Ep. 5: Scaling Up: M&A for AEC Small Businesses

Discover how M&A can help you scale your AEC firm and compete with industry giants in this episode of AEC Unscripted: M&A Edition.  Your host, Jeff Adams, Director of Mergers & Acquisitions at Stambaugh Ness sits down with Mike Ramos, President of Raymond to explore the power of M&A for small businesses. 

Mike shares invaluable insights, revealing how his firm leveraged mergers and acquisitions to achieve exponential growth, expand into new markets, and enhance its capabilities. Learn how Raymond strategically strengthened its federal presence through mentor-protégé relationships and expanded service offerings.

Whether you’re a small business owner considering M&A or simply curious about the strategies driving industry leaders, this episode offers a must-listen perspective. Don’t miss this opportunity to learn from the experts and unlock the potential of your AEC firm. 

 🔔 Don't miss out! Subscribe to AEC Unscripted: M&A Edition on your favorite podcast platform. Let's explore the M&A landscape, unlock growth potential, and achieve deal success. Ready to dive deeper? Let's go! 🤝💰 

Transcript

[Intro] 00:00

Welcome to AEC Unscripted: M&A Edition, your go-to podcast for unfiltered conversations and expert analysis, brought to you by Stambaugh Ness.

[Opening Credits]

Jeff Adams 00:28 

Welcome to AEC Unscripted. I'm your host, Jeff Adams, the Director of Mergers and Acquisitions at Stambaugh Ness. Today, we're going to be exploring M&A through the lens of a small business entity. I'm delighted to have joining me for this episode, Mike Ramos, the President at Raymond, a minority-owned and service-disabled veteran-owned small business based in Conyers, Georgia.

After joining Raymond in 2017, Mike has worked to grow Raymond's presence across federal, state, local, K-12, higher-ed, and commercial sectors, leading their efforts to grow revenue by over 300% during that time. During that same period, he transitioned the firm from being solely a building envelope consulting firm to now a full-service architecture and engineering design firm.

Mike also leads Raymond's mergers and acquisitions strategy, as well as the new research and development initiatives to enhance Raymond's competitive position while bringing new capabilities to the AE market. Mike, it sounds like you've been a busy man. Thank you so much for joining today.

Mike Ramos 01:36

Yeah, I appreciate the opportunity. I'm very excited about joining your show and want to jump into some M&A conversations.

Jeff Adams 01:44

That sounds good. Mike, before we get started, tell everybody a little bit about yourself. How did you end up becoming President at Raymond?

Mike Ramos 01:51

I'm a little bit unique in this industry. I didn't study architecture and engineering in the traditional sense back in the day. I have a degree in chemical engineering and a master's in biotechnology, and was basically a recovering management consultant. It's the way I look at my career at this point.

And what basically happened is that I'm a second generation for ownership of the firm with Raymond; my father is Ray Ramos. He started the company back in 1992. So I've been there since the beginning, and in some form or fashion, I've been involved with the company for over the last 30 years. Fate just kind of worked its magic, and as it would happen, I found an opportunity back in 2017 to join Raymond full-time. Even though I've been sitting on the board for a few years longer than that, and Ray and I came to the agreement that we were positioned with this strong base of business, lots of good quality in our design work, a lot of good strong customers, a good network, that we had something that we felt was really special and that we could grow.

And some of that's been through mergers and acquisitions. A lot of it's also been through organic growth and just taking advantage of when we saw an opportunity, jumping on it, and being very entrepreneurial. As Ray transitioned out of the business, I've been building the leadership team and making sure that we're ready for the future.

Jeff Adams 03:20

So, I noted in the introduction that you've more than tripled the revenue since you've been there. Tell us a little bit about that. What's contributed to that growth?

Mike Ramos 03:29

Well, one, we've been very entrepreneurial. Ray and I very much are cut from the same cloth in that respect. And so when we've had opportunities to grow, we've taken advantage of them. And there's been two ways we've really done it. One is acquisitions. So we've made some very small strategic acquisitions that dovetail nicely with our existing business at the right times.

The first one was actually in the 2015 timeframe. Rooftop Systems, out of Raleigh, North Carolina, is a very solid building envelope firm that the owner was looking to start transitioning out of. The owner had a previous working relationship with Ray from his SME days, and it was just a perfect opportunity, which at the time stretched the company.

