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Welcome to the Growing EBITDA Podcast, where we unlock the doors to management and technology

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insights in the middle market.

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Join us as we explore innovative strategies to drive revenue and EBITDA growth, interviewing

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industry leaders and technology experts.

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Whether you're looking to streamline operations, understand the latest tech trends, or lead

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your company towards exponential growth, you're in the right place.

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Stay tuned and let's grow together.

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Well, we're off to quite a start this year, aren't we?

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Lot going on in the world, isn't there?

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Every day there's a new news flash, I feel.

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I think so.

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I think so.

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So how many people's budgets do you think are going to be spot on this year with all

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the tariffs, changing cost of goods sold around?

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Yeah, I think plus or minus 30 to, depending on temperaments, 40%.

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There you go.

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That'd be a good guess.

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I think guessing is just pretty much what everybody's doing these days, trying to figure

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it out.

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So for our listeners who haven't guessed it yet today, we're talking about tariffs, something

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near and dear to everybody's heart in 2025 with the current political climate, shall

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we say.

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I think this is going to impact almost every business in some way, shape or form.

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I mean, you're going to be hard pressed.

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Maybe some B2B, B2C services businesses aren't going to be impacted that much, but certainly

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anybody with a widget in their value chain to some degree or another are going to be

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impacted pretty heavily by widgets, not just on the operating company side, but obviously

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it's going to impact the private equity community a lot too.

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The impact it's going to have on people's P&Ls, going to make a lot of folks rethink

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valuations, deal structures, potentially exit timing, just a lot going on given the global

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supply chains that we have and how prolific some of these tariff programs are going to

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be.

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Yeah.

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And Mike, to that point, one of our main verticals is manufacturers, right?

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So we deal with a lot of manufacturing folks.

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And so I always love to get the Wall Street Journal update on where that's at.

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And I'm not sure if you saw that poll that went out, but I think it's like 80% of businesses

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think they'll be affected by tariffs, which to me is interesting that 80% of businesses,

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fun fact, we found out that one of the businesses, actually Mike, would you like to guess what

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type of business that the poll said that would not be affected by tariffs as much as others?

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No idea.

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Business services.

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And I thought, wow.

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Oh, there you go.

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Got it right.

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I thought it was a trick question.

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Yeah.

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Business services is an interesting one.

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I was like, wow, that's an issue because it's very insular.

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We saw a lot of deal movement last year.

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So if I'm a betting man, I'm assuming we're going to see some more deal movement this

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year on that one because again, if you're not selling something, you just kind of have

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humans doing work, it might be a little protected from the tariffs.

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But to your point, most folks are going to be affected to the poll 80%.

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So I think one of the things that to that point and how as we start to kind of break

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that down and go through the conversation today, Mike, I think this one squarely fits

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in your side of the world.

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And so if you don't mind, I'll take point on asking you some of the questions that I

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kind of teed up here to walk through.

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Does that work for you?

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Sure.

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Yep.

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You said PE and you said others and I agree with that, right?

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We expect, we hope for this year to be a good M&A year.

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And we discussed that in a couple podcasts, whether that's be strategic, trying to snap

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up businesses because we think there's better deal multiples out there, whether that's

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PE, need to deploy dry powder.

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We've talked about a few vectors of why we think it's going to be a good M&A year.

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And I have this feeling and I'm happy to be proven wrong that tariffs are going to create

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a bit of uncertainty this year in that deal making.

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So we think that there's going to be a lot of movement, but these tariffs may cause a

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bit of doubt in the market.

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What are your thoughts on that?

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Yeah, I think I would only change one word, which is you use the word bit, a bit of doubt.

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I think it's creating a lot of doubt.

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I think that you're right.

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We did expect 25 to be a very active year for M&A.

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And we're sitting here a couple of months in and it hasn't really been the case.

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There's been some decent activity, but nowhere near as busy as I think a lot of folks were

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thinking it would be.

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And a lot of it has to do with the change in foreign policy and these tariffs and the

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change in the administration.

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I think there are a lot of folks that thought Trump would be a boon for M&A activity.

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And I don't think that anybody would say that they expected this level of tariff.

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And I think that's caused a lot of people to kind of pause, rethink their strategies.

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Tariffs to an outsider, you may think like, hey, yeah, it's a tax that's being levied.

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It wasn't there before.

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From an M&A perspective though, investors like stability, right?

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So when you deal, let's just go back to your example of manufacturing business where you

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have 50% cost of goods sold, right?

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It's 50% of the cost of your product is in the materials that you use to make it.

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If those materials are coming in from Canada, Mexico, China, your costs may just have gone

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up 20 or 30% overnight, right?

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And most businesses' profit margins aren't even 20 to 30%.

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So now you're confronted with a couple of things.

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You spent the last couple of years, hopefully, passing on some inflation-driven price increases.

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Can your customers tolerate yet more, 20%, 30% higher price increases to offset the tariffs?

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Likely not.

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It's got to come from somewhere, right?

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You're going to try to negotiate some price concessions from your suppliers.

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You're going to try and squeeze out costs out of your supply chain.

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But even the best businesses in the world, best management teams in the world, they'd

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be lucky to save 2%, 3%, 4%.

