Pavo kosiki welcome to acquiring minds thank you will Pavo you acquired Oakville Sight and Sound a home feeder and smart home design and installation business outside Toronto yep your search start to finish was just six months so we're gonna hear that story today and learn something about the home theater and smart home installation business but please start us off Pavo with some background on you yep so coming out of high school I had a pretty traditional background went to engineering school worked as an engineer for a couple years uh did an MBA after that after the NBA worked as a consultant corporate strategy operations from their transitioned into corporate roles in-house corporate strategy in-house operations management so running multiple factories trying to improve individual plans trying to figure out how to make operations in a large organization better okay and how how so how many years of that experience how long was this corporate life of yours so it was two years as an engineer and then about five six years of sort of the business operations corporate strategy type stuff four years as a consultant and then another three four years doing in-house the same role in-house great you discover the the concept of buying a business where does that come from and how old are you when that happens so I stumbled on it almost accidentally so I stumbled on it when I was 38 years old now I read a few Twitter threads sort of realized what the valuations are how affordable it is how accessible It Is by through Twitter literally and some of the Twitter threads the valuations they gave I didn't really believe that those would be the valuations that was even possible so I thought I'd put it to the test and logged on to Biz by cell to prove Twitter wrong and I ended up proving Twitter right and myself wrong fortuitously uh do you remember if there was a thread in particular that that inspired this uh skepticism but Intrigue on your part yeah so there was a thread by Seva Kaczynski on July 31st specifically where he laid out the purchase of a company in the low I think seven figures low millions that he was able to put five percent down it was a very well cash flowing business and that he'd make his money back within three months and then it was mailbox money after that and that just seemed too good to be true but I had some spare time so I thought I'd put it to the test by actually going through the search process log on to this by cell on August 1st and just seeing what can I do is this even possible Is it feasible and if it is phenomenal if not it was a would have been a fun sort of project yeah and happening upon the Sea of a thread so does that mean that you were generally following on Twitter or whatever you were reading about kind of entrepreneur personal finance personal Improvement stuff I mean as a corporate guy what was your um own orientation towards entrepreneurship were you bound to be an entrepreneur or if you hadn't hit that Twitter thread like you'd still be working your W-2 I know it's not called a W-2 in Canada but yeah it's close enough I know the W-2 from that sort of environment so we can refer to as W-2 for most listeners um yeah so I probably would have been but there's a thread of Entrepreneurship in my family so my father has been running a small land surveying company for 20 years now so I've been helping him with that uh doing his systems doing his internet marketing sort of trying to improve operations as well as being in the business and just summer vacations working for him so there's that entrepreneurship growing up and my wife about three years ago right at started covid started her own company as well so she's been running that company as a side hustle in addition to her W-2 so with those things it's sort of I probably would have eventually gone somehow in that direction um and not having realized that Acquisitions were a thing I probably would have done it from a side hustle perspective rather than acquiring company yeah you don't happen to remember the valuation that that cieva's thread talked about was it just a typical kind of 3x roughly 3x of cash flow I don't remember the valuation or the details they just seemed yeah that was the rough estimate but it seemed too good to be true so I figured it's worth at least prove myself wrong yeah yeah well good good for you for for doing that and being open-minded enough to not only have your mind changed but Forge ahead on this path we'll have to dig up that cever thread and link to it in the show notes okay so you're you're on Biz by cell and so Biz by cell has some traction some volume in the Canadian markets yeah it seems to it seems just another sort of filter term of Toronto Ontario Canada whatever so there's quite a few businesses there it seems to be up to date and quite good great so you go to Biz by cell and you search Toronto and so you actually so you see that what Seattle was talking about could be true and then you also see a business some businesses that you say to yourself well maybe I should buy this so take us from here into your actual search yeah so within the first few days of log on to business I sell I reach out to listings research Brokers have a pretty good response rate my understanding was that the response rate is typically not that great for companies listed on active years like that but I think I got responses to 75 or more of inquiries I reached out to even to the point of sorry the companies under Loi we're not accepting more bids so even those kinds responses I received so it was a very positive experience of yeah this seems like a good platform people are using it as I would expect marketplaces to be used and so through that I re set up conversations with a few Brokers one of the early conversations I was working from home my wife was there she's sitting off to the side arms crossed as I finish up so are you gonna tell me you're gonna acquire business because I haven't even talked to her about that I told her don't worry about it I'm just kicking the tires on this thing it's not going to happen it's absurd you're gonna have a kid in three months so what am I doing uh trying to buy business I'm just playing around don't worry about it and where was your head at at that point were you a tire kicker yeah yeah and actually and yeah take us from the the kind of the pivot in your own mind from this intellectual exercise to like wow I might really be doing this so the pivot actually came later so I'm having conversations still signing ndas and I'm still in the tire kicker phase I eventually sort of three weeks later reach out to a broker uh who happened before Oakville Sight and Sound he says I don't want to meet you by phone the seller doesn't want me by phone come by to our office uh let's have a conversation in person so I didn't know much about the company it just uh high-end home theater systems which I don't have a background in I have a friend who does have a background in that and so I call her up hey Rita I'm looking to maybe buy a company meeting with this guy you want to come along probably nothing's gonna happen to it uh come of it but it's a fun experience so she came along to that meeting as we were walking in other people walking out so he had a production line of here's how I'm gonna sell the company I'm gonna have people come in meet with them pick the best one so it was a previous potential buyer who was walking out as we were walking in met with the seller um turned out he was 44 years old he this was the fifth or sixth company that he was selling and he was looking to move on to develop build other companies but with that in mind it was his fifth company he had been running opal Sight and Sound for 20 years and those other companies were his side hustles that he spun up and spun out very quickly unrelated so this was really his baby his big project of his adult life and and so the time frame here uh Pavo is you the Sea of a thread was in July this is July of last year so this is quite recent yep and and then and where are you now that you've actually gone to see Oakville Sight and Sound what month are we in so July 31st was the thread August 1st was me first logged on to because by cell August 16th is when the seller posted it on Biz by cell August 18th is when I reached out to him and the first in-person meeting was August 25th okay all right so we're 25 days into this journey in your meeting with the seller yes now um okay you come out of this meeting with the seller