And it's still one of those things where we see a good opportunity. We know it makes business sense, and that's how we've treated a lot of our acquisitions where it just makes sense. If we can make the business fundamentals work from a cash flow perspective, we take this leap of faith and grow from there by using acquisitions as an initial jumping point into the market. Taking advantage of the existing or the acquired business fundamentals. We've been able to then apply our natural strength, which is organic growth. And so we've done that in Raleigh. We did that a few years ago with a small architectural interior design firm called TSM up in Richmond, where that one wasn't a building envelope, but that was more architecture and interior design, something that we really wanted to grow into. And we saw this great opportunity where you've got the growing emerging market in Richmond. Architecture and interior design now coming in, and being an opportunity to continue to grow that line of business. We were able to strategically hire and dedicate a lot of organic growth there through our very strong BD presence. And that has been wildly successful in growing the Richmond office, which is our farthest north office. So we've done a couple of acquisitions. We've done more recently, one with HCH out of Christiansburg, Virginia. And so our acquisitions have been one side of it. But then also, we've been very fortunate that our initial strategy to go into the federal marketplace has really paid off.

Raymond's in a mentor-protege with Pond & Company, a very strong defense contractor based out of northern Atlanta in Peachtree Corners, Georgia, and so we've been able to find a firm that was willing to mentor us and mentors in the right way, which I can talk about all day long on mentor-protege relationships. But by being able to find the right mentor with the right resumé and matching us as a firm, we're able to grow all these nonbuilding envelope disciplines: architecture, interior design, structural, mechanical, electrical, plumbing, and now civil, and bring that to bear on the federal market learn under a strong mentorship relationship and then actually expand it outside of the federal market into where we're servicing state, local, K-12, higher ed, and even commercial customers.

Jeff Adams 06:45

It sounds like it's been very beneficial to you to have that mentor-protege-type relationship in the federal space and beyond.

Mike Ramos 06:54

It has been very beneficial from a growth perspective. I will say we're very fortunate. What basically fell into our laps is that we had a preexisting relationship with that firm. They were interested in doing a mentor-protege with us and were looking for the right protege. So we're fortunate from that perspective. Also, the firms are very aligned in how we like to do business.

And so that strategy in going to market, especially in the federal market, it's very SF330 driven, RFQ driven if you prefer, but I will say, like, for all the fortunate things that happened and the stars to align in order for us to win contracts and then be able to execute on them as a small business we're always bound by certain cash flow limitations, whether it's in the federal market or mergers and acquisitions. And so all that success came at a heavy toll for us, trying to always pump back our cash directly into the business, hiring, training, building processes, actual quality control system, new project management discipline coming online. A lot of it went into it in order to get to that level of success that, from the outside, it looks fantastic. And we're doing great. But at the same time, it came with a lot of learning curves, to say the least.

Jeff Adams 08:22

Well, pretty much every firm has to start through that kind of small business entity, start-type situation. And I know one of the common challenges when looking for growth as a small business entity is, "Is it organic?" "Am I going to do strategic hire?" "Do I do M&A?"

How do you go about determining the right path to take to grow?

Mike Ramos 08:48

Yeah. So it's been an evolution. Ray started the company to find good people, and regardless of where they are, you want to invest in those people. So, at the end of the day, that's what I consider true organic growth in its purest form. And for example, we saw that in Savannah with our Savannah office. We have that going on in our Charleston office right now. Orlando is a good example of a place where people dictated geographic expansion or even market-level expansion. What we found over time, though, I mean, Raleigh, Richmond, and Christiansburg have already been great examples, and I think this was covered in your very first episode, Jeff, when you were talking with IMEG and their M&A leader, the fastest way to grow a market is to make acquisitions. And so we have been much more proactive in looking at that as a way to do growth. Now, we still do a tremendous amount of organic growth. That's very important to us. It's built into our DNA as a firm, so to speak. We have over-invested in our business development arm. We are willing to put that level of investment in, even though we could generate higher profits if we were just a more seller-doer model. There's nothing wrong with the seller-doer model, but we invest so that we can have a very strong level of organic growth. And then we look at acquisitions as being the mechanism for, well, I need to strengthen a discipline perhaps, or I need to strengthen geographic reach, things of that nature. We're not just targeting every single market by any stretch of the imagination.

We're in five states: Virginia, North Carolina, South Carolina, Georgia, and Florida. So, when looking at acquisitions, we want to increase capacity. The customers that come on are a side effect to me. It's great that they come with the business. But we've been very successful in growing. We're averaging since 2005, give or take about 20% year-over-year growth. Capacity is as important to us as the actual business lines. It's nice to have that work coming in on day one, but we want to find a firm to grow through our more traditional organic growth mechanisms. And that's proven well with the three we've already done.

We're looking for acquisitions that match our culture. So if we spend the money upfront, there will be a huge cost after that.

Jeff Adams 11:22

Yeah, absolutely.

