Josh (1:33.667)
Welcome back to another episode of the Bold Brands show. I'm your host, Josh Miles. Today with me, we are chatting with Josh Lair and Joe Smatona, co-founders and partners at AEC Advisors. Josh Lair has spent his entire career dedicated to the AEC industry, advising clients on mergers and acquisitions, capitalization, internal stock valuation, and ownership transition issues. He's also a frequent keynote speaker at industry conferences, seminars, and webinars.
Prior to AEC Advisors, Josh was a senior vice president at EFCG where he'd worked for 11 years. He graduated from Harvard University and played varsity soccer. Joe Smetona, throughout Joe's career, he's focused on corporate finance, investment analysis, mergers and acquisitions, and financial sponsor advisory. Prior to AEC Advisors, Joe worked in several corporate finance advisory and investing roles, including as a vice president at EFCG.
an investment associate at a family office, and a capital markets analyst at CIT Group. Joe graduated from Columbia University with an MS in operations research in Case Western University with a BSc in mechanical engineering and a BA in philosophy. He was also the varsity captain of the Case Western tennis team. And for the sake of full disclosure, I've had the pleasure of working with the AEC advisors team for the past few years on various video and photography projects.
and they just happen to be one of my favorite companies in the industry. Great to see you guys both. Welcome to the Bold Brand Show.
Josh Lahre (3:6.380)
Thanks for having us, Josh.
Joe Smetona (3:8.430)
Thank you.
Josh (3:9.421)
Yeah, the two things I learned from you guys when I started doing headshots for you was one, it seemed like everybody there was an athlete and everybody there was attractive.
Joe Smetona (3:19.803)
Don't make us embarrassed. Start.
Josh Lahre (3:22.290)
No comment.
Josh (3:24.948)
Get you blushing right out of the gates. Well, one of my favorite things to do on this show, know, everybody we talked to is sort of involved and deeply in the AEC industry, but we like to go deep on topics and kind of focus and concentrate around your areas of expertise. Specifically, we want to talk about uh corporate finance and M &A activity with you guys, of course.
Josh Lahre (3:26.262)
Uhhh, yeah.
Josh (3:49.369)
ah And we had your friend Bjorn on the show previously speaking about M &A over at Stantec. So for listeners who haven't caught up to that episode yet, we will definitely link that in the show notes. And if you're watching on YouTube, it's gonna be, you know, that link up there, whatever side that that's on. But today, looking at the industry a little more broadly than just what's happening at Stantec, ah maybe for firms who are like, I am never going to sell, why should they keep listening? Joe, I think...
This one's directed to you. Or no, Josh, this one's directed to you.
Josh Lahre (4:22.444)
was going to say, they're watching, think Joe's flow is enough for anyone to keep listening or watching. in all seriousness, I think one of the things we want to talk about today, Josh, or what we're going to cover is that creating value and what makes firms valuable is the same whether they're planning to sell or never sell. So a lot of value creation is
Josh (4:28.547)
Hahaha
Joe Smetona (4:30.350)
but not my nasal voice,
Josh Lahre (4:49.792)
basically the same for those that are looking to transition internally and don't have plans to sell. But what makes them valuable internally also makes them valuable from an M &A perspective.
Josh (5:1.741)
Joe, anything you want to add to that?
Joe Smetona (5:4.098)
No, I would agree. At the end of the day, I think if you're a business owner, you also want to have optionality. You may say today, I don't want to sell, but you never know in the future, five, 10, 15, 20 years down the road, perhaps your partners have retired, perhaps you're alone at the top and don't have an ownership transition plan. You don't know how those things are going to play out. And it seems to me that you're always want to be in a place where you've got options, even if you don't plan to sell.
Josh (5:28.419)
Well, the exact words I think I said about my first agency that I sold after 16 years was prior to that, I said, you will have to pry it from my cold dead hands. But you know, life happened and things changed. And so I found myself in a position to sell to a partner. And so that worked out well for me. But specifically, we want to talk today about why M &A has been so hot and continues to be so important in the AEC industries.
And from the looks of things, nothing's slowing down. um Joe, what's going on there?
Joe Smetona (6:2.862)
So there's a lot to say about that, but I would say historically there's been a lot of M &A activity in the AEC space. So that's not really new, but it kind of got turbocharged really over the last five years as private equity came into the industry in a big way. I think in many ways the industry has always been providing sort of critical services to society, but it kind of got glossed over in the newspapers and the headlines and people are more focused on tech and other sexier industries. But I think in 2020 when we passed the trillion dollar
Infrastructure Act that brought a ton of attention to our space and people started saying, whoa, what's going on here? And then that was followed up with the whole ESG and environmental movement with increasing awareness around climate change. And then more recently, the whole energy transition challenge, right? AI.
electric vehicles, crypto that all requires huge amounts of energy generation transmission. So I think those macro themes convinced people that this is an industry that's going to grow a lot faster than GDP and probably have less volatility than GDP. And that brought a lot of attention to the space. And I think the other things I would say is investors came to realize that these businesses make money, they're profitable. It's not a technology business that you have to invest in for 10 years. They're
services businesses that are profitable pretty much, you know, after the first couple years. It's a very fragmented market. So if you buy one, there's a lot of things that you can add on to sort of accelerate the growth in your business. And there's a lot of baby boomers and aging owners who kind of are at the helm of these businesses and will need to transition ownership either internally to their partners or externally via sale. So I think those are just a few of the reasons that M &A has really sort of accelerated over the last five years.
