Nitin Khanna, CFA - President N3 Business Advisors

Welcome to another CEO Wisdom Pod. We have Nitin Khanna with us. Nitin is a CFA. He masters the business of construction, right? He's the president of Entry Business Advisors. He's been doing that since quite some time, 25 years. It's an M&A advisory firm based in Ontario, and they assist owners of construction companies that purchase and sell their business. So Nitin, welcome to Pod. Tell us a bit more about yourself and what you've been up to.

Thank you, Charles. Thank you for having me on the show. So, Charles, we are the leading M&A advisory firm based out of Canada, focused in the construction industry. And what we do is we specialize in working with construction company owners with preparing their businesses for sale and eventually help them sell their business. So be it an HVAC business, electrical contracting, roofing contracting, general contractor, home builder, construction equipment business, we say anything which touches construction somewhere, we work with those folks to help them prepare their business for sale and help them sell the business.

How did you get into this, right? Like construction business, we've talked that it's a big industry in Canada and a bunch of places in the world. How did you get the idea to launch your firm 25 years ago?

So Charles, sorry, so it was started in 2010, so almost 16 years ago now.

Yeah, 15.

And so a bit about myself, I am a hustler of a person. So I started my first company when I was 15 years old. It was an IT training business. I built it and I ran a very successful business. Around 300 students used to come to my coaching center to learn to get IT training. Then I moved to Canada in 2001, and for the first 10 years or so, I worked in the corporate sector. I worked with one of some of the largest construction companies in the world. One of those was Carillion Construction, which was somewhere around $5 billion company. Then I worked with Aecon Construction, which is Canadian household name. It's a publicly traded construction company. And then following which, I worked with a private equity firm where I managed somewhere around $600-700 million of assets. And we were dealing with the small contractors all the time when I was working with the private equity. So during that 10-year period, you know, I bumped into a lot of construction companies. I myself learned how the construction— large construction companies operate. And I realized there was a huge gap between how the large companies work and how the smaller subcontractors operate. Right? They all work really hard, but then, you know, in most cases what we found was the small contracting companies, they are typically built as as a as the as a job, as a business owner being the business itself. Right? So I identified the gap. I also being a small business owner myself, I connected with those folks and I said, "You know what? That's the right opportunity for me to to add some value to their business." to help them and to do something which I love to do, work with the small business owners. So that was a long answer to your short question.

No, it's good. I like it. But there were other choices, right? Like, have you just worked with mostly construction businesses back then? Was it a conscious decision or was mostly like life throwing this at you?

I would say it's a mix of both. So when I left my private equity world, I started this M&A advisory. So, you know, I had to pay my bills, I had to take care of my family, and I went door to door. As I said, I'm a hustler. So I went door to door knocking on people's doors, asking them if they want to sell a business. So initially I did work with some other companies, other businesses as well, which were not construction. But then it was also very natural for me to come back to the construction space because that's where I had all the contacts, I had the knowledge base and so on. And I wouldn't say it was life throwing things at me. It was just also more of a calculated decision that this is the space where I can connect with and I want to stick to it. We also built the business with the philosophy, you know, do one thing and do it right. We don't want to go out and say, okay, we can do anything in the world. We say we are specialists and we believe in that statement. So we specialize in the construction space, right? I'm sure there is a, there's a reason why Microsoft is not selling groceries out there. They believe in specializing in certain things.

And ultimately there are big construction companies that are growing through acquisition. Is that the interest? Like me, as a small guy, I have a small construction company, right? Like I get acquired by these guys later on. Um, you work on both sides, right? Like, but I guess that's how you scale truly as a construction company, which is capped, right, by the market, by the nature of the, the trade itself. Like, what do you have to say about that?

Yeah, so this— it's all over the map, Charles. I will tell you, there's a lot of consolidation going on in the industry right now. So that definitely larger companies are acquiring smaller companies, and smaller companies are acquiring micro-sized companies. companies and so on. But then, you know, there is also people who are the private equity firms. There are— there's a huge roll-up going, roll-up activity going on in the industry, right? There are companies out there from US coming to Canada and saying, okay, look, we, we have a platform business in US and we are looking to get a foothold in American Canadian market. So they— those are the guys who are coming in, right? Then there are, uh, in Canada, as you know, the country is built with immigrants. And there is a lot of new immigrants are coming to the country with sometimes with money from overseas, and they're saying, look, I don't want to do a job, I have money, I have experience in my home country, and I'm going to acquire the business. So those are the kind of buyers who are like buying the businesses too. Then, you know, there is an electrical contractor who says we have the, we have the client base, um, in, in the electrical for the electrical clients, and we would like to offer them the HVAC services. So they go out and buy an HVAC company, right? Or one HVAC company would say, okay, I am in this vicinity, I'm in this neighborhood, I want to expand into another neighborhood. So they would go buy another company. So there's all sorts of buyers out there. That's where we as advisors, we want to make sure that we find the right fit for the kind of business we are assisting.