Mike Ramos 11:24  

Especially for a small business, we've got to find people who match us. And for the most part, that's worked out pretty well for us as well. And so, to answer your original question, it's an evolution for us. I don't think that in the beginning, back in '92, Ray had ever thought about acquisitions. It was probably just hire the right people. But sometimes those right people want to work with you. They just happen to work for a different firm already. And so that's not necessarily a deal breaker anymore. We do have the ability, within reason, for us to leverage our cash flow as a small business to make small acquisitions.

Where we're at today.

Jeff Adams 12:01

That cultural point, I tell people all the time, there's no compensation that you can give for a bad culture. If it's not a fit, it's not a fit, and money's not going to change that. 

Mike Ramos 12:16

I think you're spot on. That is one of the biggest lessons we learned. Of the three acquisitions that we did, two of them have worked out where pretty much the original principles have stayed; they're happy and excited, and they're energized by the acquisition. On the first one with Raleigh, the founder had retired at this point, but his second team is still there. And they are critical people to Raymond as a firm at this point. I mean, we acquired them back when we were probably 20 or 30 people first acquisition; it was a little bit of a stretch for us, but it made sense. When we did the Richmond acquisition, that was a little bit different, but we found during that one that we found good people. They were very well respected by their customers, but they were very, very small. It's the smallest acquisition we've done today; it's three people. We did like them for a number of reasons. And I will argue that that has been an incredibly successful acquisition. But we did find out about a year later that there was a mismatch between their culture and ours.

And so, at this point, we've invested a lot of time and effort into Richmond, which has been a very successful market for us in tackling the state of Virginia and opening that entire Commonwealth to us. But at the same time, it didn't quite work out long-term with the founders, and they've moved on, and we wish them well. So, that cultural part of it, understanding that upfront, is critical to long-term success so that everybody feels happy early on and energized, and we're all going to market together on the same ship.

Jeff Adams 13:54

Well, you mentioned that you had acquired some really good people and talent during those acquisitions. Were you able to assess that, and if so, how were you able to assess that before the acquisition, before closing, or was that something you found out afterward?

Mike Ramos 14:11

No, we knew them upfront. We were pretty fortunate. So, if you take something like the rooftop management, Rooftop Systems acquisition, in Raleigh, that one was based on a personal relationship. So John Willers, who founded Rooftop, and Ray had worked together years and years before the idea of an acquisition never came to mind. And so that one is built on relationship, and I might call it another way, trust, and so they both respected each other. 

Jeff Adams 14:40 

It's a great way to find good firms to plug together.

Mike Ramos 14:44

Yeah, exactly. That one was pretty simple. From that perspective, another more comparable one would probably be the more recent one of HCH. Raymond is bigger nowadays, so we have more resources. You could argue that we're always resource-constrained as a small business, but with HCH, we did know the firm a couple of ways before we even initially talked to them.

We had identified them as someone we might want to talk to about acquisition because of their reputation. And so, in Christiansburg, in that kind of Appalachia region of Virginia, we had to compete against them. They were very well respected by the customer base in that region. We knew that because we were talking to the customers, and they were saying, yeah, well, we've got this strong relationship with HCH; they've always served us well. And that put them on our radar. Now, we wanted to shore up our services in Virginia, especially in building envelope. And so HCH was all of a sudden something that was rising as the cream of the crop might do that. And so you've got this list of firms that we want to reach out to, and obviously, we worked with your team, Jeff, in order to start doing that proper reach out, and they came back and said, oh, yeah, we would entertain that conversation. As we went through our due diligence process, after we started signing the initial LOIs and things of that nature, that's when we started bringing in our building envelope team to start talking to them, not interviewing them per se, but spending time with them, making sure they understood the HCH process, and then even looking at, well, we've never actually seen your work.

We know about your reputation, your customers are saying great things, and we want to work with these customers too. So there's a little bit of trust there. But we did a review of how they do business and the type of product they're putting out. And we were very happy about what we were seeing. And we even talked to some of our peers, "Hey, have you ever worked with these guys?" And we're hearing good things. So we felt confident going into the final acquisition, that phase that we're going to be in good shape with that one.

Jeff Adams 16:57

Cool. Yeah. Speaking of hearing things, Mike, I think you might have had some sirens going on in your background there. Your building's not on fire or anything, is it?

Mike Ramos 17:06

No, no, no, sorry. It's a busy street outside.

Jeff Adams 17:09

Well, yeah, it wasn't too bad. I could hear you. So, Mike M&A never works smoothly all the time. What are some of the hurdles or challenges you faced along the way in acquisitions?

