Acquisitions Anonymous - #1 for business buying, selling and operating - $1.7mm Revenue Amazon Automotive Tool Business / $22mm Civil Heavy Contractor in Corpus Christi - e28

Episode Date: May 17, 2021

This week, we discuss two businesses for sale:- $1.7mm Revenue Amazon Automotive Tool Business- $22mm Civil Heavy Contractor in Corpus Christi (Do you have a deal we should discuss? Email it to us! michael @ girdley dot com.-----* 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.-----Past guests on Acquanon include Nick Huber, Brent Beshore, Aaron Rubin, Mike Botkin, Ari Ozick, Mitchell Baldridge, Xavier Helgelsen, Mike Loftus, Steve Divitkos, Dzmitry Miranovich, Morgan Tate and more.-----Additional episodes you might enjoy:#62 Two Landscaping Businesses for Sale - Mike Loftus CEO of Connor's Landscaping#66 Analyzing Software Businesses for Sale with Steve Divitkos, experienced industry CEO#42 $900k Moving and Storage Company / $500k Rural Mini-Storage#61 Two Manufacturing Businesses for Sale - Brent Beshore - Founder and CEO at Permanent Equity#24 $5mm pool services and lifeguard staffing co / $2mm septic services business -  featuring baller @WilsonCompanies as a special guest!#45 $800k/yr cleaning business in Midland, TX / a $565k/yr window cleaning business in San Antonio, TX #48 Two Landscaping Businesses for Sale - Mike Botkin of Benchmark Group--- Support this podcast: https://anchor.fm/dealtalk/supportSubscribe 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]

All right. Welcome to Acquisitions Anonymous, the weekly podcast, where me, Michael Girdley, and my two co-host, Bill Alessandro, and Mills Snell, the newly business bought Milesnell, by the way. Congratulations on reaching the big time, Mills. Thanks, man. I'm just glad that, I think on our second episode, you didn't remember my last name. So I'm glad that now after 20, you got it. Thanks. It's because you bought a business. So now you're legit. Now I'm actually, now I'm actually friends. You were dead to me before. Now you're something. Yeah. Just so you know. That's the whole reason I did it. The cash flow, the wealth building, none of that matters. Anywho, you're always special to be Mills, Jackson. I mean, Snell. No, anyway, the theme of this podcast is a great one. The three of us get together. We have varied backgrounds. And each week talk about two small businesses that are for sale, typically, that are going to be priced,

20 million are below, that we're breaking our own rule this week and have one that's bigger than 20 million, though just by a little bit. So cool thing. We have both of our deals this week are submitted by listeners. Again, if you're a listener, and you would like to have us analyze a deal on the podcast, you just send us a teaser or summary or whatever you feel comfortable with, and then we we will keep the deal as anonymous as you want it, and then we'll talk about it. So you get free consulting and we get a podcast out of it.

It's great. Cool. So here's the first one. And it is from a brokerage. The title is SBA prequalified. So small business association loan prequalified, 11 year old Amazon private label business. FBM 3PL. What does FBM stand for, Bill? fulfilled by merchants. So what this means is rather, this is the opposite of FBA. So FBA be fulfilled by Amazon. You sent the Amazon's fulfillment centers and they ship it. FBM is you ship it from your own fulfillment centers. Although this one says FBM 3PL, which implies to me that they have a 3PL that does

fulfill by merchant on their behalf. Got it. Okay. And so FBM fulfilled by merchants. So they fulfill the orders themselves. So they run their own warehouse. But then they also do third party logistics. No, I think they don't run their own warehouse.

I think they have a third-party logistics firm who runs their warehouse for them. Oh, okay. Well, that sounds even better. And then they are in the high-mergin automotive tools business. Business size, revenue listed as $1.7 million. They list income as $416,000, and they want a multiple of three-time revenue for the business, or three-time income for the business. So that means for $1.7 million of revenue, they have $416,000 in income,

multiple of three times, and they're asking $1.25 million plus the value of their inventory for the purchase price. So they always sneak that inventory stuff in there. I'll go on my cell box in a minute about that. Yeah. Well, and if you want to go find this one, we're only talking about public information on this one. It's on Quietlight, the Quietlight brokerage's site. So we will also poop on the level of detail in this teaser. So, but anyway, started in 2009, this 11-year-old Amazon, FBM, and FBA business, private label business, has enjoyed sustained success over the years with 630 active skews. That's a lot. This business sells high margin branded tools for automotive mechanics for engine and chassis repairs.