Interesting. How many of these deals can you do a year, buyer side and seller side?

Quite a bit.

So are you alone or do you have a team? Like, because I mean, if you do like more than 10, that's a lot of work, right?

Oh, absolutely. Absolutely. I don't think anybody can even do 10 deals a year if they are doing the right things. Right. It's a lot of work involved in putting a deal together. So we have, to answer to your question, we have a team of around 13 people in our office. So including some of the marketing department, the senior advisors, junior advisors, the office admin staff. So we are a team of 13 people and we are growing. We are growing. Until 5 years ago, I was just by myself and our business has grown in the last 5 years significantly as well.

Interesting. How have you been using AI in your business in the last couple of years?

Not enough, but yes, we are using, we are embracing the technology. We do use it to prepare our marketing packages. We do embrace AI to review the documents. We do embrace AI to manage our CRMs. And so we are, we are AI-friendly business. I still see there is a lot more opportunity, and I don't think we have used it as much as we should.

And at what level do you use it precisely? To analyze the deal? For, for what exactly?

So as I mentioned, we would do to prepare our documents, the presentations, the marketing packages, to manage our CRM. Sometimes to source for the leads and so on, to source, to screen the buyers, vet the buyers, and so on too.

And why not like an engine that would be sort of a CRM and you would know like which construction companies are about to sell, right? Like based on signals.

We are slowly using it. Right. I don't think we don't have it, to be honest. We don't have a dedicated staff at this point to say, okay, look, this is how you should be doing. But we are looking into those options. But yes, I do know there, there are those options out there available, and, and we are looking into them.

Yeah, and a matchmaking backend, right, like, uh, would potentially give you the value of this company at this very time, like the stock market, and then potential buyers here, and the AI could just Pair them together and you could reap the back end of that. I think that that'd be pretty cool. How many of these construction deals happen in Canada on a yearly basis? What's the TAM of that? Are we talking about 50 construction companies selling themselves? Hundreds? Hundreds? What's the total addressable market there?

So, Charles, this small business market is very opaque. There's no publicly available information on those because all the deals are done confidentially. I completed one transaction almost 15 years ago, and if you go to their website today, I'm surprised it still says the owner of the business, the same owner who sold the business 15 years ago. They still don't want to disclose it to the public that that person actually has sold the business. And the person who bought the business shows as VP of sales or something like that, right? So the, the small business market, the M&A market in small businesses, it's very opaque, right? That, to be honest, I can, I can tell you some brief or some approximate numbers. How accurate those are, I don't think anybody can, you know, say with the conviction that those are the exact numbers out there. It's not like real estate where any transaction happens and the data gets showed on the MLS or something that, but it would be hundreds. I would say it's not, it's not 50 or 60. It would be somewhere in hundreds.

And what's the average transaction value if we stick to small, right? Which most construction companies, maybe 10, 20, 30 employees. Are we talking about a couple millions?

Our sweet spot is a company at the minimum, $1 million in enterprise value. And up to say $25 million in enterprise value. That's the sweet spot we have. Our typical transaction is anywhere between $3 to $10 million, sorry, $4 or $5 to $10 million in enterprise value. I'm not talking about the revenue.

Again, you're saying this small construction company with like 10 employees would be making at least $1 million a year?

Oh, should be more. Okay.

And is it—

sorry, when you say making a year, we're talking about revenue or the profit? Revenue.

Yeah, revenue.

Oh, yes, absolutely. With 10 employees, you should be doing more than a million. If you're not, if you're only doing a million a year, chances are you're losing money. You're a loss-making business.

Yeah. And it's mostly in the residential sector, right? So people building houses for normal people, right?

No, no. We work with commercial construction companies. We work with the residential construction companies. So it could be all over— somebody who is just a kitchen designer, or somebody who builds the bridges, somebody who builds the schools and, you know, highways and so on. So it's, it's construction— is we say anything which touches construction, we can help them.