Josh Lahre (7:45.066)
might add, oh thinking about it, Joe, that you mentioned private equity or financial sponsors uh more or less flooding the industry. I guess from our perspective, it's a whole new form of ownership structure that really wasn't available except for a select few, even as recent as a decade or two ago. So I think we look at it as private equity in general has just offered up a new uh avenue for ownership in the industry that really wasn't available to most.
ah So that alone has created more M &A and through the recapitalization events that those private equity groups go through is going to create naturally more M &A activity as well.
Josh (8:25.773)
I think one of the most challenging things, at least in my mind, is how you would go about valuing a firm. So if you're wanting to explore selling your firm or figuring out what's my firm even worth, where would you start?
Joe Smetona (8:40.910)
Sure, I'll take a crack at that. I think I would use an analogy. So if you're selling your house, how do you value the house? You typically look at what other homes in your neighborhood sold for and you come up with some price per square foot and that's what your home is likely going to be worth. You look and you say, it a little nicer? Is it a better view? Is it more modern, et cetera? And so for engineering businesses, instead of square feet, it's really earnings. And the key earnings metric that buyers and investors look at is something called EBITDA. And so
Really these businesses are valued on a multiple of EBITDA and the multiple will depend on things like how fast they're growing, how profitable they are, just like a home, what geography you're located in, if you're an attractive geography, you're worth more, the quality of the leadership, how attractive their clients are, how diversified their clients are, these types of things. So the better quality business will get a higher multiple of earnings than a lower quality business or a smaller sort of less developed business.
But that's the key way that businesses are really valued. And they really look at what you've done over the last few years and what you're currently doing. Certainly people look to the future, but at the end of the day, these are project-based businesses. It's hard to really know how much earnings you're going to generate a couple years out. So people really tend to value them based on what you've done sort of recently versus what you kind of say you may do.
Josh (10:1.965)
Josh, anything you want to add to that?
Josh Lahre (10:4.996)
I mean, I would add sort of parlays into the next section here about uh creating value and how firms can create that value. And I really want to emphasize something Joe was saying about the home example. We use that a lot. And we always talk about investing in that home, investing in for the future so that it can scale and grow with maybe your family is a good analogy. And so when you look at businesses and we think about just from the highest level,
Firms that are the most valuable in my opinion are those that can basically run on their own. They stand alone. They are going to be able to grow and scale without much investment or very little investment. And so you just look at that from an objective standpoint, the less I have to put into a business as an owner or investor, the more valuable it is to me because it's gonna run on its own. So anyone looking at their business saying, well, how do I create value?
You need to create leadership succession. You need to have a succession plan and a deep leadership bench. It can't be just one or two people driving that business. That thing needs to be able to run on its own. And you need to have proper systems in place, right? Make sure you've got the systems to scale. We so often run into business owners that are running their business on a shoestring and they come to us and say, I'm ready to sell, but I haven't invested in finance. have no ERP or back office system whatsoever.
and I want to sell for top dollar. And the short answer is you can't because as soon as someone looks at your business, they're going to look at all the things they're going to need to put into it. And so using that home example again, that owner put all their money and just threw it up in the attic, right? They just buried their money in the backyard. They didn't invest in the new kitchen. They didn't invest in everything. They didn't make that home more valuable. So either you invest now and do the hard work and make yourself more valuable ah or someone else is going to do it.
Josh (11:41.721)
Right.
Josh Lahre (11:54.163)
And they're going to pay you less today because they got to put more in tomorrow.
Josh (11:58.733)
What are the most important levers that principals can pull outside of finances?
Josh Lahre (12:4.352)
Yeah, I guess I touched on it there. It's, it's almost shocking every time we, we do a deal and you realize just how important leadership really is. Uh, the people at the top matter so much, and maybe we shouldn't be surprised because these are people, uh, asset businesses, right? Professional services. And, uh, at end of the day, it's a relationship driven business and clients hire people. They don't hire the firm. So it comes down to how deep do those client relationships go?
how much IP exists across that company, right? How maybe, how educators are these individuals, you how much skill do they bring to the table? ah But really when you sit down with a group and you recognize they have two or three generations of leadership behind them, that's gotta be the first and foremost, the absolute most important thing. ah Frankly, the numbers tend to follow that kind of situation. So I would say leadership in people would be my answer. I don't know about you, Joe.
Joe Smetona (12:57.486)
No, I agree. mean, at the end of the day, what are you buying? You're buying people. And who are the most important people? The people that run the business. And I think the only other thing I would add is at a most basic level, if you want to get a higher value for your firm, you have to be growing because that's how you provide a quicker return to the investor. And you have to reduce risk. People pay a higher price when there's less risk. So what are the biggest risk factors?
key man, key woman risk. One person at the top holds all the relationships, hasn't transitioned them. That's something we find a lot. And it may be great for that person while they run the business. But if you're going to get a wheelbarrow full of money, people are going to be worried that you're going to go off to the sun and that sunset and there's no one there to replace you and to continue to mind those relationships. So building up those successors is just critical to reducing risk in the business. And then I would add like not being too dependent on any one client. It's easy to grow with a client and then you milk that client.
a great relationship that gives you sole source work. But if one client is half your revenue or 30 % of your revenue, the buyer is always going look at that and say, what happens if we lose that client? We lose 30, 40, 50 % of our business? That's a big challenge.
Josh Lahre (14:4.812)
Yeah, you said it. was just, as you were talking, I was thinking, what are the things that like blow up a process for us? We go out to market and people say, yeah, it looks like a great business, but I'm going to pass. It's the leadership, right? It's the risk associated with the business itself, what they're doing and our client concentration. Those have got to be the three largest factors why people pass on what would otherwise be a great business.
Josh (14:29.677)
Joe, tell us a little bit about your role in the M &A process and how AEC advisors does things differently.