Mike Ramos 17:22

Yeah, so we've done three acquisitions. In the last 24 months, we've talked to a solid 12 firms. We've only done one acquisition of that bunch of 12, and they've all hit for different reasons why you don't go through the final deal. Sometimes, it's the asking price, and we're just not aligned on how we do the valuation of the business. Sometimes, it's culture. It just doesn't feel right. It's not to say that our firm is right or their firm is. It's just a culture thing. We had one that I was pretty excited about. We had spent a lot of time negotiating the deal. Our management teams started talking to each other about what everything was going to look like, and then what ended up happening on that one was the second team just wasn't quite on board. And that would have been a bigger acquisition for us, nearly 20 people, and we're only 100 into it. So, that would have been a pretty sizable merger on our side. And so when the second team wasn't aligned, luckily for us, and I do consider this lucky for everybody involved, we were able to ferret that out during the due diligence process.

I think it would have been, by far, the worst-case scenario that we went through with the transaction. The second team wasn't on board, and either we lost them, which would have damaged the acquisition and the core business of the firm being acquired, or you never want to sow discontent. We don't want to create a bad culture inside the firm.

So, we've seen things of that nature. The ones we have accomplished, and the biggest challenge by far, is integration. It really is; we want to acquire firms that have a good culture that matches ours. That's one thing. But then, when you're acquiring a small company, the processes and the IT are never quite as robust as you want them to be. It's just one of those things. And so with even the most recent acquisition, HCH, now they have their way of doing things, but it doesn't quite match ours. So it's deploying our management team up there for weeks, potentially at the time, in order to make sure that we're able to get everything into our system. For example, they've got a different numbering system, and somebody has to fix every little thing that comes into it. Typically, we're sending our COO, CFO; I've been up there a bunch of times this year, and we're sending our Director of Building Envelope in that case because they're really roofing and building envelope firm prior to our acquisition. And we have to spend a tremendous amount of time. And so, that's one of the logistical challenges we have as a small business because I don't have a dedicated M&A team to rely on. Whereas a large business might actually have that opportunity. Then, the other thing that we ran into, especially on the most recent one, was that we did our due diligence. It's one of those things we want to understand all our contracts. So we requested a copy of the contracts and went through their T&Cs (terms and conditions), and one of their bigger customers in higher-ed had a clause that said, "We want to be informed of anything related to an acquisition." And that's a normal clause to put in the contract for bigger customers. That was fine, so we spent time communicating with them. Unfortunately, we didn't do it in person ahead of time. And what I think happened was that we're dealing with more of their lower-level project managers, who are good people. But it wasn't being escalated up the chain for formal review. So, on the Friday before, I was going to sign the paperwork with HCH on Monday morning at 9 a.m. The Friday before, we were notified in the morning the paper was coming over. We were going to reassign the existing contract to Raymond from HCH. Just fill out the paperwork; no big deal. Within a couple of hours before we even got the official go ahead, hadn't even signed anything. They came back and said, "Nope, we're not going to allow it after all." Someone else had come in the woodwork of that organization and said, "It can't be just an asset sale or stock sale like we want to weigh in on this."

They were worried about liability. So, instead of going up there to sign at 9 a.m. on Monday, I spent all day meeting with the customer, meeting with our team, and having to go through well; this was wildly unexpected. We really wanted this deal to go through. We are at the finish line. How do we make this work?

Jeff Adams 22:12

Well, what's interesting about this, Mike, is that you had your list of things you were going through, right? Your checklist of things you were checking. And one of those was to make sure we checked customer contracts. There are not any issues. Sounds like you had done that. In hindsight, what would you do differently?

Mike Ramos 22:31

I think we would have gone up there in person. That customer was very important to HCH's core business. One of the challenges with small businesses is. Can I be in all places, pure and simple? I don't have that M&A team, but it'd be nice to have that. That would be quite the luxury for a small business. But we should have gone up there for that meeting in particular. We didn't have any issues with any of the other contracts that were reviewed, meeting with the customers, or talking to the customers, but that one was important enough. Doing it in person, I think, would have set the tone, and we wouldn't have been almost at the finish line with the deal falling through. I think that's the only thing that could have been done. That one was really hard to find, to say the least.

Jeff Adams 23:23

Yeah, that's always a punch in the gut when you go through everything; you think you checked all the boxes, you're sitting there at closing, and then all of a sudden, something explodes like this that you have to deal with and sometimes feel like it's going to derail everything, but thankfully, you're able to work through it.