you and you have brought along your friend who's in this business already who's in the business industry already so she's not in the industry she's just an audiophile knowledgeable about the industry knowledgeable about high-end speaker systems and her background is also MBA electrical engineer very smart person and so a good person to have involved in this process okay so uh the two of you leave the meeting with the seller leave this conversation um maybe there's some other buyer coming in behind you that you walk past just like the previous the previous buyers have done for you so in that case no our meeting was set up for 45 minutes it went to an hour and a half so more than doubled a lot of times we kicked it off really well with seller we were very different people but I had came out with tremendous respect for him out of that meeting and I think he was also impressed by how we were approaching things the questions we were asking so that connection was forged right in that first meeting it ran so much longer because we were so well connected yeah well this is um a common pattern and an important point that people often often emphasize is that Rapport um can make make or break a deal sounds like you had it instantly which is fortunate the what how could you have impressed him Pavo given that you are completely novice to this whole process how could you have been asking good questions I think because I was so novice to both the process and the industry and I'm generally curious so just by not having any kind of ego asking all the questions I could be being genuinely curious digging in deep into the answers he was giving I think it was just that Curiosity respect that really impressed him and he's a really smart guy and a completely different way than I am so and he also doesn't have an ego so through my questions he could see my curiosity and respect for his intelligence and his questions and me he quickly teased out my type of intelligence which you recognize being different from him and complimentary to his and what and how would you characterize his so he is a very social interpersonal leadership type intelligence as I mentioned he started up five businesses so he can recognize Market needs he can muster support behind them and I'm very much analytical so engineer background MBA that kind of structured thinking and it ended up being down the line that the reason he's looking to sell is he's taking the company as far as it can go using his leadership type now shoot from the hip type style and he didn't have access to the structured thinking systematization analysis within the company and within his tight Network to be able to sort of build the company in that direction very interesting okay so you leave this meeting and do you go home and tell your wife okay wife now now you are right I am going to buy this business what are the next things that happen uh so Aretha my friend and I are driving back talking and sort of discussing how impressed we are with him how forthright he was that it's worth continuing to pursue that we might as well put together an Loi at this point and I get home I tell my wife hey I'm going to put together an Loi in the business that it's gonna involve some of my time to go through put it together do due diligence but it's still a big jump I tell her it's the first Loi all the advice I've gotten was don't fall in love with first deal sign the LOI go through the process figure out what's wrong with the business how to improve it figure out what you don't know put together a system and then the second or third Loi is when you would typically buy so don't worry about I'm just putting in a lot together but nonetheless I'll eventually ask you to meet with the seller that my wife is obviously intelligent so I prep for that I'll eventually ask her to do some due diligence as well personal due diligence so in your mind you're characterizing this is kind of like you're going through an exercise here um you're getting you know you're going through the motions to learn the process but also you're getting that notoriously likely to fail first Loi kind of out of the way it just yeah exactly to get to your second and third deal in your in the back of your mind are you like well maybe this is the one yeah so I definitely had my mind open for the whole process and the company seemed interesting the guy uh sorry the seller Jamie was a really good person came off really genuine and honest so everything felt good about it but as you mentioned the first failure you have to go through a few failures to get a success so I was expecting to fail but keeping my mind open for a successful closure and your knowledge of you know Loi is the next step your due diligence I mean you're talking about all the steps as if you are somebody who has been listening to the podcast or maybe even done this before and you hadn't so what were you where where were you getting all this knowledge to be forging ahead after you know we're still within you know a month of having read that sea of a threat I was really making it up as I went along so I after that meeting sort of that weekend I read what is an Loi what's communicated in it and so I tell the seller hey I'm gonna put together another Y and I'm giving me until so it was I think Tuesday I responded to him on Thursday or Friday saying we're putting together an l y we'll have it to you for Monday Tuesday he responded that's great the other sellers also putting together an Loi so if you can make things quick that would be great so that weekend I spent drafting an Loi and it was a good heartfelt nice letter that I sent him on Monday to which response thank you for the LOI it's very beautiful have your broker put a formal standard Loi together and so I can easily compare the standard Lois instead of having your nice little two-page letter wait so this out this quote unquote Loi that you put together Pavo was really just a letter with an offer number in it but all the other kind of typical stuff of an Loi it did not have so it had as much as I thought it should have but it was a very on the surface it was a letter expressing my intent to purchase the business but it wasn't a formal document that would be classified as an Loi interesting and so and did you realize that you were doing something unconventional and do so intentionally or was this your own naivete I think it was the naivete I had some uh inclination that I was being naive but I didn't have a broker I didn't have any systems behind me so I was making do with the tools I had but having said that I put a lot of time and effort into the LOI so it was heartfelt and it had I think it forged the connection it strengthened the connection between me and the seller even though it wasn't what he was expecting and what would be standard and that might have actually worked to my advantage and so so he seemed to react well to the letter but he said look I need I need a formal Loi here and he directed you to whom to his broker he said yeah yeah so he was working with a brokerage firm and at the first meeting with him I met with a broker that wasn't the broker who was representing the seller but was working for the same firm so I ended up using the gentleman who introduced us as my broker who was in the same firm as the seller's broker but they were different people so you were and okay and so you give your letter to this person you and take him to represent you at least for the LOI process does he represent you for the remainder of the transaction yes oh so you were represented as a buyer that's that's unusual um I don't know so here in Canada actually bring maybe potentially a Canadian spin to it yeah um the business brokers are licensed accredited as real estate brokers they have the same forms the letter of representation was the exact same as a real estate letter representation so it might be more typical to have representation of two sides here and okay great so you see you get your letter repackaged as a proper Loi and and then then right take us from there yep uh so sorry before getting to the extra the LOI stage the seller and I had talked about sort of the terms that would go in it so pricing obviously being one of them uh I wanted to understand how he arrived at his pricing and whether it was a fair price for the business so what he did he was very forthright and open and did two and a half packs of last 36 months of SCE so sorry let me explain that a bit more clearly so the average sde for