Joe Smetona (14:38.318)
Sure, so I think a couple things. One is AAC advisors were very focused and know you helped a lot on our website and that's one of our sort of core values. We just focused on the space. We like to know it sort of inside and out and hopefully better than any other advisor. So I think that's the first difference. And the other thing I would say is that we provide sort of, you know, full service from the second you engage us to when you actually close your transaction and a wire comes across, we're there, we're helping you prep, we're holding your hand.
We're negotiating for you. working through diligence. We're not just someone who opens the door and sets you up with some other focus. We help prep your business. We point out the things that you need to address. We position it in the best possible light.
Then I think we've got a pretty unique sort of insight into who would like to buy or partner with you, just given that we live in this space exclusively. And then we're there to sort of guide you all the way through diligence, both from a negotiating perspective, but also there's a heavy lift. If you've never been through this process, people are going to ask for every document imaginable that you didn't even know you had um to pull all sorts of reports and go through all kinds of, we'll have all sorts of questions. And I think we can help sort of parry a lot of those to make your life easier. And what's a stressful process.
And ultimately, I think that helps you get the best outcome in the most efficient way possible.
Josh (15:55.033)
I'm having PTSD to being a small business owner and applying for a mortgage. I'm picturing the stack being about 10x that.
Joe Smetona (16:2.326)
And this is like 10 times worse, right? Because with a mortgage, they have a security, which is your property. When they buy your business, there is no security.
Josh Lahre (16:12.524)
I mean, I'd like to say we also have a good team, Joe. mean, talk about going back to the whole people thing. ah We're very biased, but we have an excellent team where, and we do hear this, I think what differentiates is beyond the most senior folks in the company, the team behind us really steps up and uh handles the client interactions very well. They're mature. ah We kind of have tried to live what we preach.
Joe Smetona (16:15.148)
Yes.
Josh Lahre (16:41.228)
to our clients that we need to have a deep bench behind us as well. And frankly, the goal is that you're not calling Josh or Joe or Andre or Tyler. You're calling everybody at the company and frankly, stop calling us. We're trying to make ourselves irrelevant is what we're trying to do.
Joe Smetona (16:58.862)
And we want to bring the whole team. When we get an assignment, we normally have four to six people on that assignment. So you've got a lot of redundancy. ah No matter what time you have a question over there, if someone's on a plane flight or traveling, ah you're covered.
Josh (17:13.059)
Do you guys have a preference for working with sellers versus buyers, or is it pretty evenly mixed?
Josh Lahre (17:20.160)
We like sellers because there's a much higher likelihood of success. ah When you engage on the sales side, it's nice because that company has decided that they would like to pursue a sale and it's much more likely that there's going to be a successful outcome. Not that we don't like working with buyers, they're perfectly fine people, but you're normally one of 10 or 20 or more and so your odds are much lower. So we have...
We have tried to focus a bit more on the sell side, as I'm sure most bankers would love to. ah But we are very selective on the buy side and work with groups in certain processes.
Joe Smetona (18:0.056)
I would also add that it's a very meaningful thing when you are working with a business owner who founded a business 20, 30, 40 years ago, spent their whole life working on that business and building it. When they ultimately go to sell it and find a partner, it's deeply personal and emotional. I think you build a close relationship with that founder and at some level you're changing their and their family's lives and hopefully finding a great home for their people too. I find it's not that it's not impactful working with buyers too, but it's really, really impactful.
working with sellers.
Josh (18:31.491)
Josh, I've heard you talk about professionalizing your business. So if I'm a firm principal and want to further professionalize my business, what would that entail?
Josh Lahre (18:42.890)
Yeah, we sort of alluded to it earlier. When you think about the internal operations of the business and we think about that in terms of you normally have like a finance function and HR function. You probably have some sort of legal counsel, either internal or external. uh And really beyond the sort of human roles, you're also going to need to have certain systems in place in our industry. In our industry, they have ERP systems.
Uh, and, uh, you frankly have an accounting, some sort of accounting software as well to help your finance team. The more systems like that you have in place, obviously the more scalable your business is and the more quote unquote professional you are. Uh, and once again, going back to what we keep talking about, whether you're going to sell internally or externally, the business has to be positioned to grow, has to be positioned to scale.
Uh, and whether you need a CFO today, you may not, but having a controller or some sort of individual that's working in the finance department is a good first step. So we think about it as what are the day-to-day operations, uh, or functions within a, organization that you need to opt to basically function, right? To, to, operate. Um, and you need to go and invest in those and professionalize that business beyond that. Um, there's.
you know, something that you taught us and David LaCour's taught us too, is you also need to professionalize the way you present yourself to clients, to markets, to customers, and to potential employees and staff. uh And that was pretty lost on us until we met you all. This is maybe an infomercial for you guys, but you really helped us appreciate uh we need to first and foremost sit down and truly recognize who we are as a company, what's our mission, vision, values.
Josh (20:24.929)
Yeah
Josh Lahre (20:34.156)
What does our brand stand for? Which was one of the most interesting and insightful processes we've ever gone through. And then once we define that, we defined our brand, our logo, our color scheme and everything. We need to live and breathe that every single day. And I know I sent you an email this week that we put together our first handbook ever as a company. And it took a really long time and it was super painful, but I'm really proud of it.
The team did such a good job on it. And when I read that it's this like living document about who we are ah And to me that's very professional, right? I think about if you join an organization like you join Goldman Sachs They're gonna hand you this info about here's the things we do Here's who we are and go read this book and do that and as a small business. We just didn't have that ah but now I'm recognizing or we are recognizing that
Josh (21:2.499)
Hmm.