But it's mostly residential is what I'm saying, like 80% of their business is residential, right?

Um, I wouldn't say. I think there is more commercial. I mean, it's not, not, uh, I would say maybe, uh, perhaps 50/50, I would call it.

Got it. And commercial is way more interesting than residential most of the time? There's less competition and it's— you can charge higher prices, people pay more promptly. Uh, what's the difference between the 2 markets?

Both have their own nuances, right? If you're dealing with, just to throw an example here. So if you're dealing with a large construction company, right? The challenges in most cases those guys are gonna have is they are dealing with larger clients who don't pay you on time, right? So you've got to deploy a much higher amount of working capital to run that kind of business. Chances are if you're dealing with the larger— in the commercial space, you're dealing with the larger clients, chances are you might only have 10, 15 clients, of which 2 of your top clients would make up 50% of your revenue. So you are going to deal with the customer concentration risk, right? So I'm not saying all companies are built like that, but that is a— there's a high chance that those companies will have to deal with those issues. Now, on the residential side, it has its own nuance, right? Its own challenges. Projects are typically smaller. You're dealing with, you know, a new client all the time. You're dealing with, uh, you know, my kitchen drawer doesn't close properly, right? A housewife doesn't like the way kitchen was designed versus somebody else in the house, right? So it's got its own nuances there. But on the residential side, chances are you don't have to deploy as much working capital in the business. You know, you could have more— you could collect some deposits before even the project starts.

And what is the typical scenario of someone that wants to sell their construction company? Is this their Boomers, they're aging and they want to exit, they want to retire. Is that like the 80% of what you deal with?

Somewhere close, I would say. But, you know, I got surprised, and you'll be surprised to hear that I've sold businesses to people who are 40 years old, right? I share the story with many people, you know, I think 7, 8 years ago, it was a fire protection company. We were we were working with, and it's a husband-wife team that came to me. We did our business assessment and they were somewhere in their early 40s, like 41, 42. And I'm like, people start business when they're 42, 43. You're selling a business at 41, 42. And they're like, we both drive sports cars. We started this company when we were 18. We got a cottage, we got enough money out there. We got We, you know, enough retained earnings in our business, and we've been doing this for 22 years. We're done. We're tired. We just don't have the passion we used to have for this business. The business has done very well for us. So, you know, when I looked at them, I'm like, what, 42? Why are you looking to sell? Something is wrong with the business. But they have a genuine reason why they wanted to sell. You know, they were just— they were exhausted, and they were— they just lost the passion. After 22 years, they wanted a change in their life.

Right. And what's the profile of the acquirer? Is it, um, is it PE-owned most of the time, private equity-owned, and they just want to hyperscale and return money to the investors? Uh, what's the profile of someone that wants to acquire a bunch of these construction companies?

It depends what kind of construction company we are looking to sell, right? I'll throw a scenario here. A PE, if they are looking to purchase the platform business, their chances are they want a business which has got a minimum of $5 to $10 million in EBITDA. Right now, after they've acquired the platform and now they're looking for a tuck-in acquisition, in this day and age, they would even look at something in a million dollars EBITDA to say two three million dollars in EBITDA. Range, right? But now if you have a business which is doing $1 million in revenue, chances are that business is generating maybe $200,000 in cash flow for the owner, right? A PE firm is not going to touch it. It's just not big enough for them, right? Now that is a business which will be acquired by somebody who wants to be hands-on operator. So different profile, different business, different profile.

Okay, but the general profile is like someone that wants to scale, right? And like I mentioned when we started, the market itself is kind of limited. Lots of competition in that market. Obviously the demand was high for houses. I'm not sure if it's gonna keep being that high. There's been like, I think, higher interest rates, especially since COVID right? So if I'm a construction business owner and I want to scale, right, I want to Make it way bigger than than my city, for example, or my my part of the city. And if I'm ambitious, right? If I want to scale to higher levels and I'm not satisfied and I want a larger exit, my best way is to acquire competitors sort of or acquire other construction businesses, right? So I would be, I guess, in my fifty. And also, why would I not be burned out? Is a fun question to ask, right? Like. Why would I still have the desire to scale that? Me personally, I would never scale that type of business, right? Like, I don't think that it's hyper-scalable. I would rather do software. But yeah, I want to learn more about the profile of the potential buyer of these.

