing definitions, explanations, and insights into the world of mergers and acquisitions.
The host introduces John Carvalho, the president of Stone Oak Capital, a Mergers and Acquisitions Advisory Firm. John is also the co-founder of Divestopedia. The host acknowledges the significance of Divestopedia as a resource for small and medium businesses.
John Carvalho shares his experience in the mergers and acquisitions space, emphasizing the importance of Divestopedia in his own learning journey. He mentions that it took him and his partner five years to build the content and database of Divestopedia. Writing definitions and articles for the platform not only helped them create a valuable educational tool but also sharpened their own knowledge and expertise in the field.
The host shares his personal experience transitioning from the tech industry to marketing and eventually into mergers and acquisitions. He highlights the unfamiliarity with the language and terms used in the industry and how Divestopedia became a go-to resource for him to learn and understand concepts like family offices and private investors. He credits Divestopedia for a significant portion of his learning in the mergers and acquisitions space.
The conversation concludes with John expressing his pride and gratitude for The Hub's readers finding Divestopedia useful. He acknowledges that the field of mergers and acquisitions is constantly evolving, with new words and terms emerging. However, Divestopedia remains a valuable resource for anyone looking to learn and stay updated in the industry.
Concept 2: Diverse Experiences Shape Acquisition Expertise
The podcast reveals that diverse experiences play a crucial role in shaping acquisition expertise. The two individuals, the host and guest, one with a background in real estate investment and marketing, and the other with a professional accounting and corporate finance background, both found their way into the world of mergers and acquisitions through different paths.
While Ron went into M&A by jumping in after exiting a real estate investment business he had built, John had a more traditional career trajectory. He graduated with a business finance degree and worked in an accounting firm, eventually becoming a professionally designated accountant. However, he had an entrepreneurial drive and decided to break off and start their own firm. Through their journey, they recognized the need for education and founded Divestopedia, a platform aimed at providing necessary education for the lower middle market mergers and acquisitions community.
Both individuals highlight the significance of their diverse experiences in shaping their acquisition expertise. Ron's background in real estate investment and marketing provided them with a unique perspective on the industry. They learned the importance of practical application and the challenges of turning ads into profits for small to medium-sized businesses. This experience gave them the skills to navigate the fast-paced world of mergers and acquisitions.
Similarly, John's background in accounting and corporate finance equipped them with a strong foundation in financial analysis and due diligence. Their experience working for Deloitte further honed their skills and provided exposure to various aspects of the industry. Their entrepreneurial drive led them to start their own firm and create Divestopedia, which became a valuable resource for the mergers and acquisitions community.
Concept 3: Focus Is Key For Success
One key theme that emerges from the podcast is the importance of focus for success in the field of mergers and acquisitions. John reflects on his own experiences and acknowledges that a lack of focus early on in his career hindered his progress and prevented him from achieving his full potential in each endeavor he pursued.
The Podcast reveals that John had multiple projects and responsibilities at the start of his career. He was involved in starting Divestopedia, buying businesses, and running an M&A advisory firm. While these endeavors were valuable and provided him with diverse experiences, he admits that trying to juggle all of them simultaneously diluted his focus and prevented him from excelling in any one area.
John's realization of the importance of focus is a valuable lesson for anyone aspiring to succeed in the world of mergers and acquisitions. It highlights the need to prioritize and allocate resources effectively in order to achieve the best possible outcomes. By spreading oneself too thin and trying to pursue too many objectives at once, it becomes difficult to devote the necessary time, energy, and attention to each endeavor.
Furthermore, the podcast emphasizes that focus is not just about narrowing down one's activities, but also about identifying and pursuing a specific area of expertise. John acknowledges that he initially wanted to focus on value creation in mergers and acquisitions but found that this concept was not widely understood or appreciated at the time. This realization led him to reevaluate his approach and focus more on building an advisory firm, where he could apply his expertise and provide value to clients.
Concept 4: Value Creation Requires Market Acceptance
The podcast discusses the concept of value creation and its relationship to market acceptance. John shares their experience in the field of mergers and acquisitions, highlighting the challenges they faced when trying to build a business around a value creation model that was not widely accepted in the marketplace.
John initially believed that helping business owners build value within their businesses and finding ways to partner with them for equity or compensation was a better approach than traditional exit planning or M&A advisory work. However, they soon realized that although value creation might be a good way to maximize value for business owners, it was not something that was commonly accepted or compensated in the market.
