Acquisitions Anonymous - #1 for business buying, selling and operating - $15 million / year renting cars! - Acquisitions Anonymous 205

Episode Date: June 23, 2023

Michael Girdley (@girdley) and Heather Endresen (@EndresenHeather) review a fun deal on a car rental franchise that produces some strong EBITDA #'s. Check it out here: https://woodbridgegrp.egnyte.com/dl/FgpypTxSP1-----Thanks to our sponsor!This episode is sponsored by HoldCoConference, the conference exclusively focused on HoldCo Entrepreneurs and Executives. This conference is where Holding Companies meet, learn, scale and grow. From tech to Home Services, Holdco Entrepreneurs from around the globe will be meeting in Cleveland this September 18-20th in Cleveland Ohio.Check out holdcoconf.com for more details.Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Hey, Michael here. Acquisitions Anonymous, number one podcast about buying, selling, and operating small businesses. Today, Heather and I got together and did a fun deal to talk about a car rental franchise that we think was located somewhere near the Arctic Circle. And this was a big boy. They did nearly $16 million in EBITA last year and provided a lot of interesting stuff for us to talk about. So here's the episode, and I hope you enjoy it as much as we enjoyed making it. This episode is sponsored by the Holdco conference. This is a conference exclusively focused on holding company entrepreneurs and their executives. It is where holding companies meet, learn, and scale, and grow. From tech to home services, Holdco entrepreneurs from around the

globe will be meeting in Cleveland this September 18th to the 20th, 20th, 23. And it will be there in Cleveland, Ohio, which has me super excited, also because I will be one of the speakers and attendees of the conference as well. So I encourage you to check out their website and consider joining us there. The website is holdcocomf.com. That's h-o-l-d-c-o-c-n-f.com and get more details there and sign up to join us. See you soon. Heather, how are you doing? Happy Thursday. I am good. Thank you. How are you doing? I'm very good. I'm leaving this afternoon. Actually, me and a bunch of buddies are flying to Mexico to mountain bike this weekend.

So hopefully I do not get run myself into any trees or get accosted by any cartels. Those are my two goals. Anything above that is a win. I'm hoping that that's the case, please. Yeah, otherwise you guys have to find somebody else to coast. I'm just trying to survive the cold. Southern California summer.

Oh. Which sounds strange, but it is cold. Yeah. We're all feeling your pain. All right. So we got sent this deal by a listener. And it's turned out this, you know, when we first started this podcast,

we used to have to do work to find deals. Now the people send them to us. It's like we have a community. So it's amazing. It is amazing. So the second I saw this one, I was like, we have to do this one. So let me pull it up.

And do you want to read it? want me to read it. Sure, I'll read it. It's a, it's a car rental franchisee operating under three brands, 15.5 million of EBAA. It looks like it had a pretty bad 2020, as one might expect, and then seems to have bounced back. So revenues 4.6 to 19.7 to 24.6 from 20 to 22. car rental franchisee strategically located in a destination highly sought out by tourists and business travelers alike, and carries automobiles, SUVs, minivans, light duty trucks, strategic brand partnerships with airlines, hotels and travel agencies, par sales operations for fleet renewal under household name brand, future story, expand vehicle inventory, increase car sales, global car rental market expected to grow at nine and a half

percent Kager through 2033. Sustainability, long-tenured successors, 85% of bookings generated internationally, by internationally renowned franchises, corporate agreements in place. Okay, so they're getting a lot of business from the, from the franchise, franchisor, I should say.

Defensibility owns three out of nine car rental counters at the largest, busiest airport in the state. I wonder what state that is. because some states have a busier airport than others. Limited recognizable rental brands available in the market. 31 million investment required for competitors to purchase comparable fleet. So barriers to entry there basically what they're talking about. So pretty interesting deal.

It totally is. I was trying to find the listener, the DM this to me, but he said he believes it's in Anchorage in Alaska. And this is the licensed officer. operator of Hertz and a couple of other brands. And I mean, I think the way I understand the car rental business works is there are really two or three main companies and they operate under multiple brands. So like the Hertz Corporation has Hertz, Dollar Thrifty or something like that.