Mike Ramos 24:44

Yeah. During that Monday, we had to talk through all the worst-case scenarios, the worst-case scenario that we were very comfortable with in the end. But knowing what I know now, I would have planned for it ahead of time rather than doing it on Monday, was we met internally and said, "This is a six-person acquisition. Can we absorb all the labor?" Because we originally weren't targeting the customers, we were targeting capacity, and we came back and said that if this customer and Raymond cannot come to a negotiated agreement, we'll do it anyway. We'll sign the paperwork. And I had to be flying out Monday night. I needed to leave for the airport at five. Right before I left, we were signing the paperwork from 4:30 to 4:45 and faxing it everywhere.

Jeff Adams 24:38

Man, you said a couple of interesting things here, and I didn't want to interrupt you in the process, but one of those was that while you evaluated the culture and knew you had a good culture fit, that did not automatically make integration easy.

Mike Ramos 24:57

Yea.

Jeff Adams 24:57 

Because of all the systems. Right. And different things. So.

Mike Ramos 25:01

Yeah, culture can be defined in a bunch of different ways. Right. So you've got work ethic and priorities and things of that nature. Then you have a process. And people, once you define a process, tend to stick to that process even if they don't like it. Right. And so that's one of the things that I think has been the hardest in integration because when you're dealing with a small company, their process tends to not be as robust.

Jeff Adams 25:31

Right.

Mike Ramos 25:32

Or it can be, if we distill down to the simplest version, most small companies use QuickBooks, whereas we're already using Deltek Ajera, and bigger companies use maybe Deltek Vision and things of that nature. And migrating even when we originally migrated from QuickBooks to Ajera. I mean, that was a nightmare. I mean, not because it's impossible, but because it was a completely different way of doing business. Now, the advantage here is that if we just spend enough time, effort, and training, we can overcome that hurdle relatively quickly. However, it still takes a significant amount of upfront time, effort, and training. Originally, I went up there; our COO was immediately there after that, and the CFO was coming in, and we're doing a bunch of HR training on the very first day. Luckily, we had already told them the expectation is you're going to train, and you're not going to do work. We're going to help you catch up on the work, and we'll go from there. But this is the expectation because we've got to get you guys in line with how we do business. We're not trying to erase how you did things.

If you have good ideas, we can integrate those things. That's where we have an advantage as a small business; even with 100 people, we can still right the ship, so to speak. We can still change things. We still don't have that organizational momentum that you're going to find in the really big companies in the industry, so we can take their ideas and implement them relatively fast and still be nimble.

So, the process of setting up good habits to go forward and then taking all the data and integrating it into our systems and our way of doing business takes significant time and effort. The faster and earlier you do it, the better. You can't let that fester whatsoever.

Jeff Adams 27:22

Yeah. There's another interesting point you put out there, too, that I don't want people to miss. That is, this acquisition had six people. But yet here you are a 100-person firm. You're acquiring six. Many firms like that, looking at that, that proportion would say, oh, it's just like hiring six employees, not a big deal. Share why it is a big deal.

Mike Ramos 27:45

I think that's a good way to look at it.

Jeff Adams 27:45

Share why it is a big deal.

Mike Ramos 27:49

Like it is hiring six people. You could easily argue you're absolutely right. In fact, sometimes I do think about it. It's like, well, this is the highest recruiting fee I've ever paid. It just comes with the territory. But at the end of the day, we are acquiring their business, so these people are already trained. They already work together. They're a team. Assuming that we do right by them, we have a much higher chance of retaining them in the long term, which is very important. We want to do right by the employees. That's very important to who we are as a company. We want to do right by our employees whenever possible. Sometimes, it is not possible. But acquiring the business, or a business that small, could very much be seen as a hiring event, but we're not treating it that way. Think to dress your point.

Jeff Adams 28:45

Well, if you can grow organically the way you're trying to grow, more power to you, right? That's the best way to go. It's the least expensive way of doing it. But, to your point earlier, when you're trying to expand service lines, you're trying to grow into new geographies; there are times we're just plopping an individual down in the office and trying to drum up organic relationships, which is rather challenging. You sometimes just need to jump in with both feet through an acquisition.

Mike Ramos 29:16

Well, it's interesting because you bring it up the cheaper path is potentially organic growth. I would argue that the cheaper path is when you have an established presence.

Jeff Adams 29:28

Right.

Mike Ramos 29:29

So, even if you look at our Richmond office, it's still a relatively small office, it's doing well. It's pulling in its fair share of our revenue, proportionately, it's doing great. But it can go faster with the acquisition because Christiansburg is about 3.5 hours, three hours, give or take from Richmond. So we're strengthening one.