the last three years times two and a half was the price he arrived at but he also added back a few things so his own salary his partner salary and a couple other components so with that the price was very fair I felt and so on the LOI just gave him the exact price that he wanted and then the other aspects of uh the agreement sort of seller take back financing various other loans he said he's not interested in any of that he just wants a clean cash deal so no seller financing no seller financing so he presented a very fair price in order to get the terms he wanted and he attention said take it or leave it and so the LOI was for the exact price that he was asking for and you said the average from the last three years previous three years yeah and the business was growing extremely fast so it was very low three years ago and the SEO was very low three years ago and quite good in the previous year so with that he didn't take that Trend into account which I think he should have so I think I got a very very good deal and the seller could have gotten more money for the business interesting you so you think because he he was averaging the last three years and three years ago so 2020 was much lower than 2022 bringing that average number down further than it maybe than you thought was fair to your benefit right yep exactly but Pablo this feels like I mean it's it's you know people investing in their homes it feels like very much a kind of a coveted bump business what what did that am I a am I right and B did that not give you pause so that did give me pause and I was wondering was it a covet bump but the covet bump would have been reflected in the Top Line the top line was quite steady it was operating expenses that really came down uh in the last year and that was because he had brought on a lady to really manage operations for him previously it was being done willy-nilly sort of it was a good business it was making money but it wasn't being managed to the bottom line as much as to the Top Line and by bringing this lady on she cut expenses she really improved operations and improved the business great well that that's great um to see that the the growth in the bottom line is just coming from operational efficiencies and that the top line is more steady um because it's really the top line that you know obviously indicates demand for the services and for the business um the this partner that he added back the salary for is that was that partner active in the business or was it kind of just uh effectively like a dividend oh really so you were gonna have to rehire you're gonna have to replace the seller and hire some second person to be active in the business so actually a good backstory sort of on the structure so there was the seller the person I'm referring to as a seller he owned 80 of the business and the partner whose salary he added back owned 20 of the business now the main seller was the general manager and working 15 20 hours a week in the business and the junior partner was the head sales person working full-time in the business generating quotes and really the key man risk in the whole transaction okay and was that partner going to stay in the business upon a sale yeah so his intention was to stay in the business he sort of was also starting a family he wanted to de-risk his family life so he wanted to stealth his stake but he loved the business he'd been with it for eight years he's also quite young so wanted to keep working just as an employee rather than an owner well it doesn't seem like a very fair ad back then I mean that's head count that you're going to have to just retain it's going to be another expense for you just like it is for the undercurrent ownership yep so I took that into account and waited against the growth in the business and the fact that he had used the previous three fiscal years and the previous six months the business kept on growing so it should have been a trailing 36 months to use his sort of formula rather than something that was really getting quite stale and working to my advantage so by me being comfortable with the numbers I ignored the ad back and still came to a very similar number that he had listed the business for so I said okay I'm gonna have to keep the junior partner's salary but given how he evaluated the business I don't care about that it's still a good price yeah yeah his his the way he came to his valuation gave you enough kind of room that you could absorb a couple of whatever um ad backs that were not in your favor and still come out with a favorable valuation that you were comfortable with yep exactly yeah really interesting okay so you proceed you um put in this Loi this formal Loi and take us from there uh yeah so I put in the formal Loi another so big part of the LOI is the due diligence process the financing process so my understanding was that 45 to 60 days is typical for those and then financing starts after the due diligence process I presented him the 45 days for due diligence and then financing after he responds no 21 days for due diligence that should be more than enough and financing to run concurrently with that so at this point I said it's my first deal there's absolutely no way I can get due diligence done in that little amount of time but we have good rapport I'm going to go through the process learn from it but I don't expect to be able to sign off on due diligence in that little amount of time so this was kind of the first place where I thought that the deal would die because of the terms that I had to sign in the LOI so you agreed to the 21 days of due diligence but thought that it would just not kind of day 21 would come and go and you and you would be like man I'm just not even anywhere close to feeling comfortable with this yet I haven't completed my the DD I need to do exactly but let me guess 21 days was enough so as I mentioned the the seller had done this many times so as soon as we had the Loi signed off on both sides he says here is my Quickbooks login here is my CRM login here's a list of the last three years my bank statements here are my vehicle leases here is my building lease let me know if there's anything else you need so I had access to his QuickBooks I had access to the CRM I had access to his bank statements and really there was nothing else that could be needed from a company perspective so went through matched up the QuickBooks transactions with the CRM transaction with bank statements they match up quite well um and then the other part of due diligence was I had a very good opinion of the seller good impression and am I making mistake on the seller am I not seeing something about him as a person is there that became the biggest risk so most of the due diligence was spent on him now digging into his previous companies digging into the previous buyers of his other companies he had done some podcast interviews so listen through to those he was pretty involved in the community so doing sort of understanding how he's perceived in the community and there was tremendous consistency across all those things the buyers of his companies the podcast interviews his community involvement all had the exact same sort of impression that I was getting from him and the people the previous buyers of uh uh some of his other businesses did you actually speak with them yep oh wow God that's that's great kind of character diligence um for you yeah exactly and if the involvement in the community I think you mentioned like a Facebook group yeah so he runs uh sort of a pretty big 5 000 person Facebook group so I looked at his posts saw the type of people um so it's a Facebook group for fathers to help each other help the community and just build a real community on the base of that Facebook group and they had some really interesting impact of donating money to Charities really making lives better within the community and he had founded that as well so his personal Ambitions and desire to help people lined up with his desire to be very transparent and forthright in his business dealings that's great I love this Papa I mean because it's so it's like you you know you diligence the person and that that can really stir serve as kind of a stand-in for for meticulously diligencing all the other infinite details that you can because if you can really trust the the seller what they're telling you um then kind of the rest falls into place I don't mean to oversimplify or say you shouldn't do other diligence um but it kind of it's kind