They're also a distributor for flexible cylinder hones. Hones? Hoses? I don't know. Yeah, the meta comment about this is going to be how bad this teaser is. So somebody should have put on their try hard and they got the try not hard here. flexible cylinder hoses for domestic supplier and a drop shipper of vinyl tire covers. This business has a longstanding relationship with an overseas buyer representative, which gives them the ability to source any tool on the market. Because of this, they also offer tools outside of the automotive segment and have unlimited potential to add new skews to the brand. The business enjoys multiple revenue channels with Amazon accounting for 60%,

with 90% fulfilled by the merchant and 10% fulfilled by Amazon. eBay is 30% of their business. wholesale is 5% and direct consumer via their website is 5%. So mostly Amazon with some eBay. With more than 11 years since launching their first queue, the brand has established itself deeply within the Amazon marketplace, boasting over 500 reviews for the main product, maintaining the Amazon Choice badge on several products

and earning an average star rating of 4.2. All products are sourced in China with reliable and proven vendors, and all FBM is handled via their third-party logistics provider in the United States. And the owner believes, there are several obvious areas for growth, including increasing fuse to send to Amazon, getting on Walmart, and upgrading to Shopify from the guy's current Yahoo stores.

The owner is selling because he would like to retire and is now fully prepared to transition a new owner into the business. So please, I will pull out the soapbox and let Bill stretching for those of you that can't see the video and about to rip this one, a new one. So, Bill, over to you, sir. This is me cracking my knuckles. Oh, this business is, here's a couple things to jump out at me.

630 skews is a ton. And they say they've got this long-standing relationship with an overseas buyer representative. It gives them the ability to source any tool on the market. So what this tells me is, this is China arbitrage, is what this business is doing, essentially. Right. They're buying tools in China. They're probably screen printing their name on them, and they're selling them on Amazon and on eBay. Not that that's bad, but that's definitely what's going to.

going on here. What I think is interesting is that they're doing 90% FBM and only 10% FBA. That would make me guess that these tools are either are one or two things, either very heavy, which means the FBA fees would be very expensive or very large, kind of oversized, which FBI hates and charges through the nose for, or lower probability, very cheap, small and light, which it's hard to make money on in FBA. So I would bet these tools kind of fit one of those buckets, either very heavy, very large, or very cheap. And that's probably why they're doing FBM rather than FBA. They're also doing 30% of the business on eBay, which means they're probably just spraying and preying these skews. The other thing that jumped out of me is 11 years in business,

and their main product has only 500 reviews. That is not a very big number to me for 11 years in business as the primary product. So what this makes me think is this might be their number one product, but I bet it's 10% of sales or something like that. So it's either, this is either a very long-tailed business or they're horribly under-optimized on Amazon. So this might be a really good thing, because maybe they're terribly under-optimized, but I would bet this is probably a really long-tailed business. I'm also not in love with an average star rating of 4.2. Like, that's a great thing. That's like just kind of hanging on by a thread. 11 years old, like, this is interesting.

This is a guy with a supply relationship in China. You know, China arbitraging to Amazon and eBay is kind of my take on this. It's just really hard to know how attractive this is without seeing the products. But I would guess being kind of the way they're sourcing the numbers to use they have, the products are probably not differentiated. It's just China arbitrage. Yeah. Well, and so just coming from a top-down, like, novice in the space,

I have to wonder why Thrasio or any of the 85,000 other people rolling up FBI businesses hasn't picked this up. And you think it's because it's not very good? It's because it's a couple of reasons. One is 90% FBM, which the aggregators don't like. They want it to be FBA. So Amazon handles kind of all that. You don't have to think about it. Also, when it's FBM, you have to handle more customer service.

But when it's FBA, Amazon is the front line for customer service. So if you're an aggregator, you hate that about this business. Now, that might mean it's a moat for this business. Like maybe they're selling these big, heavy things that are hard to do via FBA. So the fact that they've got FBM set up is potentially a moat. And that's probably why they've also expanded eBay because they've already got the development capability. I would say the other reason an aggregator hasn't scoop this up is because it's so many skews. 630 skews.