Richmond still succeeds very well with organic growth. We were going into Tennessee, for example, which is a future priority for us at some point down the road. Can't project exactly what would happen. An acquisition would make a lot more sense for us, rather than it could be very expensive, if we put somebody in Knoxville, Nashville, or Memphis and built that up. We've seen that over time. 

The other thing that is nice, again, with this HCH acquisition, what we're looking for in South Carolina is we want to do an acquisition at some point that strengthens our presence there because South Carolina is a state that's very relationship-driven. It just takes time to build those relationships and assume you find the right firm; it's not only going to be relationship-based, that's another way of saying it's quality-based, quality of service, quality of product, it's probably going to be something that you can't grow because we understand how organic growth works in South Carolina, for example. And so I feel confident that if we find the right firm there, it'll just supercharge our efforts in the state because we can build on the relationships that we already see.

ight. And then maybe a final point about it HCH and Rooftop we're both great acquisitions; they're the bolt-ons. And that's really important in the building envelope niche of the AE industry. There just are not a lot of people compared to the larger industry that specializes in the niche. So, finding, recruiting, and retaining people, all those are always challenges. 

And so doing those acquisitions has been very important to us in terms of capacity, capability, and just being able to set ourselves up for future growth.

Jeff Adams 31:36

Yeah. And I probably misspoke when I said the cost side of it. A more accurate way of putting it is M&A has a higher initial cost, but you start getting the benefit of the cash flows immediately, right after closing. When you go for organic growth, there's not a lot of upfront investment. You hire somebody, and you pay them a paycheck over a period of time. But, what gets most small businesses is you then have a 2-to 3-year runway of negative cash flows before you start seeing the benefits of that investment. And, what I've seen is firms tend to get cold feet on that organic side, and you get to the end of that runway a lot faster than you think you will.

Mike Ramos 32:19

Yeah. You really have to commit to put somebody in a geography that we care about. But our bare minimum is, look, we're going to lose money for three years. Expect to lose money for three years. And if you don't lose money, great. But go in expecting that. Don't deviate. If you hire the right person, then it's going to work. 

Jeff Adams 32:45

I said that's a great mindset to have to go into it.

Mike Ramos 32:48

Yeah. I think it's the only mindset you can have if you're going to go that way. All of our offices have taken the better part of three years in order to get started where they've been truly organic. And, if you acquire somebody, the business is already there, and it's just, what are you going to do with it?

Jeff Adams 33:05

So, Mike, as you're thinking about your small business and you're doing acquisitions, at some point, you're going to start bumping into that ceiling. Right? That the small business entity classification puts out there. How do you foresee growth going forward?

Mike Ramos 33:22

So that's one of our biggest challenges. Right now, and for those who are not aware, this is a very specific case in the federal market. Right? And so that goes back to your NAIC code. We're registered: 541330 Engineering Services. The threshold, so to speak, is based on a five-year average of revenue. You have to be less than 25.5 million.

Now, that number has been going up a little bit lately, especially due to inflation and Covid and things of that nature. And it might go up next year. There are some rumors about that, but we have to assume it's 25.5. Now, right this second, Raymond's in pretty good shape. We still have room to grow organically. We still have room to do some small acquisitions if we choose to. And we're not yet in the position where we have to worry about that. Raymond's got an additional challenge that the small business federal market keeps changing. More and more joint ventures and mentor-proteges keep coming into it. So, I feel that we need to push that size threshold as soon as possible.

The catch is, if we just go above it to 26 million on a five-year average, we risk all of our federal business because we'll be in the unrestricted or other than the small market. And then we're going head to head with Jacobs or in AECOM or WSP. And well, those are the behemoths of the industry.

So, I actually look at—we have this opportunity through M&A, more mergers than acquisitions. And I know some people say all mergers are acquisitions, but really a merger event where we're looking for firms around our size that have similar cultures, complement each other, and could potentially merge into a much larger business entity that we're all right around the threshold now. But post transaction, we might jump up to a couple hundred million in total revenue, maybe not a couple hundred million, but maybe aim for a 100 million and have a shot at being a much bigger firm with enough diversification and enough resume that we could continue working in the federal market as an unrestricted or if we had to continue to diversify, and so the businesses are very robust, and we survive long term. It's a bit of an aggressive strategy. I feel like private equity, for example, comes in with the strategy of merging a bunch of firms, and however they want to structure a platform. But driving from the small business side, it's maybe a little bit more rare. Not that it doesn't happen, though.

Jeff Adams 36:05

Yeah. So, really, everybody benefiting together. Right? You're facing the same hurdle. Similar firms facing the same hurdle, knowing that as soon as I reach that revenue threshold, I'm potentially losing a big chunk of my business because now I can't compete against the larger guys. But if we can all join forces and become a bigger firm together simultaneously, that might give us the ability to still compete.