Josh Lahre (21:28.812)
part of our professionalization as a company is doing those type of things.
Josh (21:35.021)
Yeah, historically so many firms have uh had to memorialize their mission or vision or values and hang it on the wall because it was so unremarkable, nobody could remember what it was. So forgettable, sounds like everybody else. But when you do the hard work to really figure out, why are we different? And how do we want to be seen by our uh employees as well as our clients? And then to really live that out and to commit to it. as you said, to...
Josh Lahre (21:58.858)
Yeah.
Josh (22:3.627)
actually start creating those documents and memorializing those things in a way that's like this is real and it's something to be really proud of.
Josh Lahre (22:13.152)
Yeah, I agree. As you know, we've got them written on our pillars out here. They're literally written on physical pillars. So it's anyway, I think that that sometimes that gets lost too. People think ah it's got there and make money, but people need to want to join a real organization and clients need to be able to identify with who you are, what makes you different.
Joe Smetona (22:35.630)
And I sort of add two things that when people talk about professionalization, I think sometimes small business owners run everything by feel, right? They're close to the clients, they're close to the projects, and they're sort of head, they know what's going on, they have a sense for it, but that's not scalable when you get to certain size. And if you're a buyer investor, you're not inside the owner's head. You don't have access to that repository of information. If you can't see it in data on a piece of paper, you don't know it and you can't manage that which you can't measure.
And then as to the people part, I think sometimes, you know, small business owners or large business owners kind of think it's all about them. I'm the owner, I own the business. But if you're not really investing in your people and you're not creating a business of the people for the people, that's not going to be scalable long-term either. It's just kind of going to be your pet project. It's more of a practice area and your practice lead versus building a real business that's scaled but that someone else actually wants to pay you a lot of money for.
Josh (23:28.781)
Joe, maybe as a segue to that, if we think about what buyers are looking for today for firms that they want to acquire, what are some of the qualities that are most important to buyers right now?
Joe Smetona (23:43.662)
Sure, so I think there's two things. One is, buyers normally want to fill holes. So they could just buy more to get more mass and that's okay, but it's less interesting to them. For example, if a firm is, you know, an East Coast firm that doesn't have a presence in Georgia, and there's a hole there, they're going to be a lot more interested in buying a business that's in Georgia than buying a business that does a little bit everywhere. So I think in general, if you're a seller and you have a
business that's an expert in a certain area, whether it's a market, a service line, a geography, I think that's going to be viewed attractively by buyers. I think the second thing that buyers look for is it goes back to some of the points you mentioned earlier. They look for leadership. If the CEO is 67, 68 years old and has no successors, I'm not trying to sound ageist, but that's not real attractive.
The same CEO has five people in their 40s and 50s who have 10, 15 year horizon to run and build a business. That's much more attractive to a buyer. So it comes back to that people thing. And then I think the other thing is people want businesses that are respected. oh They want to be able to call your customers in here. This business is best in class. They do great work.
ah They're a high quality firm. So I know we tend to focus a lot on the financials and certainly the financials are important and play a big role in the price. But being someone who is respected in your market, who has a brand that's attractive, a brand that can recruit something that a buyer can leverage, that's important too.
Josh (25:10.019)
Josh, anything that you'd add to that list?
Josh Lahre (25:13.246)
No, I was going to add the market leader concept and brand leader. So I think Joe nailed it.
Josh (25:20.953)
em Josh, you touched on this a little bit before, but I wonder if there's anything else that kind of tends to be the derailing factor in a uh sale. What are some of those things that, and I guess it goes both ways, what are some things that buyers last second are like, okay, no thank you, or that uh even sellers, something that would stop the deal from getting done.
Josh Lahre (25:47.148)
Yeah, there's a couple of key things, I guess you could say, that derail a process where you're kind of signed and you're an exclusivity and you're looking to close, which by the way is very rare. But in the few instances that I've been involved with that happened is the two parties actually never really fully trusted one another.
Josh (26:9.657)
Hmm.
Josh Lahre (26:9.848)
Right, they go sign an agreement and they might have been pursuing that deal for the wrong reasons uh Price normally is the wrong reason saying well, this was the highest price But they never felt totally comfortable with the other side for whatever reason a lot of times. It's just cultural misalignment It's not that they're bad actors. It's just they're they're just culturally misaligned and so you're going through this diligence period where we like to say Before you sign a letter of intent to close a deal
You talk about all the reasons why you love each other and you want to do the deal. The moment you sign that you try to find all the reasons not to do the deal. And so that kind of confirmatory diligence period to close is very painful and sometimes almost uh offensive to the seller because they said, well, wait a second. I thought you loved me. I thought you wanted to merge our two entities. And the answer is they do. But they have uh investors, have shareholders, they have legal counsel, they have all these groups.
Josh (26:46.201)
the
Josh Lahre (27:4.342)
that are saying you need to vet everything. So they're trying to poke holes in it. And that's where if you don't really trust one another and you're not totally culturally aligned, those fishers just, become, I mean, massive, massive, you know, canyons and the deal falls apart. ah So I would say that's probably the biggest reason on either side is you're just pursuing the deal for the wrong reason. And the buyer is unwilling to admit that. So they're allowing the deal to go forward. And the seller is lying to his or herself that
you know, this, this will, the money will make up for it. Um, which I want to sort of a bit of a segue into what I was also going to say is we also have this talk about what happens, why deals fail post close, because there's deals that are unsuccessful after they've closed. And there's obviously a variety of reasons why that happens. And normally you assess a, a quote failed M and a in this industry when people leave, the key people leave, uh, quickly after the deal closes, that would be a failed transaction.
uh And we, in our experience that normally has a lot to do with the fact that there's just, there's a failed integration. There wasn't a lot of focus on once the deal closed, how do we make this firm fit into our organization? And frankly, integration should be starting prior to the closing of transaction. You should already get that going and figuring out these leaders fit into these spots. These people fit in over here. And strategically, here's how our businesses fit together. um
Josh (28:24.761)
Hmm.