That's a lot of business complexity. and this business is not that big. It's making 400 grand a year on 600 skews, which means you're making less than $100,000, or less than $1,000 a year profit on every skit. I mean, on average, right, if you just do the math. I'm sure there's a bit of a bell curve, but as we said earlier,

I think this is actually a long-tail business, given the paucity of reviews on what is called their main product. So I think that's another thing. It's just a lot of business complexity, probably for the size. I just have a few questions. where you built, my head kind of spun a little bit on a Yahoo store, the transition from Yahoo to Shopify, I don't look at that many of these businesses, but I don't ever see people

hosting their e-commerce on Yahoo. What's that about? You would have in the 90s. But yeah, I mean, this tells me like it is ancient. It's, uh, Yahoo! Yahoo! You used to have a product called Yahoo stores, which was, like, hosted e-commerce, like, way before anybody was even doing that. It's like three generations old. Like I can't even, I thought they sunset it, to be honest. I didn't even know that you could still be on Yahoo stores. But that's so it's about time, mood shop five. That being said, website sales 5% of revenue here.

Yeah. All right. This comment they have about, you know, expanding into Walmart.com, that I feel like they're maybe making it sound easy. How involved is it to expand to Walmart.com? So it entirely depends on what kind of software. tools they're using. If it's possible that they already have kind of a multi-channel lister software setup that's listing their stuff on Amazon and eBay, because they're doing 30%

on eBay. So it's possible that adding Walmart might not be that operationally complex. That being said, I wouldn't expect like a huge revenue pop from doing it. You know, you might get a 10% revenue growth or something. The Walmart marketplace is just not that big. Gotcha. Then there's this comment. Okay. So it looks like, the vast majority of their business is this kind of China arbitrage. But then these random two other things that may be their wholesale, you know, 5% of revenue, the distributor of the flexible cylinder hones or hoses, whatever it is. And then they drop ship vinyl tire covers. So I'm just trying to think through if you're a drop shipper for a manufacturer, that means that

Folks are going to the manufacturer's website to buy vinyl tire covers and you're just holding inventory for them and drop shipping it for them? Is that most likely what's happening? Or are they coming to your website and buying it? Thank you for calling out the sentence because this is definitely worth unpacking. So the sentence is they are also a distributor for flexible cylinder hones, whatever those are, for a domestic supplier and a drop shipper of vinyl tire covers. So this probably means the first part of the sentence, a distributor for flexible cylinder hones, what this probably means is the cylinder hone manufacturer has no idea what the hell Amazon is. And so they went to them and go, hey, we would like to basically be a distributor for you. We negotiated distributor

pricing. And the distributor hones guy goes, sure, whatever, as long as your money's green. And then they're listing it on Amazon and probably arbitraging that. So that's probably what's going on there, at which there's a lot of Amazon businesses like that. And then the other thing, this going on, a drop shipper of vinyl tire covers. What this probably means is someone is dropshipping the vinyl tire covers on their behalf. So they'll sell a vinyl tire cover and the vinyl tire cover manufacturer will send it for them. Typically in e-commerce world, if you say I'm a drop shipper or I'm in drop shipping, that's typically what people mean is that their inventory light. And they just do the e-com side of it and someone drop-ships on it.

we have. Okay. All right. So it's not that we provide warehouse space, you know, for somebody else's goods. It's the opposite of that. I agree. It's written the way you described, but just kind of knowing what I know about this industry and the lazy lexicon of this industry, this probably means that their inventory light on the vinyl tire covers. How is the category of, you know, kind of automotive, I feel like we've seen a handful of these, like automotive, motorcycle. accessories, but like automotive tools seems like it, you know, you raise some issues about it. They may be big, they may be heavy, but what's the relative kind of value, competitiveness, you know, attractiveness of automotive tools? So automotive is a fascinating industry. I didn't know much about

it until I made a really good friend when I lived in Colorado and he owned a brand of automotive chassis parts that he cast overseas in Taiwan and Hong Kong. And he taught me, I went to their biggest trade show with him, Seema, which is in Las Vegas, is the automotive aftermarket trade show, which is the largest trade show in America. And the automotive aftermarket industry is absolutely effing massive. And it's a really a long-tail industry also when you're talking about aftermarket car parts anyway, because there's all these different makes and models, you know, still on the road. And they stay on the road for 30 years, right? And so the aftermarket parts, you know, kind of is very long tail. Now, I don't know if

that applies to the automotive tools segment. But I would think, kind of in the short to medium term, this is probably a bigger market you would expect it to be. And if you want to kind of underscore that, drive around town and notice how many used car lots and mechanics there are. When you drive around, your eyes kind of roll over them, but they're freaking everywhere. And there's just huge demand for this, a huge market.