Mike Ramos 36:33

That is the most basic version of the strategy. It's spot on. So, that's what we are talking to other partners and peer firms about. Maybe we've competed in the past, but we respect each other. What do you think about this idea? We've already identified some firms that are interested in this concept and might have the opportunity to do it. Retargeting is still a few years out from this big transactional event, but we're trying to put the foundation in place now so that if everybody agrees that this is the right way to go, that we're set up for success, and everybody knows it's coming. We know there's a lot of accounting that's going to have to go into this, a lot of valuation work, and making sure everybody's on the same page and it's all divvied up, and that we have the right management structure post-transaction, and that everybody can do this and be happy working together.

Jeff Adams 37:31

In the meantime, Mike, as you're continuing to grow up to that, call it a $26 million number or whatever that number is at that time. How do you see being able to compete against the serial acquirers that are out there or the private equities? Is that something you think you're going to face at all as you start looking at larger firms, or how do you see this playing?

Mike Ramos 37:53

Well, typically when I run into private equity, they're more interested in acquiring me as opposed to competing against me. It's a nice little, fun fact about private equity right now. And so the way I look at it, I'm not looking to compete against them. Private equity has their models. One of the things that a lot of private equity want to do is target firms my size, whereas I can't buy a firm if I don't have the cash flow for a deal like that. And even if I could do the down payment, it's unlikely we'd find the right financing in order to satisfy the sellers. I don't see that as a viable path until maybe this big transaction.

Jeff Adams 38:42

When you start trying to appeal to these others, call it 200-person firms, all joining together. What's the pitch? What says, hey, let's do this together, versus you buying into private equity or going with a larger strategic buyer that's already out there?

Mike Ramos 39:04

Well, so what's really nice about our peer firms, the ones that we've approached that have shown interest, is that they have fund motivations, is how I might call it. I've been told by at least one that's very interested, "I want to compete as a big company against the bigger players in the industry because we built this, and we can now do something truly special together."

Private equity is not going to do that because there's always a risk of that next transaction or the transaction after that. I know on one of your previous episodes, you talked about the second or maybe the third or fourth, fifth bite of the apple.

Jeff Adams 39:45

Sure.

Mike Ramos 39:46

These firms are not interested in that. They're not motivated by that. They're motivated by, well, I'm maybe the first generation of the senior leadership team or maybe second. I built something I'm proud of, and I'm not done yet; I want to continue doing that. Now, should private equity come in much, much later, that's a different story.

But we're aligned, and we see this opportunity to lean into growing the way we want to grow without having some of the nuances, hurdles, and frustrations of being private equity-owned because everybody in the industry knows how private equity works. And it's not a bad model. But once private equity comes in, you're beholden to financials; you're beholden to a different way of doing business. If you're a bolt-on to a platform, are you being prioritized? A lot of people see that. It's not to say that they wouldn't ever consider it, but it's not necessarily the priority either. And so we're coming in and saying, hey, look, we respect you. We think we can grow together and accomplish something really great. And, we might also solve all these other business challenges too, like federal small business size threshold and things of that nature. And so there are plenty of people in the industry that still care about that, and that's been our pitch. So far, we've got people interested in it. The catch is, my big concern is how do I protect my federal small business presence or federal presence in general.

They may have other concerns, so we have to solve their business concerns at the same time. My strategy might not solve all of their problems. If they're too certificated-driven like I'm only getting work because I'm minority-owned, or I'm only getting work because I'm veteran-owned, or things of that nature, that's when it gets a little more tricky.

But we're planning on a long enough time horizon that we can adjust the strategy now and plan for those challenges as well.

Jeff Adams 41:49

Mike, one thing that impressed me with you from the get-go was that I saw that entrepreneurial spirit in you. It can be a good life to sit there in the small business entity world and just stay the same size, grow a little bit year over year, and just enjoy what you've got.

What creates the drive in you to say, I want to make this bigger and better?

Mike Ramos 42:17

Well, mine is pretty simple, and I can't speak for a lot of people in my shoes. But for me, when Ray and I negotiated my coming on board, it was an interesting time where I knew I'd be leaving management consulting, and he originally wanted to sell Raymond. That's what sparked the conversation. I knew I had to leave because I had my second son in 2017, and literally, my wife and I were talking about that, and we came to a conclusion, "You really gotta stop traveling and things of that nature." And we had that conversation one weekend, and then the next weekend, Ray said, I'm going to sell the company. I'm going to get out of this. And we said, wait, maybe there's something we could do here together. The timing is just too serendipitous, right? But what came out of the negotiation that ensued was I felt that my only charge by Ray was to make this a sustainable company, and I haven't accomplished that yet.