It's in sixth. So when you go there and you see there's 18 brands, it's really three different companies. And in this case, a lot of the independent locations are actually run by franchisees. rather than actually corporate locations, which to me I always notice because I go to a hurt sometimes and I'm like, this hurts is really good. Then I go to the next hurts and I'm like, this hurts sucks.

And I think that's why it works the way it does. Yeah, makes sense. I definitely have noticed that as well. So Anchorage is really interesting because obviously there would be some seasonality there. You know, the winter months probably aren't very busy or maybe they are with different types of clients. Yeah. But yeah, it sounds like a great business if you can make the investment.

It's a pretty big company. And there is probably a lot of maintenance CAPX. You know, you've got to be replacing the fleet. You've got to be maintaining the fleet. And I don't know if that's really captured in this EBITDA here. Obviously, EBITDA, they're adding back depreciation. But how are we covering maintenance CAPX? The true cash flow of the company would sort of deduct.

that out of it. Yeah, 100%. Yeah, so I think you're pointing out, and to explain it in simple, girdly terms, that I can understand. So the revenue forecasts for 2023 is 27 million. The adjusted EBITDA is 15.5 million. The key term there is what is that adjusted? And then also, what is DNA in terms of depreciation and amortization truly look like? Because I don't even know, what is the schedule of how quickly you can depreciate cars, is it, is it a year? Do you get to bonus depreciate them if you're a corporation? No, I don't actually know the answer to that question, but I'm sure that you can depreciate them pretty quickly faster than you probably, you know, they probably use them longer than the depreciation schedule. So there's probably a positive delta between the amount of

depreciation expense and the amount of true CAPEX cost, but you know, there's still probably, I'm still guessing that the actual EBITDA is a little, or free cash flow. let's call it, is a little bit less than that EBITDA of 15 and a half million. I would be shocked if it's not a lot less. But that's just me being a glass half-fold kind of guy. I'm such an optimist, but then I look at all these deals and I'm like, they all suck. Yeah.

This one probably doesn't suck, you know. It probably doesn't. But it's just maybe, you know, they're definitely putting the biggest number out there like most teasers do. Yeah. It's probably a little bit smaller. But I would feel like, you know, it's a solid. company, I mean, you own sort of everybody that's coming into Anchorage that needs to rent a car.

I think that's a pretty stable, stable business. I don't know about growth prospects. And that's where you'd kind of think about, like, what would you pay for this? Because you probably are, they're probably as big as they're ever going to be. You know, I don't see how you really grow, especially in Anchorage. Yeah. When you're, have you ever just, there's a lot to talk about with this, but if you ever looked at the history of the Anchorage Airport, have you ever followed it? As an airplane nerd, I'll tell you, for a while, Anchorage was the busiest airport in the world. And the reason was because of communism. And that all was because the Russians during communism would not let European airplanes that wanted to get to Asia fly over Russian airspace.

And now they do like crazy. The Russians let the airlines fly over because they get paid. a lot of money every time an airplane flies over to go, say, from Tokyo to Amsterdam, but the Soviet Union was like, forget that, we're not letting you come over. So all the planes would have to stop in Anchorage in order to get from Europe efficiently

to Hong Kong or Singapore or whatever. And so for a while, it was one of the busiest airports in the world. And then communism fell, and the Russians started to collect money from the whole thing, and they started to change that. And so now Anchorage is actually, huge as a freight stopover. So like all your Asian freight will stop over in Anchorage. So there's

a big FedEx and UPS hubs there. And so like the big 747s and all the cargo planes, they all stop there to refuel on their way into the United States. So it's totally fascinating. But the story of the Anchorage airport going from this like massive passenger thing to like this massive freight thing to like, I don't know what it is today is like an amazing story. Yeah. That is very interesting. I did not know any of that. And certainly, you know, knowing that makes it a little more interesting kind of where is it right now and all those changes and, you know, what is the, obviously the growth is there. I'd really want to know what this business looked like before 2020. I mean, you almost don't even care about, I mean, you know it's bad 2020 and you just kind of want to see what was,