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You're not going to squeeze 20%, 30% out, right?

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So these tariffs are going to create significant cost volatility, very difficult for management

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teams to manage through, to budget for.

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And likewise, for investors, just very difficult to estimate what's going to happen, right?

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You and I are sitting here today, and some of the tariffs have been announced but not

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implemented.

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Others have already been implemented.

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They could go up higher.

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Who knows what Trump's going to do?

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And investors just don't like uncertainty.

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And I think one of the reasons you touched on, James, last year, very busy year for business

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services, I think some people saw these tariffs as a potential risk and said, hey, I'm going

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to go and invest in industries that hopefully will be less impacted by it.

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It's unavoidable for folks that by manufacturing, distribution companies, a lot of this stuff

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coming from overseas, we're going to have to live through it.

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So as a result, it's going to impact.

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It's going to create a lot of uncertainty in deals, uncertainty in valuations, and it

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is going to impact M&A.

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I think we're already starting to see it impact M&A.

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Second thing too is just general supply chain disruptions.

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A lot of businesses have only just now found their steady footing coming out of COVID with

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all the inventory challenges, price increases, demand imbalances that came along with that.

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I think this is just going to be yet one more year.

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The 2020s, they're probably going to have a name for this decade and it's probably going

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to have something to do with supply chain.

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It'll be the first time ever maybe to do with supply chain and tariffs because that's kind

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of defining the decade for many of these kinds of businesses.

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And also I just think regulatory instability.

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People don't know where trade policy is heading.

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It was fairly stable for many years.

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It's been changing quite rapidly more recently.

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I think people are just going to be a little bit more uncertain in terms of what lies ahead

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and all these things, package them up, put a bow on them, just driving a lot of uncertainty

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for deal makers.

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Yeah, Mike.

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And so with that uncertainty that we feel on that side and obviously the deal maker

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side is feeling some of that pressure.

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Before we move on to a couple of the topics I'm sure you have, just a quick question about

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the other side of it, right?

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So a lot of times our listeners are folks who own a business that maybe hasn't been

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Transactor, hasn't gone through M&A and they kind of use us again to use our title to help

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grow that EBITDA, right?

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And so if I'm a business, just because going back on that disruption side, right?

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And I know that my current business relies a lot on international trade and the countries

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that you mentioned, Canada, Mexico, China, that we know are going to be affected by tariffs

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here shortly.

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What do I think about, I want to transact this year.

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I know I want to sell my business this year, but I know a lot of my cogs are going to get

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tied up in this tariff side.

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What are some of those things that our kind of listeners should be thinking about of like,

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okay, I need to understand and how to articulate to your point that cost volatility and those

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disruptions.

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What are some ways that they should start to capture that, at least in their management

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team before going out to the market?

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I think having a handle on what you think is going to happen, right?

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Making sure that all of your imports are coded appropriately.

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You know, they have digital solutions.

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I'm not an expert here, but they have digital solutions that can help you navigate that.

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You know, there's obviously consultants that you can engage to help make sure that you've

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coded things historically appropriately and you kind of know how to navigate that on a

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go forward basis.

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I think if you were on pace to kind of exit a business this year, it's certainly something

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that you're going to talk about.

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I wouldn't say that it's going to dissuade or I wouldn't say that it should dissuade

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you from pursuing M&A.

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I think you just need to be, you need to have in the forefront of your mind that this is

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going to be a topic that people want to dig in and to a degree, it's going to be in part

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outside your control.

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You know, could you wait?

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Yes.

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But other things could happen if you wait.

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You know, who knows when another pandemic's around the corner or a war is around the corner

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or some other, you know, black swan event that could have an even more material impact

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on the business.

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I think that if I owned a business and I was thinking about selling it this year, it's

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certainly going to be something I think about, but it's not going to cause me to lose too

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much sleep over it.

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Now, I'm sure there's a couple of examples out there that folks will think up.

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Businesses that are a little bit more commodity in nature.

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If you were importing raw aluminum from China last year, this year is going to look a lot

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different.

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If 10% of your supply chain comes from China and it's commodities that are, you know, maybe

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sub assemblies or something like that, where maybe there's content coming in from other

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countries or, you know, you're doing the vast majority of the value add here in the U.S.,

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I think you might think about it a little bit differently.

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That's really helpful.

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I think you mentioned something that we talked about before getting on this cast that we

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maybe didn't talk about the top of it is it's important for our listeners to know that we're

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also not lawyers.

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We're not experts and terrorists.

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We're not tax folks.

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This is kind of two business folks that are discussing what terrorist effects we think

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they're going to be in the marketplace and not from a place of study.

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By the way, anybody who knows what's going on right now and has a crystal ball would

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be making millions because we're all trying to figure it out.

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So crystal ball broke down before the podcast today.

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Anything else on that uncertainty that you wanted to discuss?

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Because I have another topic if you're...

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Go for it.

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All right, great.

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So this goes back to a little bit what we were talking about because I wanted to tee

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up the last question because I think it sets a nice baseline for this one is how investors

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are adjusting their valuation models.

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I put that in my notes because my thought was like, okay, so we don't know what the

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certainty is.

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We're not really sure what's going on.