This realization led John question their approach and the viability of building a business around value creation. They came to understand that if the market does not recognize the value of a product or service, it is difficult to build a successful business around it. The speaker's mentor posed a simple question: "If nobody is willing to pay you for your product or engage with you for it, is it really that good?"
This question forced John to reevaluate their approach and consider the importance of market acceptance. They recognized that people buy what they want, not necessarily what they need. The speaker acknowledged their tendency to swim upstream and go against the grain, always trying to find a better way of doing things. However, they realized that this approach may not align with how the market sees things or compensates people for their services.
We also discussed the danger of doing too many things and the importance of focus. They admitted to being an idea person who constantly comes up with new ideas and projects. However, they recognized the need to prioritize and focus on providing the best content and resources in their specific area of expertise. They acknowledged that constantly pursuing new ideas and distractions can detract from the things that are already working and where their attention should be focused.
The podcast also touched on the different types of individuals in the mergers and acquisitions space. There are entrepreneurs who love to create and solve problems, and there are operators who prefer an organized, systematic approach to growing a business. Both Host and guest identified themselves as more of an entrepreneur, always seeking new challenges and problems to solve.
Concept 5: Buyers Need Capital And Expertise
The podcast emphasizes the importance of buyers having both capital and expertise when it comes to mergers and acquisitions. John discusses his experience in conducting 17 acquisitions over a period of seven years, highlighting the amount of work and stress involved in the process. He also mentions the need for systems and processes in mergers and acquisitions, as well as the importance of educating both sellers and buyers.
One key point made in the podcast is the need for buyers to have the necessary capital resources to complete a deal. This includes having cash on hand or the ability to secure financing. Without sufficient capital, buyers would not be able to make the necessary investments to acquire a company.
In addition to capital, the speaker also emphasizes the importance of expertise in the buying process. They mention the need for buyers to know how to generate deal flow, evaluate opportunities, put together letters of intent (LOIs), and conduct effective and efficient due diligence. This expertise is crucial in ensuring that the buyer is making informed decisions and maximizing the value of the acquisition.
The podcast also touches on the idea of educating buyers and sellers in the mergers and acquisitions process. The speaker believes that there is a need for education on both sides, as sellers need to be prepared to sell and buyers need to be knowledgeable about the process. This education can help buyers understand the complexities of mergers and acquisitions and make more informed decisions.
Overall, the podcast highlights the importance of buyers having both capital and expertise in the field of mergers and acquisitions. Without these two key elements, buyers would not be able to successfully navigate the process and maximize the value of their acquisitions. By recognizing the significance of capital and expertise, individuals can better prepare themselves for success in the world of mergers and acquisitions.
Concept 6: Buyers Need To Be Deal Makers
One key aspect that the podcast emphasizes is the need for buyers to come to the table with a clear deal structure relatively quickly. The host shares an example of his partner, who was able to structure a deal within five minutes of meeting with a potential seller. This ability to quickly assess and structure a deal is crucial in the fast-paced world of mergers and acquisitions.
The podcast also highlights the importance of understanding and mitigating risks in the acquisition process. Buyers need to recognize that there are inherent risks involved in acquiring a business, and they must be able to assess and analyze these risks effectively. This requires a certain level of expertise and experience in deal-making. John's partner is praised for his ability to assess and analyze risks, which contributes to his success as a deal-maker.
Furthermore, the podcast emphasizes the need for buyers to have a clear understanding of what they want and what a good deal looks like for both parties involved. It is not enough to simply have the desire to acquire a business; buyers need to do their homework and formulate a great offer based on market norms and their own specific goals. This requires research and a deep understanding of the industry and market in which they are operating.
The podcast also touches on the importance of being a deal-maker rather than just a book-smart individual. While having knowledge and expertise is important, it is equally crucial to be willing to take risks and execute on deals. The host suggests that there are many book-smart individuals in the field of mergers and acquisitions but not enough deal-makers. Being a deal maker requires a willingness to take risks, assess and analyze risks effectively, and have the ability to execute on transactions.
Concept 7: Market Tightening, Buyers More Selective
There are two sides to the buyer-seller dynamic in mergers and acquisitions. The buyers are becoming more selective in their choices, as they are looking for less risk and more solid companies with higher revenues. This may be due to the current economic climate, where buyers are being more cautious and looking for companies and industries that are recession-proof.
The podcast emphasizes the importance of having a product that fits what the market is looking for. This is critical for success in mergers and acquisitions, as buyers need to understand what the market wants and how to work towards meeting those needs.