Yeah. So Charles, it depends on who you are as a buyer, right? So I always tell people when you're building a business, Right? Build it backwards and be honest with yourself. What is it that you want to do? Right? I totally agree with you. It's not for everybody. Not everybody wants to be an entrepreneur. Not everybody should be an entrepreneur. Right? Build it backwards. Just ask yourself, what is it that I want out of life? What do I want my life to look like when I am, say, on my deathbed? I'm 65 years old. Do I want to be known as somebody who was the largest construction company in that town? Or do I want to be somebody who said, hey, I built a decent business and I retired at 50, and then I was sitting at the beach and enjoying my life? And there is nothing wrong about any of those options. Be honest to yourself. What is it that you want? Don't live somebody's life and don't try to acquire a business just for the sake of acquiring, right? So just— I just want to just say that. So Coming back to your question, what is the typical profile of an acquirer? Right. It's— yes, there are people who say, I just want to grow the business, and that's the fastest way to grow or scale your business by acquiring. If you do acquisitions correctly, I can tell you I've seen many, many acquisitions fall apart too.

Right.

Some people just say, I'm going to acquire business for the sake of acquiring because I've got extra funds sitting in my balance sheet. Sometimes that can backfire, right? And it doesn't backfire only on you. It backfires on the seller. It backfires on all the employees who were a part of that transaction. So we have sold businesses to somebody who is 40 years old, right? I was running a $10 million company and they look, it's not enough for me. I want to be a $50 million company. And they have acquired a bunch of those, right? And we, we have, um, the, the buyers who come to us from a private equity world and say, okay, we've got a platform company and we're looking for a tuck-in acquisition and we want to build it into a $100 million HVAC or a mechanical contracting business. And they are acquiring companies back to back, 5, 6, 7, 8 transactions. So there is those kind of buyers too. So there is, it's hard to say who is typical, right? There is such a wide pool of buyers available out there.

Yeah, it gives me a good idea. Could there be reasons as well why I would want to acquire a business because of, because my balance sheet doesn't look good, right? Like, is there acquisition sometimes that can actually save the company because your current business is is not headed in the right direction? Do you deal with some of these?

If done right, yes. Yes. Right. I mean, if you— I think it all starts down from knowing first of all why your balance sheet doesn't look right. What's wrong with your business? Right.

Well, maybe COVID, right? Like COVID, COVID, did it increase house production? And I guess overall it did, but let's say that this created like a huge hole in my business, right? Want to sort of save face and show some— show something good to investors, right?

Sorry, can you repeat your question?

Did COVID increase the demand for houses? Because I believe during one specific time nothing was being constructed, right? Or was it deemed essential?

Yeah, yeah, no, you're absolutely right. It did increase the the amount of activity in the construction during COVID right?

And how's the market in Canada at the moment? Like, that could be a justifier. Let's say if the interest rate is higher, the demand is less, business goes wrong, and I'm like, hey, I'm just going to acquire these guys that are in commercial, right? And I want to diversify and show my investors I'm doing something better. That could justify an acquisition and wouldn't be to grow, but sort of to save the company in itself.

Yeah. And that's why I said, Charles, you got to do the acquisition for the right purposes. We have seen people acquiring businesses just because they want to save their job. And I'm talking about the large corporate world. I've seen companies going belly up because they had cash sitting in the bank, in their books, and they don't know what to do with the cash. And they had to justify their existence in the company. And they said, okay, you know what? I can show I acquired a business and then I can say it takes me 3 years to merge the 2 companies together. And in 3 years, who knows where I would be, right? So that's the wrong reason, right? But if you think about a typical, a good typical acquisition, I have got a yard which is say 100,000 square feet and I'm only using half of it. And there is another company who's got a yard which is 100,000 square feet and they're using half of it. If we merge them to 2 together, we put one— both companies into one yard, it's right off the bat there is synergies and there is savings out there, right? That's a— that could be a very simple example of where these synergies could come in and why the acquisition makes sense. So if you're doing the acquisition for the right purposes, absolutely, that's the best way to grow the business. That's how largest companies have grown, right? But then largest companies have also gone belly up by doing the acquisitions for the wrong reasons.

Yeah, I guess it could make sense as well at various stages if your company is going public.

Your audio is gone, like I can't hear you.

Oh yeah, um, I can hear you, Charles. Yeah.