For all the successes that we have had, building all these new disciplines, business lines, geographies, and acquisitions, of that success, we haven't actually accomplished the final goal. So, I don't need Raymond to grow to be the size of one of the behemoths, but I do want it to be self-sustainable. And so, at the end of the day, I define that as a solid business that is not dependent on certifications, including just being a small business.

That's why we've got to solve these challenges over time. When we do accomplish that, then come back to me with that question, and we'll see where my head is at that point.

Jeff Adams 43:53

I love that answer. So, Mike, what advice would you give to other AEC buyers out there based on your experiences thus far?

Mike Ramos 44:03

Well, one of the things I might say is if you haven't spent time with an advisor like SN, has been very helpful.

Jeff Adams 44:11

A free plug. I appreciate that.

Mike Ramos 44:13

Yeah, free plug. Absolutely. Use an advisor. I come from management consulting. So, I do look at things a little bit differently. I worked with private equities for years prior to coming to Raymond, so I've got a solid business education on the job. Because of that, I started looking at my challenges and said, "Hey, this is how I think I can address them. Mergers and acquisitions are going to be a big part of that." And we've done two transactions since I joined Raymond. I help fund the first one. And then we actually brought in SN in order to facilitate a bunch of evaluations that we've done so far and even some of the initial negotiations. And then also, HCH, you guys helped with that. But put your plan in place. That's the most important thing. That doesn't mean that you have to stick 100% to your plan. Just like any plan, a good plan allows you the flexibility to adapt. And so we've been like I mentioned at the beginning of this, we've gone to various stages with a minimum of 12 companies in the last 24 months talking about them. Some of them were just valuations, and some have gone much further than that. A couple that we thought were going to happen, but they didn't happen for whatever reason. And that's okay. But the plan is still there. In the near term, we're doing small acquisitions where we don't have to compete against private equity. For smaller acquisitions, private equity would never be able to financially justify the level of integration effort. And so we consider that sweet spot, a firm with fewer than 20 employees. And so, coming in and looking for those firms, there's going to be limited competition. Their cash flow doesn't necessarily make them good acquisition targets for any given reason.

One of the things that we're really interested in is that our plan is looking at architecture firms not just to shrink our architecture practice but because architecture firms subcontract a significant amount of their engineering work and their building envelope work. And so if I acquire an architectural business, I potentially capture more of their top-line revenue than what their net income is really built upon.

Jeff Adams 46:32

That's why we call it where one plus one is something greater than two. Right.

Mike Ramos 46:35

I very much believe in that. And I think it's only a matter of time before we acquire our first real architecture firm. Also, the average architecture firm in the country has 5 to 10 employees. That's very much in my target set, less than 20. We can afford less than 20 at this point. And we're really gearing up to continue growing to that size threshold.

When we get pretty close, that's when that bigger M&A strategy needs to come online. So, the plan and why you're structuring it are critical. I'm trying to solve business challenges. My intent is not just to grow to grow; that can be very dangerous, in my opinion. I need to solve that original charge of how to make it sustainable. And M&A is one mechanism for us to do that.

Jeff Adams 47:29

Yeah, that's a great word there, Mike. I appreciate you sharing that. Before we wrap up, is there anything else you'd like to share with our audience?

Mike Ramos 47:38

Yeah, if you are interested in talking to Raymond, again, we're about 100 people today. We do have experience with M&A. We're a full-fledged architecture and engineering firm at this point in our corporate history, so to speak. We do a lot of building envelope work. If you are interested in partnering, or talking about future opportunities. Please let us know.

Entrepreneurial is how we describe the firm internally. There is always an eagerness to look at the opportunity. Now, that doesn't mean we do everything, but look at the opportunity and evaluate it and see if it makes sense. And we're also entrepreneurial, as President, if I need to help my employees by taking out the trash. And that's what we do, right?

We get the job done, we do it right, and we have a high priority on really spending time with our customers to understand what their problems are and helping them solve them, especially over the decades that we've been in business today. I appreciate the opportunity to be on the show today. Jeff.

Jeff Adams 48:37

Well, Mike, I appreciate you being here and participating in today's podcast. 

And thank you, everyone, for tuning in to AEC's Unscripted: M&A Edition. I'm Jeff Adams, and it's been a pleasure guiding you through M&A from the perspective of a small business entity in the AEC industry. 

Remember to subscribe and leave us a review wherever you get your podcast. And until next time, keep pushing forward.