Selling your life’s work can be like sprinting through a month’s long marathon.
Baker Tilly Canada Capital (BTCC) understands this as its team of financial professionals do this day in and day out. BTCC was recently the exclusive financial adviser to Jacob Bros Construction and its shareholders in a transaction described below.
The B.C.-based civil infrastructure construction business, including its workforce of 350-plus salaried, hourly and craft personnel, plus its two owner-operators, was acquired in mid-2024 by Bird Construction Inc. for $135 million comprised of mostly cash and some common shares in BDT. Though our client was very pleased with the outcome, getting there wasn’t easy.
Before the deal signed, we experienced some challenges and we share them with you so you can learn from them as you prepare to exit your business.
In the Jacob Bros deal, there were three key challenges we experienced, as summarized below.
- Small inner circle
- Forecasting income
- Negotiating net working capital
Challenge one: Small inner circle
To ensure confidentiality, only the most senior executives at Jacob Bros were part of the deal’s inner circle.
Though the objective of ensuring confidentiality was met, the senior executives found themselves in an unfamiliar situation when Bird submitted its due diligence list comprised of 100-plus very detailed and specific information requests. Those in Jacob Bros’ inner circle found themselves getting bogged down in the smaller details of the daily operations.
The senior executives of Jacob Bros found themselves in a two-month long sprint. Not only was the volume of information requested high, but so was the information variety and complexity. BTCC acted as stewards of the diligence process by assembling, creating and relaying requests and acting as an extension of Jacob Bros’ inner circle, resulting in a successful and completed transaction.
Key Takeaways
For the business owner planning to exit, we recommend you consider in advance who you need or want in your inner circle.
They should include those you trust, but also those who have practical access to necessary information and experience in deal making or transactions. Ideally, everyone who sits in a key seat of your company would be part of the inner circle but that may not be feasible when solving for confidentiality.
To help you pick who should be in your inner circle, consider the information that will be requested during due diligence.
Speak with an M&A adviser or email for more on BTCC’s Transaction Preparation Checklist.
Some of the information that will be requested in due diligence will be readily available (e.g., external financial statements).
Other due diligence items will require you and your inner circle to compile, collate and (in the extreme) create.
And before you share any data or information with the other side, it is best to have your M&A adviser scrub it clean.
More sophisticated purchasers will ask for more complicated information. In the case of Jacob Bros, there was a request for an income forecast (as summarized in the next challenge below), which was outside of its normal annual budget process.
Challenge two: Forecasting income
As a public company, Bird communicates its business prospects partly by presenting income forecasts.
This helps Bird set expectations and provide a benchmark for its investors to evaluate progress. Jacob Bros was not experienced in creating highly detailed forecasts. Its lenders never requested forecasts because Jacob Bros is well capitalized and has excellent historical financial results.
And as a closely held private company, its capital allocation decisions were never scrutinized by a slate of independent board directors who held day jobs elsewhere.
When Bird received Jacob Bros’ budget, as requested, Bird’s executives found the level of detail light relative to the forecasts they prepare and provide to Bay Street analysts.
BTCC worked with Jacob Bros’ inner circle to solve the issue. This involved collecting information from several internal sources and tying them altogether.
After weeks of discussions, a forecast was finalized to the satisfaction of the parties mentioned above.
Key Takeaways
For the business owner planning to exit, we recommend you spend the time necessary to understand the levers you pull in creating revenues and managing expenses so you can forecast them (preferably using industry standards) and negotiate for a higher valuation.
Whether you sell or not, this is a valuable tool in managing your businesses.
If your company is a sales-driven organization, then use your CRM in estimating what revenues could be, given the prospects you have in the pipeline and the odds of success (e.g., conversion rate) depending on the different stages they are at in the sales cycle.
Or if your company is advertising driven, then use the historical ad performance data (e.g., return on ad spend) given the size of your next ad campaign. And if your company does project work like Jacob Bros, then work with your project managers and estimators in determining when invoices should be issued for work performed, as well as each project’s expenses given what is required (e.g., labour, materials) and its complexity (e.g., size, experience).
Challenge three: Negotiating net working capital
Construction companies have complex net working capital (NWC) needs.
This is due to the unique nature of their businesses.
Their NWC requirements — which impact their cash flows — are a function of the different projects that also have varying durations, payment/billing structures and timing of expenses.
Furthermore, when it comes to highly profitable, well capitalized, closely held private companies from across industries, we commonly see there is little motivation to optimize receivables and payables processes.
Jacob Bros was no different.
A purchaser would typically want a higher level of NWC (whereas a seller would want the opposite). In the end, the final NWC peg was based on a very detailed analysis in the NWC report, which required agreement from both sides – no small feat for a contentious issue.
Key Takeaways
For the business owner planning to exit, we recommend considering the following three steps to prepare for negotiating NWC.
First, optimize the receivables and payables processes years before taking your company to market. This means negotiating favourable payment terms and strictly enforcing them with customers and suppliers so you can show investors a sustainable track record of improved cash management.
Second, if there were periods of abnormally high NWC (e.g., poor collection with a former client), be sure to understand and document why it happened and why it will not reoccur.
These facts and story telling will need to be communicated when you negotiate for a lower NWC peg. Third, if there is seasonality in your company’s NWC, then discuss with your M&A adviser the possibility of doing a deal when NWC is normally at its low point of the calendar year. Doing all three can save you millions of dollars.
Summary
Every deal is different and will experience unique challenges.
Nevertheless, we would not be surprised if you experience some of the same challenges we encountered in the Jacob Bros deal.
You will understandably want to keep your inner circle small to ensure confidentiality but there is a cost in terms of time and stress to such a decision. We recommend you thoroughly consider what sensitive information you will need to provide, and which key employees you want (and trust) working with you in sharing that information with prospective purchasers.
Though you may not sell to a public company, which will likely require an income forecast from you, you should create a sensible forecast built from the ground up. A forecast can help you negotiate a higher valuation given purchasers are normally more interested in acquiring companies with fantastic futures than those with prodigious pasts.
And before you agree on selling, you will need to agree on a level of NWC which can be very complicated and contentious. The best way to negotiate NWC is to prepare in advance by not only optimizing it, but by understanding why it varies and using this insight to your advantage when you are at the negotiation table.
Howard Ma, CFA, is a director at Baker Tilly Canada Capital.
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