of a a good way to 80 20 a diligence is to is to diligence the character of the seller the but but having said that going back now to the diligence you were doing on the financials um like when you were comparing the you know the QuickBooks to his bank statements to his CRM I mean how I'm just curious how meticulous did you in fact get doing that so in retrospect I and if I was to do it again I'd probably be more meticulous than I was um but I start off by looking at the top line of QuickBooks with the top line of the CRM and the cash flows within the bank statements and they matched up on that level to within five percent so they were consistent and then I dug into a couple projects to audit them so this job number here's the bottom line value of the job is there a corresponding transaction in the QuickBooks and are there corresponding deposits in the bank and then from so the top line I audited that way the bottom line was much more difficult to audit and I don't think I did a very good job there because I couldn't match up the expenses of jobs into either QuickBooks or uh the bank statements because the number of jobs that they do they were all washed together so that was I couldn't audit that and I said that's okay because everything else matched up so well so that was something that I took on faith that the expenses were as they were presented yeah the and so in looking at the jobs and and auditing individual jobs and you know some a job shows up in the CRM and then you trace it into the the bank account to see if money was actually received for that job at that amount you did that in kind of a random sample way kind of you you looked at five or 50 of these and you kind of do it that way yeah so I took the a few of the biggest jobs and then a few random jobs of the not the biggest the now are you at all tempted to do a quality of earnings pay a third party to do a quality of earnings for you I mean this is getting realer and realer Pavo yeah no so I didn't really even know what a q of e was at that point and I didn't think I needed it I assumed it would delay the process so it didn't really even cross my mind to do that well to the point about delaying the process I will say the one if I'm if I'm you putting myself in your shoes at this point the one not red flag but cautionary flag is that he seems so eager to get the deal done and a little impatient to get it done that would strike me you know that would give me a little bit of pause did it at all to you yeah so it did and so in the LOI we were targeting uh January first close um as I mentioned there were other interested buyers and he had mentioned that one of the other buyers was targeting uh November 1st close so he asked if I could accelerate the close on my Loi which at this point I was still Tire kicking trying to learn I didn't see a problem accelerating it because I didn't expect the deal to actually go through yeah so yeah it did give me pause but I had the due diligence still to sign off on and the financing still to sign off on so the way the financing was it was almost to get out of jail free card yeah if I could get financing on my terms I could say no I want a zero percent interest rate over 20 years I couldn't get that so therefore no so I still had that as a get out of jail free card yeah yeah interesting so tell us about the the financing piece of this now um since for Canadians and non-americans who don't have an SBA um it's always a little bit less straightforward to share all the detail that you can if you would yep so uh with the buyer side broker I asked him hey I need financing do you own any people who could provide financing so he said that it would be difficult to get financing it would take some time but it's feasible so he introduced me to a couple people one was the closest equivalent to the SBA that we have which is a crown corporation uh company owned by the government which helps fund businesses but they're more focused on funding Capital asset purchases rather than business Acquisitions they do some Acquisitions they they help with that but their ability to fund the Goodwill portion of the balance sheet is extremely small so they would fund the capital asset purchase and then partner with a bank to do the the Goodwill purchase so that was One Direction I was taking and the other one was with tier One Bank in Canada we have five big Banks and they do 90 95 percent of the banking Market in the country so he introduced me someone out in one of those Banks and with the BDC the crown Corporation lender the term the interest rate was quite high that he was quoting me he was saying that it would take a long time to get done and that it probably wouldn't be feasible unless I told that gentleman thank you for your help thank you for being honest I'm speaking with this bank so I'm going to pursue that direction the tier one Bank yeah the tier One Bank and so things seem to be going well got the documentation for the bank got everything ready for them and then sorry backing up a little bit because before we got to as we're doing the banking conversation I did end up signing off on the due diligence portion um after the 21 days that we agreed on and I told him hey I'm having a little bit more delay with banking it's going to take a bit more than expected because of these conversations that we're having he said that's fine yeah the seller and I were having almost daily conversations anyway so we had good rapport so we said I see your working with banks go ahead and take the time you need so he was understanding on that regard and so I'm talking to one of the to the tier one bank and this is where the biggest snags started to happen now because they were not as responsive as I would like them to have been they knew we were on a tight timeline that we were trying to get the deal done but they were the process seemed to have ground to a halt and there was not much I could do to move it forward and so how many weeks into this are you so we signed off on the due diligence towards the end of September uh September 28th I think and so now we're halfway into October and I still don't have a firm commitment letter I just have a rough term sheet and they said that will get you the commitment letter in two weeks two weeks come by still don't have commitment letter so we're now getting into November and the seller is getting antsy because he wanted to close quite a bit before then yeah he knows I'm working to get the financing but nothing's moving forward yeah and how are you feeling you're like well I I didn't expect this deal to happen anyway so no no so by this point I fall in love with company the seller is phenomenal um when I signed off on a due diligence I really was signing off on a due diligence and was making a personal commitment yes I'm signing off on due diligence I really do want to buy this company now but if something comes up I can still back out but after the due diligent sign off I really was dying off at that point and this whole time you're still in your W-2 yes so this is all but were you working from home I was working from home okay um so that made fun conversations and stuff easy like you didn't have to go into the stairwell to be harangue the bank or whatever okay so the bank goes dark on you uh this tier one bank that I assume you don't want a name uh it doesn't matter for the Canadians out there please to say the name yeah so was the bank that was difficult to work with but yeah Bank of Montreal but I'm wondering if it how much of it it has to do with the bank itself and how much the representative working on my case yeah yeah because when I get to the end of the story I'll have this same thing was it the bank that ended up giving me the loan or was it the person I was working with who really went to bat and made it happen yeah yeah well but the people are you know all the businesses is is comprised of people as we hear time and again in our world of small businesses so I mean it should reflect on that they have a guy there who's wasn't doing a good job for you so you you you're getting things are getting the pressure is building bmo's gone dark on you and so you say to yourself I gotta I gotta start from scratch with another bank I got to get something else going because this doesn't look like is gonna follow through yeah and so part of the reason why I was just single sourcing it I was in conversation with the seller he had done this before he had closed transactions before and he had had