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But now I'm thinking about afterwards is like if I'm someone at a principal level that's

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sitting in a let's call it a PE firm because that's easy and I'm working up the deal valuation

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and we talked about it from the uncertainty of the I'm going to transact my business.

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That's going to give us a nice explanation there.

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But now I'm on the other side.

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I want to buy this business.

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Again, a strategic a PE firm, who cares?

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And I'm thinking about how that calculation happens.

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What am I like, am I adjusting for that?

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How am I predicting adjust for that?

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What sources could I use?

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Just kind of give me what you would be doing if you were on the other side of the table.

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Yeah, well, I won't just tell you what I'm doing.

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I'll tell you what I'm kind of seeing other people do too.

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I mentioned investors don't like uncertainty, right?

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And we're in a period right now of fairly reasonable uncertainty, right?

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What we know is that our costs are going to be quite volatile in the months ahead.

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We don't know exactly how volatile they're going to be, right?

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So we're going to have to make some some educated estimates and hopefully create some downside

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protection for us.

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What I'm seeing lighter M&A and M&A works like most other marketplaces in the world.

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It's a function of supply and demand, right?

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So you're going to see costs for assets as investors refer to them or prices for businesses,

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maybe as an owner of a business would kind of think about it.

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Probably come down a tad, but it's not meaningful.

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We're not seeing a five or 10 or 20% decline in the value of these businesses, at least

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not yet.

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There's still a lot of capital out there looking for homes, looking for businesses to buy.

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So I think some of the risk premium, it may show up five ish percent.

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I think what you're going to see though, what's really starting to change is the amount of

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focus on diligence of tariff impact, right?

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So you should expect these investors to come in and really do a deep dive and hire some

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outside experts, lawyers, tax attorneys, things like that to really dive into the impact of

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tariffs.

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They're going to want to understand the opportunity to resource or reshore some of the component

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parts or commodities that the business is buying and doing some financial analysis around

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that.

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I think probably the thing I'm seeing the most right now is what I would describe as

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creative deal structuring.

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So instead of reducing the price for a business, I think you're going to see more investors,

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especially right now as the tariff uncertainty is probably at its peak.

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You're going to go to a seller of a business and say, Hey, listen, I know you want $500

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million for your business, but we did some math and we think that tariffs could have

253
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like a $40 million impact on your enterprise value, right?

254
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The price that we're going to pay for the company.

255
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So instead of paying you $500 million for the business, which by the way, we think it's

256
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worth $500 million.

257
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It's just too risky for us to price in no tariff risk today, I'll still pay you $500

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million, but we're going to put $40 million in escrow and then subject to these outcomes

259
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from a tariff perspective occurring, either we get that 40 million back or you get to

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keep as the seller that $40 million or some split in between.

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We're not going to get into the mechanics of how those specifically come together, but

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we call these holdbacks in private equity, right?

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So that the money goes into an account on its way to the seller and provided that the

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investors don't get stung with some huge tariff exposure in this case, that would be released

265
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to the seller of the business.

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If they do get stung, some portion of it, potentially all of it could come back to the

267
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investors and that effectively is a purchase price reduction for the asset.

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But it's a nice way of bringing a buyer and a seller to the table and saying, Hey, listen,

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we probably aren't going to be able to agree on a specific number today, given the volatility.

270
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Let's agree on what the business is worth.

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Generally speaking, we're going to give you the vast majority of that value upfront, but

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we're going to hold some portion of that back to account for uncertainty and risk that we

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just can't, you just fundamentally can't price into our models today.

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Wow.

275
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I didn't even know that was a thing.

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That's a, that's a very interesting, have we seen that before in other ways, Mike, that

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weren't tariffs that happen in deals?

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Is this a common thing?

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Yeah, I think, you know, we, we, we saw it with the last round of tariffs a number of

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years ago.

281
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Sometimes you'll see it in the wake of very, what's the right word, very seismic shifts

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in the global markets.

283
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You know, when COVID happened, you'd see a lot of businesses whose earnings had completely

284
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tanked, right?

285
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Their revenue was way down.

286
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If they were a retail business, their store visits were down.

287
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If they were an airline, their passenger miles flown were down.

288
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You know, most businesses had just a huge impact when the economy shut down, but it

289
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didn't completely shut down M&A, right?

290
00:16:20,960 --> 00:16:25,240
Like six months later, investors like private equity investors were coming in and saying,

291
00:16:25,240 --> 00:16:30,320
Hey, listen, in 2019, your business made, let's say $10 million in profit in 2020.

292
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It made a million dollars in profit, but it looks like it's going to get back in 2021

293
00:16:36,000 --> 00:16:39,000
to making about 10 or $11 million in profit.

294
00:16:39,000 --> 00:16:41,840
So we're going to kind of run rate out your current profit.

295
00:16:41,840 --> 00:16:46,520
We're going to assume that it's going to get back to that same level of profitability,

296
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maybe on slightly higher sales as things rebound in the case of COVID as the entire economy

297
00:16:50,920 --> 00:16:51,920
rebounded.

298
00:16:51,920 --> 00:16:55,440
And if it does, we would value your business at this.

299
00:16:55,440 --> 00:16:58,440
The fact that it hasn't rebounded yet, that's a problem for us as investors.