Josh Lahre (28:33.236)
as opposed to, again, haggling over price and a dollar here, a dollar there. Another kind of one of these cliched sayings we have at AEC Advisors is no one has, and it's actually true, no one has ever come back to us after a transaction closed and said, you know, if I paid a million dollars less, would have been a great deal. Kind of the deal is a good deal at any price because when a deal is successful, the growth is exponential, the synergies are all there, and basically it pays for itself in time. ah
Josh (28:50.649)
You
Josh Lahre (29:1.952)
The other side of it is though, the deal is a bad price at any price because it becomes damaging, not just financially, but morale wise. You just think about it's like, you basically a body not accepting a cadaver uh entity, right? It's sort of rejecting it. uh That is just what happens. And the rest of that body ends up uh feeling down. And frankly, you can hurt the morale of your existing business. So we talk again, we talk about price, but
That integration is so critical and it's actually not as common as you'd think in our space where buyers are super good integration. There are several, you mentioned Bjorn, I'll give him a shout out. They're wonderful at it and they're some of the most thoughtful people out there, ah but not everyone is as thoughtful as they are.
Josh (29:50.211)
Yeah, I mean, he talks about how intentional they are about being better together and that it is the intention that if we acquire you, if you become part of Stantec, you will be Stantec within the year, sometimes less. uh And I know lots, I've heard lots of other buyers that have a, we'll figure it out and see mentality, which is sort of the opposite of like, maybe we'll keep their brand. Maybe we won't, maybe we'll change your name. Maybe we'll be a family company of this or that.
You know, it's tough for everybody when there's kind of that gray area that the employees don't know, your current clients don't know, their current clients don't know. It makes it really tricky. So um again, I thought it was really interesting how intentional they are about this is part of the deal. Like this is part of the vetting process to see if this is even gonna work.
Joe Smetona (30:43.020)
And two things I'd add is if you're a seller where I've seen deals fall apart is that there's not alignment in the partnership group. Maybe it's the CEO or one or two partners who quickly pushes for sale and they think they have alignment and sometimes a month or two into the process or at the very end they find out, boy,
actually my partners weren't on board. So I think if you're a privately held business that's got a number of partners, don't assume you're all on the same page. You need to take the time to build consensus, get everyone aligned before you go to a process rather than getting down to the altar with someone and then hoping that everyone's going to come on board.
I think these conversations are tough and they can be awkward and people are worried about confidentiality so it's easy to kick the can down the road but that's definitely critical and I think the other thing I've seen blow up deals is where people don't hit their numbers. Selling your business is very distracting both timelines, emotionally, you're meeting with folks, you're trying to prep all this diligence and it's easy to take your eye off the ball on the business and you have a few bad months right before closing and you're selling off of X dollars of earnings and now you're at
.7x, well most of the buyers are going to say, hey you told me you have x and now you give me .7, well guess what, the price is now .7 and that tends not to go over very well. So see those are just two other things to keep in mind as a seller.
Josh (32:3.981)
Joe, um would you suggest in your experience that M &A is a good strategy only for larger firms, or could firms at any size succeed with that path?
Joe Smetona (32:16.588)
I think firms of all sizes can see with M &A, but there's a couple of important variables. One is your capitalization. A mid-sized firm that has outside capital or investor and a big pile of money is probably going to be better positioned to acquire businesses than a firm that may be much larger, but maybe they're employee-owned and they're spending most of their cash flows to buy out former partners. That's variable number one.
And then I think the second variable is that if you're a smaller firm that does not have outside capital, you have to have a strategy at M &A. You can't expect to just go to an auction and compete with Bjorn at Stantec and a bunch of private equity investors. You're probably not going to be able to win. And once a firm goes to auction, price tends to be pretty close to the gating sort of metric. So I think if you're a smaller business, you have to really look to sort of build relationships with sellers. And quite frankly, that applies to larger businesses too, but maybe particularly smaller ones.
ahead of a process. So you already have your foot in the door, you've gotten to know them, you've built a relationship. When a seller is selling the business, they're effectively giving away their baby. They're kind of getting married. And you either need to be the best partner for them or you better show up with a wheelbarrow full of money. So I think if you're a smaller business, really focusing on that cultural fit and building the relationship, getting to know them, showing that you care, showing them how they could fit into the organization is really important. And I think the other thing is that while a smaller
firm may not be able to offer as much money, they can sometimes offer a lot more leadership, autonomy, and a more important role in the organization. And we found that one of the most important things that a buyer can provide in addition to money is that leadership and autonomy. Most firms don't want to sell and just become a cog in the proverbial machine. They want to feel like we still have an important role. We were a CEO, we were COO, we were CFO, we don't want to just be a middle manager. Show us a role. Maybe we need a certain division or geography or
have some other sort of important role in the firm, we still feel that sense of we're accomplishing something or not just buried in the bureaucracy. I think that's something that small firms can excel at just because there's more white space on the page for them.
Josh Lahre (34:25.736)
I wanted to underline that autonomy comment, Joe. Uh, we helped Terry rule the CEO of Lochner do it actually like a thesis on M &A and success. And through all the research he did, I remember he found that autonomy is what made people the happiest, uh, in a transaction and money is fleeting. You know, we always say six months after the deal, people forget all about that money.