In the long term, I might be a little bit worried because the tools to fix a Tesla are probably very different than the tools to fix a GM. But I don't think that would be a near-term concern for this business, again, because of the really long tail and light. I mean, in 50 years, there's still going to be gas cars on the road. We can be sure of that. They might not be making new ones, but there will be gas cars on the road. So this, I like the automotive aftermarket industry. That being said, I don't know if this is automotive aftermarket.

this is more kind of tools to people who work in the automotive market. It's interesting to me the differences in the e-commerce world with these categories and the lower middle market private equity world because there are certain segments in lower middle market private equity where you just know you're going to get tons of customer concentration. So if you work with or you look at a deal that is automotive related in private equity, you just know you're going to have massive customer concentration, probably 20 to 30 to 35 percent customer concentration at best because there's just so few manufacturers. And even if you trace it back, right, you may have a couple middle tier, but at the end of the day, you're basically selling

into one of just a few. So it's interesting to think about down the food chain with something that's not an OEM or something that's not directly in the supply chain, these ancillary things, just the different characteristics of it. Yeah, yeah. Like you're saying there's like there's Napa, there's O'Reilly, and like that's nearly it. Right. So I'm even more thinking like if you like I've looked at a handful of deals in the past of like, hey, we make this wire harness.

You know, it's basically a bunch of wires that are all bundled together and they go into GM vehicles or they go into Ford, you know, vehicles. And so at the end of the day, if you're making these wire harnesses, your margins can look okay. You can have a fairly differentiated product, probably with a medium term contract, but you may have 60 or 70% customer concentration. But you also then get into NAPA

and advanced auto parts and stuff like that because you're providing this thing that's in thousands and thousands of cars, hundreds of thousands of cars, and then they also have to be replaced and repaired. But you end up just, you end up marrying your, to customer concentration. It's the same in aerospace. If you make something that goes into an airplane,

there's only a few airplane manufacturers. So at the end of the day, if you're making something that goes into an airplane and Boeing doesn't do well or Airbus doesn't do well, then you're in bed with them. Yeah. Yeah. So you're talking about OEM automotive, if it's going to go in a new car. Yes. Yeah. Or replacement parts. But just accessories, right, or kind of things that go along with your vehicle, like seat covers or vinyl floor mats or whatever, those are in a totally different category in my mind. And that ends up usually being in this e-commerce channel. Yes, that is what I would call automotive aftermarket, like automotive accessories or upgrades or, you know, kind of hobbyist stuff is a really big and good market that you probably have less customer concentration. And e-commerce

loves it because of the long tail, no shelf space constraints, it's perfect for the internet. All right. Well, it sounds like we love the space. kind of worried about this one. Yeah, question marks. Question marks. Well, in the sake of time and I think closure, let's move on to our second deal, which I also have, and I will pull it up here. It is right around the corner from me in South Texas in the mostly lovely city of Corpus Christi. Funny story about Corpus Christi before we go there. I went down to pitch some investors there one time, and I was like, ah, you know, why are you interested in investing in people in San Antonio in the rest of Texas.