300
00:16:58,440 --> 00:17:02,160
So maybe instead of paying you 100% of the value for the business, let's just say it

301
00:17:02,160 --> 00:17:05,920
was $100 million in that case, instead of paying you $100 million today, because it

302
00:17:05,920 --> 00:17:09,080
only makes a million, it only makes from a last 12 months perspective, it's only made

303
00:17:09,080 --> 00:17:10,160
a million dollars in profit.

304
00:17:10,160 --> 00:17:15,440
We'd be paying you a hundred times trailing 12 months earnings instead of doing that because

305
00:17:15,440 --> 00:17:16,840
that really wouldn't be fair, right?

306
00:17:16,840 --> 00:17:19,960
They're saying, Hey, listen, I'm going to kind of give you some consideration that this

307
00:17:19,960 --> 00:17:21,920
business is likely to bounce back.

308
00:17:21,920 --> 00:17:24,280
Maybe I'm going to give you a 50 million today.

309
00:17:24,280 --> 00:17:29,040
We're going to put another 50 million in escrow and provided that that revenue comes back,

310
00:17:29,040 --> 00:17:30,580
the earnings come back with it.

311
00:17:30,580 --> 00:17:32,640
We'll release that to you as the seller.

312
00:17:32,640 --> 00:17:37,200
And quite frankly, it's a nice way of continuing to allow a marketplace for deals to happen,

313
00:17:37,200 --> 00:17:38,200
right?

314
00:17:38,200 --> 00:17:42,160
It gives the owners liquidity, it gives the buyers a buying opportunity, which otherwise

315
00:17:42,160 --> 00:17:43,160
would be shut down, right?

316
00:17:43,160 --> 00:17:45,280
And then nobody, nobody does anything, right?

317
00:17:45,280 --> 00:17:49,160
The last thing that any of us want is every dollar in the capital markets sitting on the

318
00:17:49,160 --> 00:17:50,520
sidelines waiting, right?

319
00:17:50,520 --> 00:17:53,600
You want these kinds of transactions to occur.

320
00:17:53,600 --> 00:17:58,080
And that's just one of the many creative ways that the finance community has come up with

321
00:17:58,080 --> 00:18:02,280
to address those valuation gaps, particularly in times of uncertainty.

322
00:18:02,280 --> 00:18:03,720
That's really, really neat.

323
00:18:03,720 --> 00:18:06,520
And I love these learnings because I think this is one of those times that we learn a

324
00:18:06,520 --> 00:18:07,520
lot, see a lot, right?

325
00:18:07,520 --> 00:18:13,200
And so like one of the things I'm seeing or just happened to have happened recently is

326
00:18:13,200 --> 00:18:17,740
on the diligence side, we were, we got a request to do an IT diligence.

327
00:18:17,740 --> 00:18:22,600
So for as a reminder, I lead the digital technology practice and we do IT diligence as part of

328
00:18:22,600 --> 00:18:24,600
our day to day jobs.

329
00:18:24,600 --> 00:18:29,000
And one of the things that we got asked is how easy would it be for this company to have

330
00:18:29,000 --> 00:18:33,760
access to data to be able to report and understand the tariffs.

331
00:18:33,760 --> 00:18:37,440
And so that was kind of almost like a double click on the diligence, but we went a little

332
00:18:37,440 --> 00:18:43,720
deeper than we'd gone before and kind of got some questions we hadn't really heard before.

333
00:18:43,720 --> 00:18:48,120
And so as you're working through some of these things and putting together that model and

334
00:18:48,120 --> 00:18:51,480
understanding what that hold back would be or what was the word again for it?

335
00:18:51,480 --> 00:18:52,480
Sorry, you said it.

336
00:18:52,480 --> 00:18:53,480
Hold back.

337
00:18:53,480 --> 00:18:54,480
Oh, good.

338
00:18:54,480 --> 00:18:55,480
Okay.

339
00:18:55,480 --> 00:18:56,480
What that hold back would be.

340
00:18:56,480 --> 00:18:59,080
Would you do through like a diligence work stream?

341
00:18:59,080 --> 00:19:01,520
Would you try to do that internally?

342
00:19:01,520 --> 00:19:05,240
How do I figure that component out or how do I figure out what that estimate might be

343
00:19:05,240 --> 00:19:07,440
if I'm the buying entity?

344
00:19:07,440 --> 00:19:08,440
Yeah.

345
00:19:08,440 --> 00:19:12,080
I mean, I would say that in most cases, it's going to come in two phases.

346
00:19:12,080 --> 00:19:16,640
The first of which would be during what's called preliminary due diligence.

347
00:19:16,640 --> 00:19:20,600
The second phase would be during what's called confirmatory due diligence.

348
00:19:20,600 --> 00:19:25,200
So preliminary diligence is typically, you understand that a business is going to come

349
00:19:25,200 --> 00:19:31,200
up for sale, you learn about it briefly, you say, Hey, that's really interesting to me,

350
00:19:31,200 --> 00:19:35,000
but I got to learn a lot more about it before I decide like I'm really interested.

351
00:19:35,000 --> 00:19:36,000
Right.

352
00:19:36,000 --> 00:19:39,200
So you're going to do some maybe market research and some of this could be desk research, right?