good experiences with so he was saying they really are the best bank don't bother reaching out to the other ones because they've gone financing on a couple of my deals and they were really good with it ah so the seller was kind of guiding it as well saying that this really is the direction you should go ah interesting well and and that is a good important point to make to people that that there have been entrepreneurs that you namely your seller uh that you have heard really good things about from so um also to to be to give a balanced perspective important to mention that great um okay sorry taking a bit of a bigger picture rather than digging down here I think the big lesson here is to not put your eggs into one basket in terms of any aspect of the deal and the financing is so critical that if it's possible sort of diversify the risk and pursue multiple options in case one does fall through yeah yeah no for sure okay so so tell us about what happens with the Second Bank yeah So eventually we give up the deal is not going to happen with the interest rate hike happened um it made it more difficult to get financing they're not being responsive we just call eventually resign ourselves to bmo's not going to do it so we reach out to another bank RBC and get introduced through connections to one of their account Representatives this was early December at this point and RBC is the bank through which the company has their accounts it's off the bank through which I have my personal accounts so there was good relationships with them but they're not my impression was that they weren't a good commercial lender or a small business lender nonetheless I reach out to an account rep or get connected with an account rep she is extremely responsive now it's here's the checklist of things that you need I know you're on a tight timeline I know you want to get it done before Christmas as I said it's early December so I sent her all the documentation within a few days she responds okay I got my uh risk team on it they have a few questions jump on calls now I get a term sheet quickly get a letter within I think three weeks of my first contact with her so that process went so smoothly we got the commitment before Christmas and okay I guess I got the money I got the I'm comfortable with the deal I had a lawyer engaged earlier on but had the sale agreement drafted even at risk sort of before I had finding signed off just to keep the seller engaged and show him that yes I really want to get the deal done that even though financing is not coming through I'm putting more money out to get the legal documents drafted to actually be able to close as soon as we get financing in whatever form it is so well and it sounds like you've also learned your lesson that you should be doing things in parallel anyway yeah to just to keep all kind of all channels moving forward yeah exactly so we had our Shield share approaches agreement got that updated mid-December towards Christmas and had everyone sign off I think the week before Christmas before all his employees everyone was starting to go away on vacation we got it signed off and it's actually happening great Christmas uh Christmas gift uh circling back a few minutes ago you said that the Bro the broker your buyer your representative said I think it's going to be hard to finance this acquisition um but obviously you're making it happen what um can you give us the terms of your loan and and given that there's no SBA like what would you tell other business buyers I mean despite your bad experience with with it sounds like in fact if you had just you know called RBC first it kind of would have been easy or pretty straightforward um it is do you think it could be for other Canadians or were you bringing a lot of your own money to the table so kind of Flesh all that out for us um yeah so actually a bit of the structure of the deal would help in order to explain sort of the financing aspect of it so the deal was structured at a purchase price for the company plus working capital adjustments so there was a Target working capital of zero anything above that I would fund on top of the agreed upon purchase price and so what the bank saw was the purchase price didn't see any of the working capital and their policy was funding up to 76 percent of the company purchase price so it's a reasonable amount the rest I funded through myself through family and my friend harith who came on that initial conversation I brought her in as a partner as well and so you have also now done the research figured out what Fair like a what a fair piece of equity is for your friends and family contributions to the to the to the the equity uh so we just did it pro rata whatever Capital you put in that's how much Equity you get now my benefit would be having a good fun interesting job and I did put in most of the equity for the purchase now friends and family so they put in some and they were more sort of bored and advisory seats with an equity injection so we just did a pro rat I didn't do any research of 2 and 20 or whatever might be fair it's just keep it honest and uh simple equal yeah and I don't think that we've talked about the the numbers of this business the size of the business can you give us a sense of uh of Revenue and of sde yeah so revenue is lower mid seven figures sde was lower seven figures lower seven figures it was above seven figures yep and fantastic ebitda was upper six figures mid upper six figures and so the purchase price valuation the way we arrived at it was based on sde but for my financial modeling and Debt Service I was using Evita and really that net income because there was no depreciation no noteworthy depreciation so it was based off of taxable open income rather than the SD which was more nebulous than I didn't feel comfortable with some aspects of it but sort of doing the modeling on the true net income the deal pestled out and so if ebit does high six in in the high six range and he wanted two and a half times for it so this acquisition was somewhere between two and three million yep great and so you and your wife had saved a good chunk of change to be able to to to bring a sizable part of the equity to the to the deal where you give us now just speaking personally give us a sense of how much risk you're taking here in terms of of putting your nest egg into this so my wife had a huge windfall her company that was a privately owned company sold itself for a very generous amount and the owners of that company were very generous to the employees so we had lucked in to a significant amount of money because of that transaction that she was heavily involved in she was quite senior in the company she had been with it a long time so we got this injection of money that we weren't expecting that we didn't know what to do with so the biggest conversation was hey wife uh I know you got this big bonus recently can I use it to buy a company it was hey by the way wife I'm I'm thinking about buying a business oh and by the way wife can you uh can you stroke the check for me yeah and thank you also for giving me the child in this whole process uh yeah right you you glossed over that before when was the due date no the child was born on October 2nd October 2nd well congratulations man and how's that going good fine it's number three so this is another one deal yeah well uh let's all applaud your wife here because uh yeah she's yeah this this came fast and Fast at her yeah so sorry going back to how much we put in so we put a significant amount of our personal net worth liquid net worth yeah into this yeah but given the numbers given that were still relatively young now we still have Runway to sort of build up our retirement if things go poorly yeah and the other aspect in Canada we have pretty generous maternity leave policy Social Services madly policies so yep she's currently on maternity leave from her business from her company running her side hustle as a full-time job I talked to my boss eventually and sort of my intent was since we have a child I'm also entitled to a year and a half leave unpaid not that without any benefits but my W-2 is secure in case this goes south so I knew that interesting I could go on paternity leave run this business and have if something really goes bad a way of going back to my W-2 as a record plan so are you're still formal you're still formally employed I'm still formally employed my boss now knows that I've acquired company and knows I probably won't