And they go back to what does my day to day look like? What does my life look like? And if they suddenly have all these new overlords telling them what to do, their life is generally worse off. Uh, and so the price of autonomy is, is frankly priceless. Uh, and I do totally agree. Smaller firms can offer that because you're joining an organization, you're a larger piece of the puzzle and they really need you to step up and lead something that either they don't have or it's fledgling. Um, so I think autonomy is just.
by the smaller firms calling card in M &A.
Josh (35:23.629)
Joe, I've appreciated that you guys really are thought leaders in this space and the conferences and the webinars that you've held. um Really do a great job of exposing what's happening right now. um So what is happening right now? What trends are you seeing in 2025?
Joe Smetona (35:44.174)
at a high level there's certainly macroeconomic concerns. There's the whole tariff tantrum over the last couple months that everyone has been following. People are worried about interest rates. People worried about us heading into a recession. So I think that there's certainly some concerns out there. But maybe the part that's surprising is that I think the AAC space largely is sort of a safe haven for investors and buyers who may be worried about those trends. If you think about it, tariffs tend to impact products businesses much more. If you're a manufacturer,
or you're a clothing retailer and you buy products from China, Vietnam, Europe, another country, you're going to be far more impacted by tariffs than someone who's selling a service in the US. So I think that given that our clients are services businesses, I think there's maybe been, by investors, a of a flight quality towards services businesses. And then within the whole services businesses world,
A lot of what the AAC does is sort of mission critical. It's transportation. We can't have bridges failing. It's water. We need clean water, clean air, power to fund the latest sort of AI innovation. I think it's not that the tariffs necessarily are making engineering firms more successful. It's more, I think, highlighting how this industry is a place of resiliency in a world that's otherwise a little bit more chaotic.
Josh (37:5.795)
You know, for me, this all, everything sort of comes back to branding uh as a side point. think working with firms through a merger or some other type of ownership transition is really the most rewarding kind of branding projects that we can work on because those clients, those businesses are so engaged because they understand how mission critical it is versus somebody who's like, I'm just gonna update my colors and do a different thing here. uh
But I'm curious what the role that you see for uh sellers, what that brand value is and how that can also impact the deal.
Josh Lahre (37:46.720)
Yeah, it's a good question. uh It's interesting because certainly in the early or middle part of a deal, it feels like sometimes brand, your logo is one of the most important issues to a seller. And they talk a lot about it. And with a lot of these firms, there's a really strong legacy there. And it is important. uh Less so for the reasons they might tell you, because I think it's more personal and emotional to the individual.
That part, think, is something is maybe a bit of a red herring. But where it is true and valuable is clients, their clients, the market. When they go out, they're getting hired as ABC company. And as I just said, that matters. In the time on the other side of my mouth, I did say earlier, people hire people. And so you kind of get a little bit over your skis and recognize that you have a personal brand that matters as well in the market.
That said, firms legacy and history matter a heck of a lot, especially if you've been around for a hundred plus years, which some of our clients have. And so you can't just get rid of that brand or that logo, let's say on day one. And so that part again, is something that a good buyer, a thoughtful buyer uh really has an approach that they take. And you mentioned that Bjorn said at StandTech, well, within a year where you're going to integrate into the StandTech brand.
They may say that, but they have a very thoughtful approach and they work with that seller in terms of the timing of it and where, in when, in when and how I should say the communication with the seller's clients will be that, okay, we're now going to transition to Stantec or ABC company, but we're still here. We're still here to serve you. And so it's that communication that's absolutely critical that I think sellers have a lot of heartburn over.
but we rarely hear them come back and say, you know, I lost a bunch of clients because I sold to such and such. Frankly, you should be able to assess that before you sign a deal with the firm. You should be able to get through all that. The final thing I'll say that, kind of these stories, the anecdotes that we get in all the deals that we work on is more often than not, a seller actually comes back to the buyer before the designated date and says, you know, I'd like to transition to the brand sooner.
Josh (39:49.401)
You hate. uh
Josh Lahre (40:7.852)
because it turns out that my brand has a certain cache, but yours has a different cache as well. And I recognize that they still want to work with me, Josh or Joe or Josh, but the bigger brand, normally the larger brand, the more global brand, actually is helping me out. I'm noticing I might get more calls or it might actually give me, and I might have a different type of cache. And so it's not like you're losing your brand, it's additive. And I can't tell you how many
buyers have told us, yeah, they came back to us within a couple months and said, turns out we actually want your brand and we're ready for the transition now. ah So a bit of a reversal in terms of where you think that one's going.
Joe Smetona (40:51.798)
And two other things I would add is branding also matters as a buyer. Your reputation in the market as a buyer and acquirer is really, really important. When we sit down with our clients and we go through a list of firms that we say, hey, maybe we should approach X number of firms and here are the names and we think they could be good partners.
I think you'd be surprised how strong the feelings a lot of sellers have. So if you're someone who wants to be doing acquisitions and you want to be out there in the market, you need to really protect your brand and you need to make sure that people are happy after you've acquired them, that you're holding on to your people, that these deals are successful. And then when people leave, they have a relatively good taste in their mouth because it's small industry. People talk. And if your brand is a buyer, go south, folks aren't going to want to sell to you and you'll never really know why you just keep losing and processing.
What's going on? Why do I keep losing? I'm offering a fair price. The problem may be that your brand um may need a little bit of an upgrade as a buyer and it's not an easy thing to change but it's something I think you need to be very very sensitive to because it's easy to cause brand damage and it's hard to fix it. I think the other thing is you know when Josh was talking about integration um
I think a lot of sellers are very worried that after they sell their business, their clients are going to get spooked, right? When you call the clients and you say, gee, I'm no longer XYZ company, I'm StanTech, the clients are going to say, oh gee, you I'm going to fire you. I don't want you anymore. What I think they don't realize is that most of the time the clients are going to look at it and say, I still have the same person servicing my account that I've always worked for and liked, but...