353
00:19:39,200 --> 00:19:42,320
You may spend a little time understanding the company.

354
00:19:42,320 --> 00:19:46,160
You go to their website, you're talking with the investment banker who's helping to sell

355
00:19:46,160 --> 00:19:48,200
the company, you're asking them questions.

356
00:19:48,200 --> 00:19:52,400
Maybe you get a phone call with management, unlikely these days, but sometimes you'll

357
00:19:52,400 --> 00:19:53,400
get a meeting with management.

358
00:19:53,400 --> 00:19:57,800
It depends on how big the deal is and how the process is being run.

359
00:19:57,800 --> 00:20:01,040
You're just trying to kind of digest and absorb and understand things.

360
00:20:01,040 --> 00:20:04,120
And typically during that phase, the investors are going to put together a brief financial

361
00:20:04,120 --> 00:20:08,600
model that says, Hey, if we paid this much for the business and the business grew like

362
00:20:08,600 --> 00:20:12,520
X and Y and Z over a period of time, we think it would be a good investment.

363
00:20:12,520 --> 00:20:15,680
It would meet our investment thresholds.

364
00:20:15,680 --> 00:20:19,600
Something like tariffs, which have been now on everybody's radar for call it four to six

365
00:20:19,600 --> 00:20:23,640
months, investors are thinking through that as they're building the model, right?

366
00:20:23,640 --> 00:20:26,080
So they're going to be building in some hedges.

367
00:20:26,080 --> 00:20:28,140
What if tariffs go to 40%?

368
00:20:28,140 --> 00:20:29,780
What if they only go to 10%?

369
00:20:29,780 --> 00:20:31,840
What if it only goes for Mexico?

370
00:20:31,840 --> 00:20:35,480
What if it goes to Canada exclusively just as examples?

371
00:20:35,480 --> 00:20:38,520
So there's going to be some of that priced in in the preliminary diligence.

372
00:20:38,520 --> 00:20:40,880
They're going to make an offer to acquire the business.

373
00:20:40,880 --> 00:20:45,040
They should be communicating that upfront because it's kind of a known thing that these

374
00:20:45,040 --> 00:20:46,540
tariffs could be coming.

375
00:20:46,540 --> 00:20:49,120
So they may communicate that upfront when they put in their initial offer, say, Hey,

376
00:20:49,120 --> 00:20:51,800
I'll pay $100 million for the business, but by the way, it's going to be subject to this

377
00:20:51,800 --> 00:20:55,800
thing in many cases, it's going to say almost every one of those offers is going to say

378
00:20:55,800 --> 00:20:58,640
subject to confirmatory diligence, right?

379
00:20:58,640 --> 00:21:02,720
And if the business that's putting itself up for sale agrees that they want to sell

380
00:21:02,720 --> 00:21:07,360
the business to that investor under those terms, when the investor comes in to then

381
00:21:07,360 --> 00:21:11,320
do the next phase of confirmatory due diligence, that's when people are going to go typically

382
00:21:11,320 --> 00:21:14,120
like 10 miles deep on these on these issues, right?

383
00:21:14,120 --> 00:21:19,360
So that's when they're hiring the folks to do IT diligence, operations, diligence, tariff,

384
00:21:19,360 --> 00:21:23,200
diligence, supply chain, diligence, quality of earnings due diligence.

385
00:21:23,200 --> 00:21:26,040
And that's really where all the details going to get flushed out.

386
00:21:26,040 --> 00:21:28,640
And then as they march towards signing the purchase agreement, that's where they're

387
00:21:28,640 --> 00:21:31,160
going to work with the lawyers to kind of fine tune.

388
00:21:31,160 --> 00:21:35,160
Hey, if it is $20 million going into this escrow account, if it is specifically for

389
00:21:35,160 --> 00:21:38,200
tariffs, here's going to be the terms that it gets released upon.

390
00:21:38,200 --> 00:21:42,040
Here's going to be the terms that it gets returned back to the investors.

391
00:21:42,040 --> 00:21:45,880
And that all get hammered out, hammered out then, and then the deal closes and everybody's

392
00:21:45,880 --> 00:21:48,920
off and running and hopefully it works out for all parties.

393
00:21:48,920 --> 00:21:53,880
I think a common misconception about M&A, you hear a lot of people talk and they're

394
00:21:53,880 --> 00:21:57,360
not wrong that investors want to make sure they get the right price, a good price for

395
00:21:57,360 --> 00:21:58,800
the business.

396
00:21:58,800 --> 00:22:01,160
Most businesses don't get sold for cheap.

397
00:22:01,160 --> 00:22:05,680
Most businesses get sold for roundabout how much they're pretty much worth because many

398
00:22:05,680 --> 00:22:09,880
investors tend to value businesses in a similar way.

399
00:22:09,880 --> 00:22:15,480
And the investor groups are actually, quite frankly, they're happy to have those things

400
00:22:15,480 --> 00:22:19,340
like an escrow release because that means that the business, back to my COVID example,

401
00:22:19,340 --> 00:22:23,120
it did bounce back to $10 million in earnings and they bought a good business for the right

402
00:22:23,120 --> 00:22:24,120
price.