be coming back but I have the fallback plan of interesting something really bad happens I'm formally employed and can go back yeah interesting Pablo I mean you've addressed the risk in many different ways yeah um but still I'm struck that you know by your own admission you are by your own self-description you are an analytical engineering kind of thinker and yet this story is one of of a lot taking a really a big risk and and I mean not only just the capital involved but how quickly it all just happened like you went from a W-2 guy to like this on this accelerated path to like buying a business and and changing your entire career trajectory uh in a matter of months you're you're self-teaching all the time you're you're not winging it but you're moving really quick um so anyway I'm just it feels like there's a bit of a contradiction in there somewhere so there is but I don't think there necessarily is so a good quote I like is taking risks where if you're right now you come off really well you become wealthy if you're wrong you don't go to zero and yeah I think we had that go to zero portion addressed uh through sort of the backup plan of having a W-2 in case the company goes to zero we still have Revenue my wife still has her W-2 that she can go back to after Matt leave so the go to zero was addressed with a really interesting upside both from a personal uh just lifestyle of being able to run a business being Your Own Boss working with really cool people uh and then the wealth side also there's a really good potential to make good money running a company so both those upsides far out and the likelihood of achieving the upside far outweighed the downside and the unlikely situation of us hitting the downside so it was cool well go ahead no no please no so that kind of risk weighted analysis I think I was comfortable with and the stats I think are something like five or ten percent or fewer SBA Loans going to default or have trouble being paid back I imagined it would be similar here and especially given the numbers and the commitment of the seller and the junior partner to the company would decrease the likelihood of failure because of how vested those two individuals are were how I perceive them to be and how they continue to be invested in the success of the company the the only other kind of screaming detail here in terms of protecting your downside which I failed to ask earlier in the terms of the loan is of course the personal guarantee personal guarantees in the states are attached to every SBA loan or SBA 702 when you're buying a business pretty much so so if you if the business were to just go through some horrible calamitous event you'd still be on the hook for the 76 percent of the two and a half million or whatever it was that you um that you borrowed to to buy the business correct that could you know completely break you financially so that that still seems like a pretty high risk yeah so there was a financial net worth go to zero risk but my earning potential and my wife's earning potential would still be there so in the absolute worst case it would be declare bankruptcy and start our Life Anew but the risk of that happening I think is so low that we were willing to absorb it there's some risks that we have to absorb and we said the likelihood is so low and we won't die we'll still be able to raise our kids still be able to live a good life even if we have to declare bankruptcy yeah and indeed have jobs you have a job waiting for you yeah exactly actually cool that's really that's really interesting Pablo good good deal um literally a good deal okay so let's just wrap the story of buying a business so it's around Christmas time and it all comes together it comes together finish that out for us and then I just want to learn a little bit about the business itself so finish out the story of the transaction yeah so we signed this share purchase agreement um right before Christmas we spend Christmas going over working capital adjustments because I mentioned it's purchase price plus and you're working capital so inventory counts project status updates at this point we've told the key employees that this is happening the office employees whose help we need to do the working capital adjustments so we spent we spend Christmas break going through that in detail how much inventory is there what's the actual purchase price going to be and we had a Target number in mind the surprise there was it actually came out to a little bit higher than we're expecting so I had budgeted for the purchase of the business itself plus some number of working capital and I talked to the seller hey I might not have the budget to buy all this working capital what can we do so we had a side agreement for a loan from the salary he said he didn't want a loan but for this he said okay I'll loan you money for the working capital if needed in order to be able to close the deal events we didn't need it we were just under what we could afford so got that done uh started going through the lawyers getting the final documentation to lawyers to Banks and the seller had a vacation booked for January 6th we're going to close on January 3rd and there were a few delays which pushed the closing into January 9th so he went on vacation two days before closing and so he closed he closed from vacation yeah it's one of the big risks that I hear is the seller disappears right after deal closed and then how do you run a business that you're just starting to get into and exactly in this case it was phenomenal I went in I sat I observed and the business just kept honoring itself without the seller there so great yeah and that was the deal great uh okay well that's that's really exciting that's really just here we are on February we're recording on February 27th so this is just you know a month and three weeks ago correct about yep yep okay uh so how how's it going yeah let's let's start there how has the transition Ben has it continued running itself or is it a little bit uh you know there can be a honeymoon period on transitions how you how are things here at day whatever this is 50 or 60. so things are going extremely well and you mentioned the honeymoon period and I'm wondering is it a honeymoon period or are things actually is this a steady state are things going to be moving this low and I can really focus on improving the business working on the business instead of in the business and I think given how restructured I'll be able to be working on the business because throughout the process the seller realized that he's been working on this for 20 years the reason he's selling is he couldn't take the business further because he doesn't have the systems thinking he is good at leading people and generating business but building the systems that enable Revenue growth he's not interested in that and not good at that he saw that I am good at that so he is now an employee of the company he's my general manager and works for me yeah so let's get into that that comes with its own risks um so much of it is very Case by case depending on the personality of the seller the Rapport you have with the seller how capable emotionally the seller is uh to in in terms of letting go of the rains and really seeing that they're no longer the owner or boss you you know the the new guy is you um so so how's I know it's early days but how's that feeling and how did you assess the risk of um too many cooks in the kitchen so I'm still trying to figure out how it's gonna go so far it's going quite well he is acting like an owner in the good sense of the word and recognizing that he's not so he's making decisions with the best interest in the company in mind being extremely meticulous and what he does so he's very much involved and still acting like an owner but recognizing that I am and deferring to me with decisions and this goes back to his character as an individual and being mature and recognizing that he's no longer the owner I want him to act like an owner but also accept that he's not which he is doing a phenomenal job of great well that's very optimistic and what about the other employees are they kind of like who do I who do I report to Who Do you know how do I you know who he's no longer my boss but he's still here and he's still kind of above me on the word chart yep so that's something that's on me and him more on me to really lay out and make clear because he's been on the lip company for 20 years the employees still see him as the general