what was it like before COVID? A million percent. Yeah. And also like, I mean, it is so weird when you look at the Alaskan demography, right, of where people are located. I think it's like one out of every two people live in the number one and number two cities. Like it's just such a vacant city. But even then, I was just looking at it up, even then Anchorage, I think is only like a half million people. It's like crazy how small it is. That's how big Corpus Christi is. And most people couldn't pick out Corpus Christi in the state of Texas because it's just like a, it's a second-tier city maybe, you know, because it's just so small. So just to really, interesting one. I was just trying to look up what the air traffic is in terms of passenger

embankments and that sort of thing to come in and out. But yeah, they do three million passengers a year from Alaska Airlines and then Delta is 700,000 and United is 300,000. And then it kind of goes down from there. And the number one destination from the U.S. is Seattle and number two is Fairbanks, and number three is Chicago. And then Minneapolis passed that. So not a crazy busy passenger airport. I mean, to put that in perspective, you know, you're near some hugely busy airports. What's the nearest airport to you, Orange County? Ron Wayne, Orange County. Yeah, yeah. I think Orange County, which is one of the smallest Southern California airports behind Burbank dwarfs this, right? In San Antonio's airport is 12 million passengers. And, you know,

this is not a big, despite having a lot of plane embankments that look like, is not a big passenger airport. So anyway, just something to think about with this deal is like, how many people are flying to Anchorage and when are they flying to Anchorage and what do they need a car for? That's all stuff we're thinking about. It's not probably very diverse. As you pointed out in their history,

kind of went from one thing to another and it's probably today not very diverse. So that means something would happen to that kind of travel and cut your numbers pretty, pretty low. I also have noticed Alaska businesses, the deals are hard to put together. Even if the business is good, there's just a different lifestyle. This is kind of the same thing in Hawaii. Alaska and Hawaii, like double the deal time because people don't really work that, the same way there that we might in other areas.

It's hard to get a hold of the attorney. It's hard to get a hold of, you know, everybody and to get the diligence done. Maybe this one would be different, but I definitely have seen that play out in Alaska deals. It's interesting. So what's the problem with like Hawaii attorneys and bankers and stuff? Is it just like, I don't know, what is the equivalent from Mniana? That's what we called around in St. Antonio. It's like you're on island time.

It's like island time and Hawaii and kind of the same like outdoor. They live there for a reason. And it's not to be sitting in front of a computer. And so they don't do, they do maybe as little of that as they possibly can. and that's just what I've noticed. Very interesting. Yeah, my ancestors moved to San Antonio because they wanted a slower pace of life. And then do you see what happened to me?

Look, we got so weirdo. I tried to slow you down, but they couldn't. Nobody could stop me. No. Nobody stopped me. I like the game too much. So I have a question for you. I mean, how much do you think about the fact that,

okay, whenever I see a franchise up for sale on a mass market website, And this is off of Woodbridge International, which this is an out of character deal for a Woodbridge. Like if you look at their other listings, it's a lot of like print shops and that sort of thing and, you know, more Main Street-type business. And then you have this very large franchisee that has somehow been passed on by all the other franchisees. Like, is this one of those things that I'm like, well, wait, why are we the lucky buyer? You know, because you and I don't know anything about this. Why are we even seeing this listing? That's the thing I'm confused about. Very true because within a franchise community,

they're going to trade that way first. And so, yes, there's got to be a reason that the other franchisees don't want it. And it could just be how remote it is. You know, it's too far away from their other operations and no one wants, you know, you'd really kind of have to live there to be on top of it. And maybe if you own another franchise in Seattle

or wherever the nearest airport is, that's just too far away to be managing. So it could be that, but it could be that maybe there's something not that great about this. Yeah, there may just be some aspect of this that we're like, oh, this sucks. So we just have no idea. Yeah. So, you know, let's say I think this comes up often, right? Because we're oftentimes looking at deals and we're like, well, I don't know anything about that.

I mean, I knew a lot about fireworks, but I don't know anything about buying car rental franchisees. Like, how would you, and maybe you did this through your banking career, like how do you advise people to go, like, learn about an industry. They don't know anything about. Like, if I was to consider this business, like, what should I do? What's your recommendation, people? I mean, a lot of them start with publicly traded companies and looking at the financial analysis of those companies.