403
00:22:24,120 --> 00:22:29,160
But likewise, if the earnings don't come back or if the tariff impact is higher, they don't

404
00:22:29,160 --> 00:22:33,880
want to be the one sitting there kind of holding the entirety of the bag going, oh geez, we

405
00:22:33,880 --> 00:22:35,760
way overpaid for this business, right?

406
00:22:35,760 --> 00:22:41,080
They want it to be kind of a mutually equitable deal so that at least from a starting point

407
00:22:41,080 --> 00:22:45,360
perspective, the seller walks away with a good amount of consideration and the buyers

408
00:22:45,360 --> 00:22:47,560
bought what they thought that they were buying.

409
00:22:47,560 --> 00:22:50,880
That really is the intent and that's typically how most folks are approaching it.

410
00:22:50,880 --> 00:22:55,880
I mean, that clarity is, I think, something that I haven't seen or read about yet.

411
00:22:55,880 --> 00:22:58,000
So I appreciate you having that inside.

412
00:22:58,000 --> 00:22:59,000
I feel like I've asked you a lot of questions.

413
00:22:59,000 --> 00:23:01,280
You got any questions for me on my tariff journey?

414
00:23:01,280 --> 00:23:02,760
Well, I'll turn the tables on you.

415
00:23:02,760 --> 00:23:07,480
How are you seeing the operating companies hedge against tariff risks?

416
00:23:07,480 --> 00:23:09,840
So a lot of conversations, right?

417
00:23:09,840 --> 00:23:14,040
We have a lot of conversations and I think folks are looking for sources aren't Wall

418
00:23:14,040 --> 00:23:15,240
Street Journal and others.

419
00:23:15,240 --> 00:23:18,560
I get asked the question a lot of like, what are the other clients doing about tariffs

420
00:23:18,560 --> 00:23:20,960
and what are you thinking about this and what's new?

421
00:23:20,960 --> 00:23:24,560
And so I think there's some interesting dynamics there.

422
00:23:24,560 --> 00:23:28,600
Going back to diligence, we're seeing even on kind of our confirmatory diligence as we

423
00:23:28,600 --> 00:23:34,200
were doing buy-side diligence work, we're seeing organizations that have, like for example,

424
00:23:34,200 --> 00:23:39,160
we're looking at a bakery in Canada that exclusively sold to the US.

425
00:23:39,160 --> 00:23:44,800
So like really technical baking stuff that I don't understand that they were working

426
00:23:44,800 --> 00:23:46,800
on and they were selling to the US.

427
00:23:46,800 --> 00:23:51,160
And so I went on the rep and warranty call to represent the cybersecurity portion of

428
00:23:51,160 --> 00:23:52,460
the call.

429
00:23:52,460 --> 00:23:58,740
And on a three-hour phone call, the first hour and 10 hour and 20 minutes was spent solely speaking

430
00:23:58,740 --> 00:24:01,040
about tariffs and what they were planning to do.

431
00:24:01,040 --> 00:24:05,520
And it kind of piled on from other groups in a way I've never heard a rep and warranty

432
00:24:05,520 --> 00:24:07,080
call go because they're usually pretty structured.

433
00:24:07,080 --> 00:24:08,520
We all get the call sheet.

434
00:24:08,520 --> 00:24:11,520
You know your questions, you tick through and everyone high fives and you get follow-up

435
00:24:11,520 --> 00:24:13,480
emails for additional detail.

436
00:24:13,480 --> 00:24:16,400
This one was a very interesting process.

437
00:24:16,400 --> 00:24:21,640
I think a lot of the times where I get to have a lot of visibility around tariffs, again,

438
00:24:21,640 --> 00:24:26,640
not an expert, just kind of we're all learning together, but see a lot of this, is we have

439
00:24:26,640 --> 00:24:32,080
a sourcing team at the company that a lot of times they call us to help with the system

440
00:24:32,080 --> 00:24:35,320
changes so the sourcing team can be more successful.

441
00:24:35,320 --> 00:24:39,560
So the perspective I'm going to take is the last three opportunities that came through

442
00:24:39,560 --> 00:24:43,720
that companies reached out to us and said, we need help on our systems for blank and

443
00:24:43,720 --> 00:24:46,720
we'll reverse engineer that to say what folks are working on.

444
00:24:46,720 --> 00:24:51,800
So number one I had here was they were looking to diversify their sourcing.

445
00:24:51,800 --> 00:24:57,120
So a lot of times in the systems for ERPs, they don't have a lot of rich data around

446
00:24:57,120 --> 00:24:58,340
where that is coming from.

447
00:24:58,340 --> 00:25:01,820
They have the company, but they don't have where it's actually coming in from.

448
00:25:01,820 --> 00:25:06,960
And we know that a lot of manufacturing organizations could have multiple manufacturing facilities

449
00:25:06,960 --> 00:25:08,320
across the world.

450
00:25:08,320 --> 00:25:13,840
And so those raw materials or even some finished goods should be tagged with country of origin

451
00:25:13,840 --> 00:25:17,480
so you can quickly do that analysis, but we found pretty quickly in this engagement it

452
00:25:17,480 --> 00:25:18,480
wasn't.

453
00:25:18,480 --> 00:25:21,720
And so we work with the team to update the ERP to bring that into the process.