The host of the podcast asks the guest if they see the market tightening up, and the guest confirms that the market is indeed tightening. Rising interest rates and financial regulations are making it more difficult to do transactions. However, the guest also mentions that there are levers that can be pulled to mitigate some of the risks associated with these challenges. For example, buyers may pay less or structure the deal in a way that includes more seller financing or earn out.
The podcast also touches on the buyer profile and the importance of fairness in deals. The guest highlights that being too risk-averse and trying to lowball sellers is not a successful strategy in the long run. Buyers need to be willing to make fair offers and put themselves in the seller's shoes. This approach is more likely to lead to successful transactions and build a positive reputation in the industry.
In terms of the current economic cycle, the podcast suggests that the market is tightening but does not provide a definitive answer on whether this is a temporary situation or a longer-term trend. The guest mentions that the Canadian and American markets often mirror each other and that it is rare for one country to have a booming economy while the other is in a depression. However, it is not clear whether the current tightening of the market is a temporary phase or a more significant shift.
Concept 8: Shift In Business Ownership Landscape
There is a lot of risk and uncertainty in the current economic climate, with factors such as rising interest rates, a slowing economy, and geopolitical risks. Additionally, there is a shift from traditional natural resources and fuels to a more technology-based economy, with the growth of tech companies in the speaker's region.
One of the key drivers of this shift is the aging business owners who need to create liquidity and monetize the wealth they have built in their businesses. As these owners reach retirement age, there is a growing demand for businesses to be acquired. The podcast suggests that the volume of deals will continue to be high, although there may be changes in valuation ranges and challenges in accessing capital due to rising interest rates.
The two also highlight the importance of succession planning and the need for more buyers and companies to be trained in acquisitions. The aging population of baby boomers who own many businesses will eventually retire or pass on their businesses to successors. If there is not a sufficient number of well-prepared buyers, there is a risk that these businesses will either shut down or be acquired at undervalued prices. The podcast host mentions the example of Japan, where there are articles about companies who are giving away multi-million dollar businesses to successors to ensure their legacy and honor are preserved.
The podcast concludes by emphasizing the need for better buyers rather than more buyers. Building trust and establishing personal connections are crucial in the acquisition process. The speaker suggests that educating both sellers and deal makers is essential in creating a successful M&A landscape. The challenges on the buy side of acquisitions include the need to analyze numerous potential businesses to find suitable targets. Many buyers underestimate the time, energy, and resources required for this process, leading to frustration and a perception that the acquisition strategy is not effective.
Concept 9: Tech-enabled communities for M&A.
The podcast discusses the role of tech-enabled communities in the field of mergers and acquisitions (M&A). The speaker mentions that they have built a LinkedIn group called Mergers and Acquisitions Network, which is the largest M&A network on LinkedIn. This highlights the significance of using technology to create communities that facilitate networking and knowledge sharing in the M&A space.
The speaker also mentions their new firm called Deal Institute Inc., which leverages tech-enabled capabilities to serve as an outsourced service provider for corporate acquirers. This indicates the increasing reliance on technology to automate processes and streamline the M&A outreach and searching efforts.
One of the key advantages of tech-enabled communities is the ability to reach a wider audience and connect with potential targets for acquisition. The speaker mentions that by using tech-enabled processes, they are able to assess thousands of opportunities and narrow them down to a select few that are suitable for acquisition. This highlights the efficiency and effectiveness that technology brings to the M&A process.
Furthermore, the podcast emphasizes the importance of understanding the needs and preferences of potential sellers. The speaker mentions the need to figure out what is important to the target companies and to structure a deal that is mutually beneficial. This requires a deep understanding of the industry and the ability to assess the readiness and valuation of potential targets.
The podcast also touches upon the challenges faced by business owners when approached by private equity firms. Many business owners are skeptical of private equity firms due to their lack of industry experience or negative past experiences. However, the speaker suggests that corporate acquirers have an advantage in this regard. Business owners are more likely to take a call from a corporate acquirer who has identified them as a good fit for their acquisition strategy. This highlights the importance of building trust and credibility in the M&A space.
In conclusion, the podcast highlights the role of tech-enabled communities in the field of mergers and acquisitions. These communities provide a platform for networking and knowledge sharing, enabling buyers to connect with potential targets and streamline the M&A process. The podcast emphasizes the need for buyers to be well-prepared, selective, and fair in their approach to acquisitions, and highlights the advantages that corporate acquirers have over private equity firms in building trust with potential sellers. Overall, tech-enabled communities play a crucial role in facilitating successful M&A transactions in today's business landscape.