manager and it's more who am I this new guy coming in and I have the right to change things that's the legal right to do what I want but not the moral right to do so so how do I lead the employees in order to have them see me as a good owner and boss while respecting him so this is one of the struggles I'm playing around with right now yeah yeah well that that'll be really interesting to check in with you in six and nine months to to see how that's unfolded um the you have you you've said now a couple of times about your complimentary leadership abilities his as kind of sales and kind of social social uh intelligence for lack of a better term um and yours but lacking systems thinking in you as an engineer probably very much a systems thinker so do you see uh any obvious systems that you can build right now at day 55 in this business that can take it to the next level what what are um that you could share with us yeah yeah so the biggest one is a way of seeing what the company position is going to be three six months into the future most of our projects are or many of our projects are three six months long so we should know what we're going to be doing in three or six months but we don't we don't have a way of seeing what our technician utilization is going to be into the future what are inventory needs are going to be we're playing it by gut feel of do we need to hire another technician do we have insufficient work and do we need to sort of Drive Revenue more aggressively but we don't have a way of saying we're really going to be slow in the summer we really need to start working on it so I think that's the biggest system that needs to be put in place on relative short order yeah for sure that makes that makes sense and and I suspect you'll be able to unlock quite a bit of value by by layering that in there um Pablo I want to close with again here kind of hearing about the business so we've been so in the weeds of the deal so a reminder this is a this is a home theater uh and smart home installation and design and installation business so um you know wealthier customers who are spending a good amount of money on you know putting in a home theater or and or a smart home I think you told me in our pre-call that you know a twenty thousand dollar sale is not uncommon and you'll have even six figure sales at times correct so far yeah yeah um and so tell us about so so a couple questions first of all so is does that does this qualify as a retail business because you have a showroom or a like a retail location but it's not retail in the sense that like it's these are very high ticket sales yeah um and it's also and so kind of address that but also the the it's a very much a project-based business and in the world of search project-based businesses are notoriously hard to finance and you know not as not as predictable and and so let's start there yeah and address that stuff for me yeah so I'm still trying to classify really what type of business it is in my mind most of our Revenue comes from product sales so TVs speakers controllers for Smart Homes but we sell those products through the services side so what enables us to sell is projects where we go in to a customer's home and actually install the TVs the speakers the whole home automation so it's this really interesting blend of retail margins driven by skilled trades and the other interesting aspect of the business is the flow of a project so we make a sale uh customer needs three TVs this many speakers a controller for the whole thing and only then do we purchase product so we're our retail business with very minimal inventory yeah because it's so custom so from that perspective it's interesting and then from the technician side our technicians are a very eclectic mix of skills because we have to be able to do construction do pre-wiring do some drywalling we have to be able to mount TVs we have to be able to wire it all up so some electrician type skills we have to be able to program the systems to control everything so networking programming this eclectic mix of skills is a very unique thing to find in individuals and one of the biggest limiting factors for us to be able to grow we need to find the technicians who are able to install the products with these skills that they would need to get yeah yeah and you touched on the financing part of it the Project based versus recurring Revenue so most of our business is Project based it's big projects and to me the bank didn't appreciate that it's a project-based business rather than a rep recurring Revenue based business so they didn't give me a hard time about that at all even though I could have expected them to so they didn't ask any questions around that oh well but even in your own mind in terms of you know choosing a business to buy were you at all bothered nervous about the fact that it's Project based especially let me add in the obvious detail that this is a consumer uh discretionary spend a big discretionary spend by consumers and as we you know peer into 2023 and 2024 with everybody talking recession you worry that this is exactly the sort of thing that that a consumer would decide I'll do that I'll do that next year rather than now yep so there are a few ways where I mitigated that risk that you just described or so that discomfort one is that the customers are even though it's Project based it's recurring customers we have good relations with each of our customers we know their systems when they buy TV it breaks in eight years they come back to us rather than going to Best Buy to buy the replacement TV if they need their system updated they come to us so it's a project with sort of an eight ten year recurrence cycle and that was visible in the due diligence and sort of the projects the CRM so that was one thing I looked at the other thing is we do have some recurring revenue and we're trying to build out so many of our customers are on service plans so they pay us a fixed monthly fee and they get next day service they get accelerated service they get in-depth monitoring of their systems make sure that everything's working correctly so there's a bit of a recurring Revenue portion there and then we're also building out security so we install the cameras the access the glass break sensors and then we monitor the customer's home security so that's also a recurring revenue and once again ties the customers more deeply with us because now we're servicing their system or monitoring it's very much a close relationships with customers so those aspects mitigate the project-based style of work that we do you know as I hear you talk this may be fanciful but I you know it it starts to feel like as homes become more computerized with these various systems that in the same way that you know plumbing and HVAC and electrical are just three buckets of needs that every home has you could imagine a future where there's this new fourth bucket of kind of the home network the home electronics the home security system uh and you're we're gonna all need firms to manage or and or at least technicians to help us when there's problems or hopefully to manage hopefully for you hope to actually manage it on a recurring basis yeah exactly and that's the other aspect of the business that no sort of I spent effort diligencing out early on is what does the industry look like the company is doing well the seller has huge integrity and what's the direction of the industry and as you mentioned it's growing right now we're in very high-end homes custom builds now really wealthy individuals eventually that's going to move down Market most people most homes are going to be automated in this way so there's this huge pool of untapped potential Market that can eventually be addressed which decreases the risk of the transaction since the market has grown so quickly and makes it more interesting for me as an operator to how do we help these customers how do we accelerate adoption into sort of the main middle class Market customers and in terms of the split if there if if there even is a split maybe it's all very Blended between home theater and Smart Home is do you see those as kind of two different business lines first of all and and if so which which of the two is the larger so the home theater is quite small it we don't do that many home theater projects we do maybe 10 or 15 per year it's really the home automation the whole home integration smart home aspect that is much bigger and the split there is more between new builds