454
00:25:21,720 --> 00:25:26,240
And then frankly, we added an additional layer of approval to say, hey, before you go source

455
00:25:26,240 --> 00:25:30,880
from a country that's a tariff risk country, so we call the field, I want to build that

456
00:25:30,880 --> 00:25:34,800
and that through the senior leadership team to have a second double click on that or an

457
00:25:34,800 --> 00:25:36,640
approval process before we move forward.

458
00:25:36,640 --> 00:25:40,160
Where previously it was best price wins, great service, we know you.

459
00:25:40,160 --> 00:25:43,800
Now there's an additional layer and a bit of a consideration.

460
00:25:43,800 --> 00:25:49,920
Another one is this is a it's interesting how uncommon it is, but a CMS or contract

461
00:25:49,920 --> 00:25:51,500
management system.

462
00:25:51,500 --> 00:25:55,280
This system allows you to have a centralized repository of all your contracts with vendors.

463
00:25:55,280 --> 00:25:59,960
And as you know, we all sign contracts all the time based on our delegation of authority.

464
00:25:59,960 --> 00:26:01,920
That is usually what people use to route.

465
00:26:01,920 --> 00:26:06,840
But at the end of the day, you probably informally load contracts in a folder on Windows or you

466
00:26:06,840 --> 00:26:09,400
might have a shared folder on SharePoint.

467
00:26:09,400 --> 00:26:12,920
It's somewhere but not really organized in a CMS.

468
00:26:12,920 --> 00:26:17,480
And that CMS allows you to see a central place for your pricing and your agreements and know

469
00:26:17,480 --> 00:26:19,000
where all that is.

470
00:26:19,000 --> 00:26:22,880
The beauty of that is you can know when a contract's coming up and try to negotiate

471
00:26:22,880 --> 00:26:28,560
preemptively a longer term contract to quote, lock in some pricing to at least hedge a bit

472
00:26:28,560 --> 00:26:30,920
while you figure out what the uncertainty is.

473
00:26:30,920 --> 00:26:35,200
So one of the things that we've seen is folks are looking for that visibility, a way to

474
00:26:35,200 --> 00:26:38,820
gather their contracts to be able to go to the field and negotiate.

475
00:26:38,820 --> 00:26:41,780
And then the third one, and we hear about this all the time, but we actually see a bit

476
00:26:41,780 --> 00:26:48,760
of this is the reshoring and nearshoring of a lot of the services and not using the companies

477
00:26:48,760 --> 00:26:49,760
outside.

478
00:26:49,760 --> 00:26:54,120
So for example, the big news, Mike, you and I are big Apple users and we love our Apple

479
00:26:54,120 --> 00:26:55,920
devices.

480
00:26:55,920 --> 00:26:57,060
And I live in Houston.

481
00:26:57,060 --> 00:27:01,960
And so I'd say every friend I have sent me the same dang news article that was like,

482
00:27:01,960 --> 00:27:06,040
Houston's one of the cities selected to have Apple do some reshoring, right?

483
00:27:06,040 --> 00:27:10,280
So we kind of hear these big things in the news all the time on large organizations,

484
00:27:10,280 --> 00:27:15,320
and smaller organizations every day, all day, our teams, Mike and I, we both know people

485
00:27:15,320 --> 00:27:20,040
that sit in the Northern side of Mexico all the time on that nearshoring group that's

486
00:27:20,040 --> 00:27:26,040
bringing some of those businesses that were in Asia or Southeast Asia back to Mexico.

487
00:27:26,040 --> 00:27:29,720
What's interesting now is as we're having conversations about footprint analysis and

488
00:27:29,720 --> 00:27:34,240
we have a footprint team to help folks move organizations or distribution centers or manufacturing

489
00:27:34,240 --> 00:27:39,020
facilities, we're actually hearing a lot about looking for spaces and places in the United

490
00:27:39,020 --> 00:27:40,080
States.

491
00:27:40,080 --> 00:27:44,840
So we often hear, hey, there's a lot of extra space, office are opening up, buildings are

492
00:27:44,840 --> 00:27:46,400
empty, those types of things.

493
00:27:46,400 --> 00:27:49,640
But now it's interesting the pendulum has swung that people are trying to find prime

494
00:27:49,640 --> 00:27:55,080
locations near interstates, centrally located in the country with affordable resources,

495
00:27:55,080 --> 00:27:58,320
i.e. employees in that region, to start to nearshore.

496
00:27:58,320 --> 00:28:03,040
And so from a systems perspective, when you take things that were manufactured offshore,

497
00:28:03,040 --> 00:28:08,200
we didn't have to have an MRP or manufacturing systems because you outsource that.

498
00:28:08,200 --> 00:28:11,640
Now you're bringing that in the house, not only do you have to find a facility, find

499
00:28:11,640 --> 00:28:15,040
humans, you also have to stand up all the systems to support that.

500
00:28:15,040 --> 00:28:18,360
And so those are the big three things that we're seeing that folks are asking for help

501
00:28:18,360 --> 00:28:19,440
from a system perspective.

502
00:28:19,440 --> 00:28:23,280
Is there one that you think maybe I missed on what you're seeing out there?