You know, it can tell you a lot, especially if they're, you know, being followed, and there's a lot of notes on them. So you read those. Obviously, a lot of interviewing of people who are in the industry, find anybody that you can to interview. this is kind of a retail business. So, I mean, it takes a certain kind of person to want to deal with a business that's

dealing with the public in large numbers. So I think you can kind of draw some parallels from other industries that have that and make sure that that's something that you're going to be happy with. But you're right. This is the kind of business where we're not going to find too many buyers who, if they're not already within these franchises, who say, yeah, I have experience in this industry. You know, there's going to be someone without experience. And that's a little scary for something like this.

Yeah. Now, things that I like about this deal. Let's do things we like about the deal because it's been told that I'm too critical of crappy businesses. So let's talk about the good stuff. Like, the good stuff is like people are going to keep renting cars. They're not putting in subways to the Ted Stevens International Airport. So all that's there.

People, you know, in terms of the tailwinds that you have here, people are going to keep going to Alaska to visit, you know, the country there, both for business and other stuff. Like the oil's not going to stop flowing out of, you know, the oil fields in Alaska and the same with stuff going on there. Potentially, the planet warming and climate change is in your favor here. Like you could see all of that despite the sun not shining for vast swast of the year. There's a lot of positive stuff in terms of, you know, maybe it'll be warmer and good.

Anyway, and then I love, you know, it's just like your source of customers is pretty straightforward. forward, right? Like, you're tied to Hertz or tied to whoever you're working with. And like, look, first place I look is I search for Hertz whenever I travel, because I know it's just going to work when I get there. And that all matters a lot to me. And I'm willing to pay an extra 10% to do it. Like, those are all things I like. What do you like about this one? Yeah, I like all of that. It's obviously, it's very stable other than an event like COVID. That's sort of the only, it's right there in 2020 you can see that. But it looks like in every other year it's it's growing and uh and you would imagine that it would and you're right it's probably not

very price sensitive you you need a car in anchorage you're going to get you're going to get one of these cars most likely from this business i like that all of that a lot i i i don't want to go back to what i don't like we'll get there soon look heather do not girdly this listing like let's let's be positive i'm trying it's hard uh because it's so easy to criticize it's harder to see what I like. Long-tenured successors trained to take over owner's roles. So it sounds like they're kind of acknowledging that they need to, you know, have a really good transition period and help somebody out here.

Okay, that's pretty good. No customer concentration. Yeah. It's a bunch of consumers. And you're being paid by credit card, but probably a lot of it in advance, right? So I think probably working capital here is probably neutral to net. negative, meaning, you know, you're getting paid up front, at least part of it. So I think I like that.

Your labor force is probably pretty stable, I'm guessing. You know, they live there and this is their job. And so you're probably not having a lot of competition for that labor. I could be wrong about that, but I'm guessing that. I think there's some good things here. I think this deal, like, I will definitely say it's, there's a nice company there for the right person with the right structure. You know, I definitely think so. Yeah, and so then maybe next before we start pooping on it,

like what kind of questions would we have about this one? I think number one, we haven't really talked about seasonality, or you kind of hinted about it before, like, you know, what does your business look like during the year? That would be a question I would have. Number two is like, what is the durability of these franchisee agreements? Do I have to worry about them shopping it? How long do I have that?

What is the risks that I'm going to lose it? that would be something there. And then I think question I would definitely want to dig into is they've only showed us adjusted to EBDA here. And when I see that, that is the biggest, like, flashing yellow light that I need to actually go look at how much cash do this business truly generate and how much of it is tied up in cars and tax savings and CAPEX and all that kind of stuff that gets adjusted out and looks good on a balance sheet.

But, you know, Heather, folks like us don't get to buy Ferraris from depreciation. That's just, you know, someday when I buy a Ferrari, I'll let you know if that works, but so far I've read you can't buy a Ferrari from CapEx. No, exactly. So you're the same as me. As a financial person,

that's the first thing I think of to you is I go to adjusted EBITDA. Well, what's the adjustment? You know, let's break that down. And then are we counting for all those other things? You know, what does it like to buy this fleet? And what happens, you know, how do they exit the cars too?

You know, I think there could be some challenges up there. Maybe they have to ship the cars further when they sell them. I don't know. Or can they sell them into the local market? There's probably a little nuance there that would be good to find out about. But yeah, for me, it's like what are those adjustments? How are they handling CAPX? And I'm a little curious what's driving growth.