Concept 10: Corporate Acquirers Provide Easier Exits
Corporate acquirers provide easier exits for business owners compared to private equity firms or acquisition entrepreneurs. This is the main point discussed in the podcast. The podcast highlights the challenges faced by business owners when considering an exit strategy and how corporate acquirers can offer a more attractive option.
The podcast emphasizes that many business owners in the lower mid-market are looking for a relatively short-term exit from their business. They want to take their chips off the table and move on to the next phase of their life, whether it's retirement, pursuing other entrepreneurial ventures, or enjoying the wealth they have generated. Corporate acquirers provide a clear path to this exit, making it easier for business owners to achieve their goals.
In contrast, private equity firms often require business owners to stay involved in the business for several years and receive a majority of their compensation through earn-outs and other arrangements. This can be a deterrent for business owners who are ready to retire or move on to other projects. Private equity firms also tend to have a reputation for being more focused on financial returns and less concerned about the legacy and values of the business.
The podcast also mentions that acquisition entrepreneurs, who are looking to acquire their first business, may face challenges in building trust with potential sellers. Business owners may be hesitant to hand over their business to someone with no prior experience in acquisitions. Corporate acquirers, on the other hand, are seen as a safer pair of hands by potential sellers. They have the resources, expertise, and track record to execute on the acquisition strategy and ensure a smooth transition.
The advantages of corporate acquirers are further highlighted by comparing them to private equity firms. While private equity firms may offer financial incentives, they often have growth targets and expectations that need to be met. This may not align with the goals and aspirations of business owners who are ready to retire or move on to other ventures. Corporate acquirers, on the other hand, offer a logical opportunity for business owners to exit and provide a clear plan for growth and development.
Concept 11: Gratitude And Humility In Business
One recurring theme throughout the podcast is the importance of gratitude and humility in business. The guest speaker, John, expresses his gratitude for the opportunities he has had in building his business and the lessons he has learned along the way. He acknowledges the challenges he faced and how they have shaped him into a better advisor. This humility allows him to approach his work with a sense of gratitude and appreciation.
John's gratitude is not just directed towards his own experiences, but also towards the people and resources that have helped him. He mentions the support of his network and the communities he is a part of, such as Divestopedia and the merger and acquisition LinkedIn group. He recognizes the value of these communities in providing him with valuable connections and resources that have contributed to his success.
In terms of his business, John expresses gratitude for the opportunities he has had to work with corporate acquirers. He acknowledges the trust that these acquirers have placed in him and his team, as well as the benefits that come with working with them. He appreciates the ability to use his global network to source and uncover great opportunities for these acquirers.
This attitude of gratitude and humility is not only beneficial for John personally, but also for his business. It allows him to approach his work with a sense of humility and openness, which in turn helps him build trust and rapport with his clients. It also allows him to appreciate the successes and wins that come along the way, such as building a business, completing 17 acquisitions, and taking it public.
Concept 12: Be A Fair & Timely Deal Maker
The podcast ends by discussing the key takeaway of being a fair deal maker when acquiring a business. The host asks the guest what he would want listeners to remember from the show, and the guest emphasizes the importance of being a deal maker rather than simply following conventional wisdom or relying on what has been read. He suggests throwing away preconceived notions and instead focusing on making an offer that is fair and that one can stand behind.
John references Warren Buffett's approach of buying wonderful businesses at fair prices, highlighting the success Buffett has achieved by paying fair value for businesses. He encourages listeners to find sellers who are willing to transact at fair value and to put those fair values in front of them. He advises against spending excessive time gathering information and instead suggests finding a business that one likes and wants to acquire, and then promptly putting a fair offer on the table.
The host then asks about the ideal timeframe for making an offer, and the guest shares that his company was able to present a letter of intent (LOI) within two weeks. He emphasizes that it is not rocket science and that it is not difficult to do. He reassures listeners that if an offer is offensive to the seller, they can apologize and ask for more information to make a fair offer. He dispels the fear of offending someone or overpaying, stating that the first person to make an offer does not necessarily lose. He encourages listeners to have a starting point and to put a fair offer in front of the seller. He acknowledges that overpaying is a possibility, but if one does their valuation and it is still a fair deal, it may not matter. The key is to have a mindset of paying a fair price and being prepared to mitigate risk and find solutions if things go wrong.