And this old guy, is an old crusty rich guy, he goes, son, Corpus Christi is where good ideas go to DA. I was like, that is not

what the Chamber of Commerce wants you to say. Anyway, on to this. Maybe these guys have a good idea that's not dying. So this is a teaser

that we got from a listener, and it comes from an advisory firm business broker called trusted advisors. So it is a, the title is a diverse, heavy civil construction services business with 97 employees, 20 plus active jobs at one time,

and 11 million. A backlog. Then the subheader is cash flow is $4.3 million a year. The seller is asking $22 million for the business. Revenue is $23 million and cash flow is $4.3 million. And they appear to be asking about five times cash flow. Am I reading that right? 4.3 million cash flow times times five is about 22 million. It is in Corpus Christi,

and they serve a hundred mile radius around Port Lavaca. Port Lavaca is like a town 35 miles away or so from Corpus. They have 97 full-time W-2 employees plus a bunch of subcontractors, hires as needed. The owner wants out because he's retiring or she is retiring. Profit margin is 18%. It's really high for this type of contracting. Intangible assets include diversified services and client-based, solid reputation in the area, long-standing relationships with general contractors, and word-of-mouth referrals. Details on it. This heavy civil construction business has 11 million in backlog, so that means bookings that they've already made but they haven't delivered on. And they have over 20 active projects going on at one time. Their sales size ranges

from 200K projects to over 2 million. With a team of 97 full-time employees in place, their sale size ranges from 200K to 2 million. Didn't they just say that? Is that mean? The Sim says the same thing twice. They have averaged over 225 jobs per year for the last three years, and they're already on their 70th job of 2021, and they have plentiful work there in Corpus Christi.

They offer a vast array of heavy civil construction services that included building streets, subdivisions, commercial buildings, and industrial work at petrochemical plants, as well as utility system construction, earthwork, site prep, coastal erosion control, shoreline protection, and general maintenance. So Corpus Christi has a bunch of oil refineries there, and it's on the water in case you didn't know. Most people don't know because it's corporate Christi.

By the way, I'm going to lose all both of our Corpus Christi Luster based on this. Clients are comprised of professional or private developers, industrial, counties, city, states, and government. So they do B2C or B2B and B2G. This versatile offering of services and diverse client base works in this company's favor. As they don't rely heavily on one client or sector, approximately 65% of their work is as the general contractor, primarily for the county, city, or state. So they must be bidding a lot of stuff there. And the other 35% involves working for the GC on the project as a subcontractor. So they work for

the general contractor who has the client relationship. While they do have a go-to list of subcontractors when needed, the majority of the time, it's their own team doing the work. Put an asterisk X, that that's important. The team works out of a 6,000 square foot office building located on five acres of land. The facilities include one heavy equipment shop, one truck shop, one fuel and oil shed, and the owner of the business owns a facility under a separate entity and leases it back to the business for $9,000 a month. With a solid reputation in the area, the business has a long-standing relationship with customers and GCs alike, they're able to keep their service area within a hundred miles radius of the office. So that's a good thing for them. They have a bunch of

software that they use, it appears to be more modern, and they receive invites to bid from other GCs, they've worked with over the years, and they also subscribe to websites that send notices of upcoming projects that are up for public bidding with a 20 to 25% success rate. Priced at $22 million, there's ample opportunity for growth, including expanding the service area, actively pursuing more bids, opening a satellite in an office area nearby where the population is booming, would certainly lead to an increase in revenue. More facts, companies been around since 1959, incorporated in 1971. Current owner bought it in 1996.

They're in Corporate Christie. Any other stuff going on here that's interesting? Sellers willing to stay for six to 12 months. And the current owner says they do general oversight. So I don't know. It seems like a hands-on owner because they have the CEO title. But there is also a general manager working for the CEO and owner, which maybe is a good sign that there's some established transferability of

manager there. and then they list the current people that are on the company and that the company's been growing over the past couple years. 2017, they did $18 million in revenue. 2018, they did $23 million in revenue. 2019, they did $31 million in revenue. And then it looks like in 2020, they dipped way down back to $23 million in revenue, if I'm reading this correctly.

That is interesting. So if you look at this bar chart, they're showing 2017 through 2019, revenue. They just don't show 2020 and 2020 revenue would have been down like 35%. Yeah, it looks like they... They just left it off for bar chart, but it's in the table. That's the biggest crime of all. They need to put in their COVID-adjusted revenue, right? This is crazy because every, every graph, right, that you see in a sim is just up into the right. And this one is up into the right because they left the last year off.

Yeah, so Mills, this is your space. What do you think? I mean, there's a bunch of things. The total adbacks in each year is between $1.6 and $3.3 million. So it's very, very significant. It looks like compensation to owner, that's probably material. Depreciation is massive, which is no surprise in this business. We can talk about that.