That would, you know, because I said earlier, I think this would be a hard business to really grow fast. It does have some growth, though. So, you know, I'd want to know is that, is that increases in the rates? Is just passing on kind of inflation to the customer or, you know, and what, you know, and the margins have been actually improving. Yep. So that would also be a question, you know, did they pass along their cost plus, which would be good,

whenever we see businesses that have done that during the inflationary periods. But, you know, I definitely would want to dive into that 15 and a half million. And I don't know what multiple someone would pay. It's a big company, but, you know, this is a tough one for me to guess at. You know who would know, somebody that's already in the car rental business that has passed on this. Right. So the why I'm the lucky buyer may be why we're looking for the lucky sucker. That's what we're trying to do here.

Yeah. So consistent with my thesis that this is Alaska, I just looked up on the state website of Alaska, there are nine counters for rental car companies at the Ted Stevens, Anchorage Airport, and three of them are Hertz brands. So that's Hertz, Dollar, and Thrifty. And so I think that's what it's got to be because I think the other ones are Alamo, Avis, Budget, National, and Alaska 4x4 rentals. So we know Alaska 4x4 rentals is its own thing.

That's not part of a chain. and then I think Enterprise and National are tied up, and then Avis and Budget are tied up. So I think that's maybe that's how that works. But anyway, I think that that narrows us down that this is probably the Hertz brand at this particular report. That's my thesis.

And then back to why didn't the other Hertz franchisees want it? Very interesting. Yeah. Yeah, that would be my very first question for the broker. Also, why this broker? I mean, I think that's just like $15 million, EBIT of businesses. If you click on this link, for those of you on not on YouTube,

there's a link where you can click it, you can sign the NDA online, and they send you the full book. We have not done that because that kind of ruins confidentiality if you start talking about on a podcast. But like, people don't do that for $15 million EBIT of businesses and they're not done through random mainstream brokers. So this is just, I kind of want to sign this one just because it's fascinating to figure out what the heck's going on with this one. It's like a fun puzzle. Yeah. And I guess it's the old, who is the seller? Why are they selling? Yeah. Oh, good question. That would be it. Yeah.

Interesting. Look, here's the biggest problem. We never really talked about it. I don't want to live in Anchorage. There's the reason people don't want to live there. It's like dark all the time and cold. It bears eat you. Like, none of that sounds entertaining to me and all.

They do. The bears, I've been to Alaska and, yeah, they have to carry things, you know, bear spray and, you know, horns around to scare bears off. It's actually pretty scary. but yeah, I think it takes a certain type of person that would want to relocate there. Yeah. And so that could be part of the problem they have too is just they have a limited market of people that would actually want to own this business. Totally.

Yeah. So I wonder, you know, it's interesting. They talk about this. The owner operator has run the business. And, you know, I wonder why that is. Like, could you not, this is a big enough business. you could hire a really good, a really well-paid employee to GM it, assuming that, I mean, even if you're throwing off a third of the adjusted EBIT in cash a year,

that's several million dollars, that gives you really an opportunity to, to hire a good person. Really, I mean, there's a lot of people that don't move to Anchorage for half a million dollars a year. Not me. No amount of money will make me move. But anyway, it's just, there's just stuff about this. It's just like, what?

This doesn't make sense. Yeah, I do definitely think knowing more about who the seller is, why they've operated it that way, and why they're selling right now might really enlighten the person that was thinking about this company. Yeah, super cool. All right, do you have any other comments on this one? Otherwise, if any of our listeners, check this one out.

I'm definitely interested in hearing their thoughts on it or what they learn, and we'll talk about this one on Twitter in case folks have any importance. hood at all. Yeah, I'd love to hear it too. Super cool. All right. Well, hey, this is our first one-on-one episode, I think. Or didn't we do some before? We usually had Mills or Bill in here keeping us in line, but I think we did great without them. Yeah, we did good. So you know it's super weird. Like every time they would have an episode without me, they would spend like five minutes talking about how there's no adult supervision for their episode and they were going to break some rules. And then they just do an episode like we always, yeah, I was like, what rules are you breaking here?

Right. They just went ahead and did a good job. Good for them. All right. Well, cool. I'll click stop on this one. And thanks for being here. Yeah.