I now have fixed the problem is that person couldn't work for me in all these geographies and they didn't provide these other services. So now I have the resources of a much larger firm behind them with the same personal touch that I've come to know, trust and love before um that actually becomes a pretty easy pitch. So I think it's something that I find sellers get very, very anxious about breaking the news to their clients, but it's normally not a big issue at all. Just like the changing of branding is something that I think a lot of them fear more than they really should be.
Joe Smetona (42:55.376)
afraid of.
Josh Lahre (42:56.704)
probably a sign that you chose the right partner. You're doing the right deal. When you go to your clients and say, we're merging with this entity, we're going to change brands eventually. And the client actually gets excited and says, you know what? This is great news. First, you're going to keep working for me? Yeah, I'll still be here. Oh, want to get all this other stuff? Wonderful. um If that's the response, then you probably made the right decision.
Josh (43:23.971)
Josh, what would you say the impacts are of the work that you're doing for the next generation of leadership for your clients?
Josh Lahre (43:32.808)
Oh boy, that's a heavy hitting question.
Josh Lahre (43:40.876)
What I think, because we also do the consulting work too. I'm thinking about what do we do on all fronts that are helping the next generation? I'll go back to our mission is to make this the most valuable industry in the world. So I truly think that the work that we're doing and others like us are doing in this industry,
Um, we'll hopefully make the next generation smarter, more aware of the options that are out there in terms of the value creation they can have internally or externally. Um, but also I think that it's, uh, it's, it's our job to make the rest of the world appreciate just how valuable the services are that AEC firms provide to the natural built environment. Uh, so, you know, how are we impacting them?
We're putting a brighter spotlight on them, making the outside world more aware of it. That may make things more valuable internally and externally, I think is our goal. But uh I'm hoping that the next generation of leadership is more appreciated than the one before them for what they do.
Josh (44:56.067)
Joe, how would you say AEC Advisors is standing out and trying to differentiate in the market?
Joe Smetona (45:3.830)
I would say I'll go back to some of the things I mentioned before. I think we're focused. We're a pure play advisory business, only focused on the AAC space. I think that just enables us to be more effective, to be more knowledgeable. And our clients, they're a bread and butter. We don't work in a bunch of other industries where we spread our attention and sort of effort across it. And you know, the other thing, it also puts pressure on us. We can't hide. Everyone in this industry knows each other.
where we have to do a good work, we have to treasure our reputation because work gets around quickly if we don't do a good job. And I think so far we've managed to maintain a good reputation. So I would say that pure play, AEC focus, I think that's one. The second thing is many of our bread and butter clients are sort of mid-sized firms.
They could have 100, 200, 500,000 people. That's very much our core sort of clientele. And what we've done is try to build out a very impressive team that's got expertise from big banks like the Goldman Sachs, the Bank of Americas, the Guggenheims, the Pro, Weinbergs, the Jeffries, et cetera. And to bring that sort of large firm competence, expertise and training to sort of the middle market, privately held businesses that are our core clients. And I think that's something that differentiates us from a lot of our smaller
competitors that we sort of invested in and brought in a lot of sort top talent to be able to bring that to bear even if a client is more of mid-sized client but still wants best in class advice and service.
Josh (46:32.995)
Is there anything that, excuse me, is there anything that you guys are doing differently this year from a marketing and business development standpoint that seems to really be standing out or gaining traction?
Joe Smetona (46:45.026)
I would say two things, know, Josh mentioned professionalization um of our clients and we're also trying to professionalize our own business. So I think from a marketing perspective, it's a little bit less about just hustling and calling people and staying in front of people. We're trying to do it in a more focused, comprehensive manner. Just part of that scaling our own business that I think is important. And then the other thing I would say is we're in a personal business. When sellers make a decision to hire an advisor to sell, it's one of the most sort of important decisions
going to make. This is something they spent 10, 20, 30, 40 years building and it's quite frankly most of the retirement savings in many cases. So the gravity of that decision is not lost on us and I think that we're trying to spend even more time developing those relationships, earning the trust, getting out, spending time with people sort of in person. I think those are sort of the two things that we're really focused on and I would say the third is just continuing to help the team beneath us, right? It's not just about the four partners at the top.
of the business, but the next generation, helping them sort of develop their own relationships and participate more in the marketing efforts, didn't order us to better serve our clients and selfishly scale our own business too.
Josh (47:58.733)
Josh, I've said many times on this show in particular and probably lost count otherwise, that video is sort of a cheat code for an industry that tends to hire people that they know, like, and trust. I think it's incredible too for conveying culture. So I'm curious, how many of your buyers are looking at the seller's corporate video? like, that a way for them to get a sample or a taste? Or are you seeing any of your...
using video differently.
Josh Lahre (48:31.092)
I think so. think the answer is yes, more or less across the board. First, I think about just what we do when we get hired. We go straight to the firm's website and try to watch videos, see who's talking. It's just the CEO up there talking and nobody else. tells you a lot about that organization. Right. And you want to see who else is on there and the topics they're speaking on. So I can only imagine that buyers are doing the same exact thing. ah
Josh (48:49.251)
Yeah.
Josh Lahre (49:1.206)
What are the first few words out of their mouth? What are they focused on? Again, who's in that video? uh That probably tells them more than anything else about the culture of that firm. ah So it's interesting. We haven't had that explicit conversation with our clients, but I know if we're doing it, I have to assume they're doing it. And vice versa. Sellers will do the same thing to the buyer, trying to figure out who they are and what do they really value.