I will add something that is not put in there. If you look under the compensation to owner, to the right under the note, it says three officers. So I think that means there's owner and a couple kids working in this business, if not a spouse. So this is a legit family business run like a family. I mean, they want to add back marketing expense. There's a lot you can say about this. So, I mean, at the highest level, it's actually really difficult to understand from this deck what the company he does. It says that they do heavy, you know, civil, diverse, heavy civil construction services.

That could be paving. It could be grading. It could be earthwork or site work. They could be building retainage ponds. They could be prepping parking lots. You just have no idea. And that, to me, is a pretty big deal because some of these categories are much better than others. Right. If all you're doing is going right in front of a, you know, a home developer for a big track home development and paving and curbing, right? Then that's a totally different business than, oh, well, you know, the Corpus Christi, you know, city municipal government calls us in to do repair work, right? Or heavier repair work than what their in-house crews can do. Like, you just don't know. And in this case, it's, I would say it's a bad thing that we're not getting clarity on this. Depending on what

they do. The regulatory environment for site work and dirt moving is just ever increasing. So if you want to pave a parking lot, you know, you can't do that without creating a retainage pond. And it's very, very expensive. I mean, depending on the area and the municipality that you live in, site work can be a substantial percentage of your overall project. And it's regulated. You have to do it. So it could be beneficial, but they don't say anything at all that I've seen, unless I've mystic guys about so they tell us that they have $12 million of equipment but nothing about how you know how depreciated it is in a business like this it's probably almost fully depreciated there's just a whole rat's nest of issues that we probably don't have time to get into

about where the value actually is in a business like this I just would be willing to bet that you know you're buying a bunch of really old equipment the owner hasn't kept up with all the reinvestment. If they have, they've maybe bought a bunch of toys. I don't know if you guys have ever run across this, but some business owners like this, they really love to have like the newest, the best type type stuff. But it's not necessarily the stuff that's most pertinent to the business. It's just like, oh, I found this new cool piece of equipment. And we, you know, we thought we were going to use it a lot, but it just sits in our yard and it looks really good. The people that own these businesses always seem to be the ones that are like the first one to

buy the new Corvette when it comes out. Like, every time I go visit these businesses, the owner's driving like a yellow Corvette. It's like, that's just great. That's just that. I hope you enjoy that there, Mr. 65-year-old construction general contractor. It's pretty cool. Yeah. Well, and so you know the space by me, Mills, but like even with the adbacks, like the

multiple here seems insane. Like, because most of the transactions that I see that happen in businesses like this, where you can have low net margins, right, where these guys are doing pretty well compared to most, but a lot of them trade at five, you know, have five to 10% net margins if they're good. And then like they end up trading based on some sort of earn out

with employees and stuff like that rather than getting bought and sold so much, just because the cash flows are so tough to predict. Yeah, I mean, the Cappex requirements on this, it's safe to assume that the Cappex is probably between a million and two million a year, keep this equipment up. So EBIT DA is not even, you know, an appropriate measure at this point. But yeah, I mean, it's, these businesses are very, very difficult to transfer because you also

have a bunch of depreciation recapture that the owner's going to have to face on all this fully depreciated equipment. And the ratio here, I mean, on a business like this, it's so fundamentally different than a service-based business because it's so asset intensive, the ratio between the EBIT and the DA is so vitally important. I mean, they, They've got way, way, way more depreciation than they have earnings. And so that just tells you, right, if you could ever get out in front of replacing and maintaining and buying equipment, you'd be great. But you're never going to be able to do that because the bigger you grow, the more equipment

you have to have to perform work. So walk me through this. How does this work? They're claiming $4.3 million in cash flow, right, for 2020. But they show $23 million in sales and $1.5 million in net income. Like, they're trying to give themselves credit for depreciation and interest towards cash flow and their own compensation? Well, they're calling it cash flow. They're saying it's cash flow, but they're really coming up with an EBIT number.