503
00:28:23,280 --> 00:28:29,760
No, I mean, I think, like I said earlier, we're still early days on seeing how people

504
00:28:29,760 --> 00:28:31,320
respond to this, right?

505
00:28:31,320 --> 00:28:34,120
I think no right answer for all businesses.

506
00:28:34,120 --> 00:28:38,680
I think it's going to be a combination of everything you touched on diversifying the

507
00:28:38,680 --> 00:28:44,520
sourcing, better contract management, better visibility, more reshoring, probably more

508
00:28:44,520 --> 00:28:48,080
nearshoring, even though some of the nearshore options are going to come with tariffs.

509
00:28:48,080 --> 00:28:52,160
I think you're just going to see a lot of companies rethink these global supply chains

510
00:28:52,160 --> 00:28:58,040
in an attempt to drive less cost volatility, more long-term stability.

511
00:28:58,040 --> 00:29:01,920
And ultimately, whether these businesses are publicly owned or privately owned, if they're

512
00:29:01,920 --> 00:29:04,920
public, it's going to be how do we figure out how to keep the street happy in the midst

513
00:29:04,920 --> 00:29:08,840
of all this turbulence on the privately owned side?

514
00:29:08,840 --> 00:29:13,360
How do we drive sustainable earnings growth in the wake of these headwinds?

515
00:29:13,360 --> 00:29:18,320
So it's going to be an interesting next couple of years, and we'll just have to see how everybody

516
00:29:18,320 --> 00:29:19,320
goes.

517
00:29:19,320 --> 00:29:23,480
So can I ask you the trivia question this week?

518
00:29:23,480 --> 00:29:24,480
Go for it.

519
00:29:24,480 --> 00:29:25,960
All right, man.

520
00:29:25,960 --> 00:29:27,260
I was shocked at this answer.

521
00:29:27,260 --> 00:29:28,680
So I didn't know this.

522
00:29:28,680 --> 00:29:30,040
I had to look it up.

523
00:29:30,040 --> 00:29:35,840
But which country is the largest trading partner of the US today?

524
00:29:35,840 --> 00:29:39,080
So I actually do know the answer.

525
00:29:39,080 --> 00:29:42,640
Because when the tariff thing heated up again, I was curious.

526
00:29:42,640 --> 00:29:44,580
And I think there was an article about it.

527
00:29:44,580 --> 00:29:49,920
And I thought for sure it was China, but it turns out it's our friends to the north, the

528
00:29:49,920 --> 00:29:51,600
Canadians.

529
00:29:51,600 --> 00:29:52,600
Very good.

530
00:29:52,600 --> 00:29:56,920
By the way, that is one of, I don't know how many episodes, 13 that we've gotten correct.

531
00:29:56,920 --> 00:29:58,760
I got to do a little bit of research.

532
00:29:58,760 --> 00:30:02,920
I think it's interesting because I think you hear a lot of noise about everywhere else

533
00:30:02,920 --> 00:30:04,600
being a large trade partner.

534
00:30:04,600 --> 00:30:09,560
But it really shows how interconnected we are because it is sown in our own backyard.

535
00:30:09,560 --> 00:30:10,560
Yeah.

536
00:30:10,560 --> 00:30:11,560
Good job.

537
00:30:11,560 --> 00:30:12,560
I mean, it kind of makes sense.

538
00:30:12,560 --> 00:30:16,240
I think for me, I always struggle with how could that small of a population represent

539
00:30:16,240 --> 00:30:18,080
our largest trading partner?

540
00:30:18,080 --> 00:30:19,080
Right.

541
00:30:19,080 --> 00:30:21,360
But yeah, our friends to the north.

542
00:30:21,360 --> 00:30:22,360
Good job.

543
00:30:22,360 --> 00:30:25,600
Somehow in those long winters up there, they're keeping it going.

544
00:30:25,600 --> 00:30:26,600
Good for them.

545
00:30:26,600 --> 00:30:27,600
Hey, good for you.

546
00:30:27,600 --> 00:30:28,600
Forget it.

547
00:30:28,600 --> 00:30:32,760
I think on the leaderboard up one zero, one negative 13, I think as per another episode

548
00:30:32,760 --> 00:30:33,760
we talked about.

549
00:30:33,760 --> 00:30:34,760
There you go.

550
00:30:34,760 --> 00:30:35,760
Accurate.

551
00:30:35,760 --> 00:30:36,760
Great.

552
00:30:36,760 --> 00:30:37,760
Well, good one.

553
00:30:37,760 --> 00:30:38,760
Good one, James.

554
00:30:38,760 --> 00:30:39,760
Love the trivia.

555
00:30:39,760 --> 00:30:41,760
Well, thanks for everybody for tuning in to another episode of Growing EBITDA.

556
00:30:41,760 --> 00:30:47,680
Don't forget to like and subscribe and we will chat with you guys again soon.

557
00:30:47,680 --> 00:30:50,580
Thanks for tuning into this episode of Growing EBITDA.

558
00:30:50,580 --> 00:30:55,640
If you liked this episode, hit subscribe or follow us on LinkedIn for updates.

559
00:30:55,640 --> 00:30:57,840
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560
00:30:57,840 --> 00:30:58,840
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561
00:30:58,840 --> 00:31:28,120
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