so you're building a brand new custom home you want it completely automated versus a retrofit and retrofit can be anything from just putting a single room home entertainment system all the way to re-running cable through existing drywall and renovating that existing house for Smart Homes and so what's what's where is the larger business in in the what did you call it the retrofits versus the new builds it's quite evenly split 50 50. it's pretty close to 50 50. okay so really the the growth of this business the the potential here is in no home automation the the home theater stuff um is part of it but maybe a diminishing percentage-wise a diminishing piece of it over time yeah because the home theater you need a dedicated room of a set footprint and the number of people who are able to afford that isn't going to grow very quickly just from the square footage perspective the whole automation is going to become eventually cheaper consumers are going to be able to afford it more more people are going to see the value of it so that part is definitely the part that's growing and gonna grow and on the home automation stuff are are the systems that you're putting in are they all the consumer brands that we've heard of the you know Googles and Alexa's and rings are they differ are they at a different level and brand names that I didn't just name no so we don't do any of that unless a customer specifically asks for one of those pieces to be added on to an existing system but the brands we work with are Crestron and control four which are on the cusp between consumer or commercial so they can also run board rooms for offices automate Office Buildings and sort of the homes we play in are sort of on the cusp of that and so yeah I'm here what I'm hearing is that you have very you have very fancy customers I mean these people have pretty are asking for pretty sophisticated systems and what I assume are pretty fancy places yeah now so not all of our customers all the biggest projects obviously if you're spending a hundred thousand dollars on automating your home you have to have some sort of money but their customers who just want a nice home entertainment system so a surround sound with a TV nicely hidden wires so the quality of the work that they want in a nice discreet room we also have those customers so more typical Main Street customers also make up a good portion of our client base Apollo going back to expansion so you you do so you do have a showroom yep where people come in and test all the various equipment um is one in terms of geography is that an expansion um uh a possibility so you have this one showroom by the way actually tell people I had to Google um Maps where uh Oak uh Oakville yeah thank you Oakville is so it looks like it's about 40 minutes south of Toronto so is that I assume that's still considered the kind of the Toronto metropolitan area yeah yeah um so if you were to put you know another a second location on the north side of Toronto is that is that a way to expand the business or is this not really because it's kind of this kind of design installation retail quasi retail hybrid business is that are the actual retail Footprints not important are they important I think the retail is not that important in our showroom we have three TVs on display we have a few speakers and we have a home theater mock-up but the reason for the home theater mock-up isn't so much for customers it's for us to practice now home theaters on how to build how to troubleshoot how to make them better so it's really an internal facing showroom workshop and I have not seen a single customer walk into our home theater since I've been working there so it's really not about the retail presence it's about a concerted effort to sell into Toronto most of our business is in Oakville sort of West South of Toronto but that's by choice we just that's where our employees live that's where our existing sales efforts have focused on I myself live in Toronto proper so I've been telling the team everyone that I eventually want to pull more business toward Toronto because that's where the people live that's where there's a significant amount of wealth and potential customers so the geographic expansion is there but it won't entail a footprint expansion and on the growth the other interesting aspect is so we do a lot of electrical work we run cable for an external Observer we look like electricians and a lot of what we do but we don't have an electrician license so we'll often be running cable alongside another Tradesman who's also running cable so that's a no-brainer expansion to how do we get an electrician license be able to do everything electrical in a home instead of just automation part of it mm-hmm excellent Pavo what would you say to other Canadian Searchers anything that I know a lot of the differences are just going to be about financing between my typical guests and a Canadian guest but is there anything else that you might tell the Canadian audience so I think with the financing it's a little bit more difficult here but that's reflected in the transaction prices I think the prices here in general are a little bit lower than they are in the states so that sort of to encourage people to really consider buying because it's more difficult but you're compensated for that difficulty through the lower price that you pay and I'll take that trade that's an excellent point but in terms of other idiosyncrasies I don't think there really are that many the markets the cultures everything is similar enough that it's going to be more about the person you're interacting with than about where you're doing that interaction what about just the kind of um culture where you know I mean even here in the states like most people don't know about buying a business so a lot of my a lot of my guests uh and the listeners will be the only person they know embarking on this path so probably even maybe more so in Canada um although it sounds like you surrounded yourself with a lot of people who didn't think this was weird they all thought it was weird they all thought I was crazy okay okay they just um humored me and humored my that sort of until it was too late yeah until it was too late okay all right um anything I just Canadian themed or otherwise that I failed to ask um no but in terms of encouraging people that you had a guess on your show a few months ago Frazier Vol and yeah after that Now podcast episode aired I messaged him I've had coffee with him his acquisition is going well things are going well with him so I want to sort of pay that forward and if any of your listeners want to reach out to me more than happy to jump on a call discuss either industry process financing uh having a child through a process which Frasier Bowl also did so we had that connection um so more than happy to sort of pay that forward and help in any way I can yeah I appreciate that Pablo thank you and um and just to add on to that I I keep circling back to the Canadian aspect here but for non-canadians don't think that if you know the the pavos you know only worth talking to if you're if you're another Canadian I mean so so much of this is actually um as you just said Pablo similar between the States and Canada so um so reach out to to Pavo Americans um what's the best yeah and yeah yep so just to really encourage people I believe I got extremely lucky in my search it was quick the people I dealt with were phenomenal so I don't want to hog all that luck I want to sort of share and sort of somehow make up for having been so lucky and by having conversations with potential Searchers with anyone else that's how I feel I can sort of pay my luck forward and give it a broader reach lovely lovely what how do you prefer people reach out Papa LinkedIn you know LinkedIn or email would be the best okay so I'll give you those to put in the show notes exactly that'll work well sir this has been great congratulations uh I love how your story unfolded not only the the how quickly it moved but I just it's it's just amusing how it was all kind of an intellectual exercise until it wasn't and here you are the owner of the business yeah thank you very good sir thank you thanks for having me all right until next time thank you I hope you enjoyed that interview make sure you subscribe to the acquiring minds Channel below we are now publishing twice a week so so tons of new interviews and stories to come stories that will help you along your own path to acquiring a business