Yeah, because depreciation is money you had to pay at some point. You pay that you just get to deduct it over time as your asset depreciate. Yeah, it's just a non-cash expense. The other really bizarre thing here is that their revenue dropped by 30% and their earnings stayed perfectly flat. Well, it's because they were trying to sell the business, Mills, obviously. No, no, no, no. That would never be the case. That never happens, Bill. That's perfectly normal. It just seems like a non-starter with the multiple. I wouldn't even double-click on the rest of this stuff. Yeah. I mean,

I've seen plenty of businesses like this ask for this type of multiple, but at the end of the day, any buyer who's going to buy a business that has $4 million and even die is going to be shrewd enough to know that EBITDA is not cash flow and there's no way it's trading off of EBITDA with this much depreciation with this much recurring capbacks there's just no way you would get to a true free cash flow number that is probably somewhere in the one and a half to two million dollar range and it and it might trade at a three and a half to four times multiple on that but it would not be all cash at close not not in a business that looks like it's this family centric you know and relationally driven because it's construction related. You've got 97 employees, you know, I'd be willing

to bet that a lot of these guys kind of have been in the business for a long time with the owner. There's not a lot of redundancy. And, you know, it's just, it's just a mess. Well, you know, I have buddies that are in this kind of stuff in more appealing niches than this where these guys are, which is just very commoditized stuff. And the level, the level of like experience you get from being that business for 10 years, the relationships you get with all the people. all the little weird things. Like that's the difference between losing 5% EBITDA per year and making 5% for these guys.

And like it's one of those ones where I look at them. I'm like, oh, this is a dangerous business to be in if you don't know what you're doing. Well, and you make a good point, right? On any of these, whether you act as the GC or the sub doesn't really matter. I mean, what they're trying to say is, look, we have a lot more control

because we get hired out as our own prime contractor and only 35% of the time are with someone else's sub. At the end of the day, that doesn't necessarily purport as much strength as they wanted to. But the actual trade that you're performing is so important because this is commoditized. At the end of the day, a building owner or a developer or a municipality, this is something that they're probably going to beat you up on. It's just a more commoditized. It affects their schedule because the site work has to be done before they, you know,

are really able to start framing, right, or bringing anything vertical up out of the ground. But it's not one of those trades that commands consistently higher margins because it's not a critical failure sub. I mean, that's why I bought a roofing business. So I'm kind of, you know, talking my own book, but people don't beat up roofing contractors. They don't beat up glass and glazing as much because if it fails, then everybody is screwed. And it, and it messes everything up. And if you're slow to perform, then the entire job schedule gets off and the building isn't dried in and nobody else can come behind you to do all the other stuff. Yeah. And this comes from a group called the firm. I guess they're out of Omaha, right? Is that where they're from, the brokerage?

That's right. Yeah. They get listings all over the U.S. I've dealt with them. I mean, they had a listing in South Carolina. I think we might have looked at it. They usually, my impression of them is that they get the listing and they keep the listing for a really long time. So you can infer what happens. I've talked to a couple of the brokers there. You know, they've pitched me deals or asked to get on their newsletter. And, you know, they showed me like a couple that were interesting. But in the end, I was like, same kind of thing with this. It was just like, oh, I know these guys got the listing. They promised them a really good high price. And we think you can get it. And, you know, I think that's, that's one of the things I've learned doing this podcast with you guys.

Like, beware of the brokers that win your business by promising you really high stuff. So there's just like the discount. You know, it's like, oh, we'll get you a six times responsible. Okay, that means three. Like, that's what I hear in my head. Yeah. Yeah, exactly. Exactly.

And, I mean, they, you know, the broker, they're trying to do their job. They don't have anything if they don't get the listing. So they might as well over promise and under deliver because then over time, you just by means of, you know, attrition, you're just going to get worn down as a seller and go, okay, fine. We haven't, you know, this is the best offer we've had in three years. We might as well take it. So what if it's half of what we initially told you? Yeah, started out so good, finished so terrible.

The heavy equipment stuff is just so hard. It could have been a, it could have been a contender. Could have been, this is a great way to be broke, owning this business. It just be. You know what I have seen people do successfully, though, is they own really high free cash flow businesses and then they buy something like this because the tax benefits of all the depreciation and you can operate at basically a book loss consistently. I've seen people do that and it works, right? They're still generating a fair amount of economic benefit. It's just in the form of

tax advantages. It's not in the form of true. So it's not necessarily, you don't go broke by owning this business. You probably go broke by buying this business. Right. Like it, like it, This guy is probably doing great, but you're probably not going to do great if you buy this business at a big old multiple. Yeah. I mean, oh my goodness. Could you imagine, I mean, on $22 million, you know, purchase price, let's just say you've got, you know, $15 million of that is debt. The debt service on that, I mean, look, I mean, look at it. It actually wouldn't pencil out. The earnings, the actual true earnings of the business is consistently, you know, a million to a million two or way less. a few years ago, it was a third of that. You don't have enough to actually meet your debt service obligations, just based on the earnings of the business.