Josh (49:27.553)
Joe, what would you like to see AEC or advisors do differently or perhaps the industry on the whole? What are some things that you'd like to see change?
Joe Smetona (49:37.966)
I think that there's been a lot of positive change in the industry recently. think historically engineers were undervalued and that's part of our mission is to help them sort of recoup some of the value that they've provided society. They were paid much lower than most other professionals. You think about attorneys, doctors, accountants, investment bankers, management consultants. They're all paid far, far, far more than engineers. I think finally that's starting to change. Not necessarily that engineer salaries have gone up that much, although they are going up, but more that people are departing.
of these firms are finally getting paid in the form of a sales price because people realize these are really valuable businesses. They're going to be around as long as sort of humans are around. They're providing sort of mission-critical services to society, making sure we drink clean water, have safe roads, can have energy to turn our lights on. What's really more important than that?
So I think that there's starting to be a realization of that, but we certainly want that to continue um and engineers to continue to hopefully, you know, close the sort of pay parity gap with other professionals. And I think that's important also for industry to recruit talent. I think we're solving some of the biggest challenges in society. Think about.
things like climate change, it means huge challenges that aren't going to be easy to solve. And to solve it, like clearly we have to continue to recruit more talent. I find a lot of CEOs, they say, Joe and Josh, you know, the work is out there, the opportunities are out there, the workers aren't. So we're hoping that all these sort of new intention and positive changes to the industry will help it recruit sort of the best and the brightest, which I think is beneficial for all of us long-term. So I'm hoping that will certainly continue. And I think AI also could play a big role. To said, there's not enough people
to do the work, well AI can certainly help, I think free up folks from a lot of the more menial basic tasks to focus on some of the higher level, more creative, more advisory type of tasks. So I think it is an opportunity.
Joe Smetona (51:29.516)
And in industry where construction projects are almost always over budget, delayed, uh cause a lot of frustration. Hopefully sort of AI is going to be a way to um design and build things more efficiently, more effectively, more resiliently, et cetera. So I think there's a lot of opportunity that we hope will come to fruition.
Josh (51:50.499)
Josh, anything you want to add there?
Josh Lahre (51:52.798)
No, think Joe covered the waterfront there. uh
Josh (51:55.961)
m Well, this is the uh time for you to look into your crystal ball here. Either of you have uh bold predictions for the future of what's coming next or what markets or trends we should be watching out for.
Joe Smetona (51:58.380)
Pun intended on the water.
Josh Lahre (52:16.692)
Um, I'll go first Joe sort of hit on it there. Uh, and it has to do with the impact of AI and technology on our space that everyone keeps talking about. We're one of the last industries to be disrupted by technology. We're still fairly antiquated in the way we do things in the engineering space and consulting space. Um, but my prediction is not that AI and digital will replace humans or suddenly we're going to start selling software.
It is what Joe just described that AI and digital will very soon replace the menial tasks of our day-to-day job in this industry. And because it will suddenly become far more efficient and less time consuming to do work, the old school way of billing time and material, right? The T and M basis upon which most firms bill their clients will no longer become a profitable endeavor because you're really spending a quarter or maybe a 10th of the time doing what you used to do.
So my kind of big prediction is that technology and AI will force us into value pricing, but not valuing the technology, not valuing the software, which I think a lot of people get hung up on. It's that it will force us to truly value ourselves. It will force us to reprice and revalue the services that we provide as an industry. so I mean, I'm hoping, I guess I'm predicting that AI and digital will force us into, to what Joe said, better pricing, better compensation.
to make us the most valuable industry in that regard.
Joe Smetona (53:45.762)
think the other sort of prediction is maybe not that original is M &A is here to stay. I think we're going to continue to see a lot of activity and that's going to create winners and losers, right? Because it creates change. So there's going to be new firms that come up that become...
leaders and then there's going to be some firms that may lag behind that haven't had as good a growth if your competitor is out there sort of eating your lunch on M &A. So I think it will kind of continue to shape up the industry landscape. And I think the other point is, that historically this industry had extremely low barriers to entry. Anyone could just take their laptop, their P license, go to their five best relationships, give me some work, have a one man, one woman shop and start a business. If what we're thinking about technology and AI becomes a bigger issue.
it's going to be expensive, you're no longer just going to be selling your labor, and if you don't have the capital or ability to sort of invest in those tools, it may be more difficult to compete. So I think historically there haven't been many advantages of scale in this business because an engineer's cost is the same whether you have one, ten, hundred, or a million, but AI and technology can change the dynamic and may give an advantage to firms that are better capitalized or have more scale or more profit to sort of reinvest in these things.
Josh (54:59.321)
Well, gents, it's been great having you on the show today and getting caught up. um Any listeners who are wondering about how to get their corporate finances straight or thinking about M &A, how can they learn more about AEC advisors and connect with each of you online?
Josh Lahre (55:15.648)
Guess go to AC advisors.com Joe. We're not on like social media. We're pretty bad. Yeah, please. We have a website that you know very well Josh and our information is on there and we hope to hear from you.
Joe Smetona (55:18.638)
Send us an email, give us a phone call, we'll respond. Don't worry.
Josh (55:19.671)
Ha ha ha.
Yeah.
Josh (55:32.901)
We'll be sure and link to all of that good stuff in the show notes and everywhere you find this show. Gentlemen, it's been a pleasure. Thanks again for being on the show. We'll talk to you next time.
Joe Smetona (55:43.374)
Thanks for the opportunity.
Josh Lahre (55:44.556)
Thanks for having us, Josh.