There's no bank that's going to underwrite this. Like this fantasy loan strategy that they have here, and for the listeners, they have a 70% loan to value. So they would give you 70% of the purchase price and a loan from a bank. The seller would finance another $3 million. You come up with $3 million,

and they have underwritten a 10-year amortizing loan at a 6% interest for $15 million. to help you buy this business, that somebody's going to give you three and a half turns of EBITA for this is basically what they're modeling. And that is a, that is in today's loose credit environment, I will tell you that is a ticket to fantasy land. That is not happening. Look at it. So your monthly loan payment, they even tell you it's $170,000 a month and monthly loan payments. That's $2 million a year in debt service. Scroll back up, Michael, to where the actual financials were, $2 million a year in debt service, and the net income in 2020, their best year

to date was $1.5 million. This is just assonite. It makes no sense whatsoever. It would never work. But they're going to figure that out because no one's going to make this work, right? Like even if they waste somebody's time, as soon as they get in diligence, they're going to go, we can't finance this deal. And then it's going to have to sell for the market multiple, which is half of what they think it's worth. So the market always wins, sellers are going to regardless of what a broker tells you, it's worth what it's worth. If a broker lies to you, that doesn't mean your business is suddenly worth double what the market says it's worth. And nobody with $20 million in their pocket is dumb enough to just come and stroke you a check

for this thing for $20 million cash and close, you know? Yeah. Wow. It does bring up an interesting tactic. So I've had several times in the past where I'm looking at a deal and the seller has unrealistic expectations and I really like the actual underlying asset. And I just, I just basically go to them and say, hey, look, this is what a bank will loan on, right? Regardless of your expectations, this is what, this is what can actually get done from a lending perspective. So let's start the conversation there instead of this pie in the sky idea that you have. No lender will provide more than X amount of dollars.

So that's our starting point, you know. And I've had that work really well in the past because I'm just saying, look, it's not, it's not unique to me. it's unique to anyone who will borrow money for this business, which is everyone. Yeah, but this guy thinks he deserves it. Awesome. All right. Well, good job this week, guys.

I thought we did great. Anything more on this one? No, this is a good episode. I think we went really deep on a couple of these. The listeners will benefit. Super good. All right. And for listeners, we'd love to hear and be sent your deals that you're looking at.

That's how we make this interesting. Also, invitation to help us. go from losing money on producing this podcast. None of us get paid to breaking even. So please consider joining and becoming a patron on Anchor, 10 bucks a month, anything. We pay an editor to make us not sound nasally and annoying and take out the ums and coughs. And that makes it makes it good for you guys. So if you're interested in becoming a patron, please join these 16 other people who give us money each month to help us defray the cost of putting this on. So with that, great job, guys. We'll talk to you next week. Yeah, we'll put it this way. If you guys don't sponsor, you're going to have to hear us

um and cough pretty soon here. So it's not a threat, but it's kind of a threat. Or look, yeah, I got to get something out of this. And if it means telling you guys more Corpus Christi jokes, I'm going to tell you more Corpus Christi jokes. So if we get three more sponsors, I promise no more Corpus Christi jokes. I'm going to forward that memo to the economic development office in Corpus Christi and see if they can drum something up. Oh, this guy worked for them. I'm just kidding. We're going to need the Economic Development Office of Corpus Christi to sponsor us or there will be more Corpus Christi.

This is protection money for Corpus Christi. Yeah. Well, at some point we can dig into it. But, I mean, if you talk to people that live in Corpus Christi, they think that cronyism is the thing that has held back that city for 100 years. Everybody just making sure they get theirs. And it's kind of sad thing. It should be great. It should be the preeminent port city in Texas. and it's a nowhere's fill

compared to what it could have possibly been. Kind of sad. On that note. On that note, see you guys next week. Great job. See you later. Thanks, guys.