Acquisitions Anonymous - #1 for business buying, selling and operating - $1M of EBITDA Selling Supplies to Industrial Clean Rooms - Acquisitions Anonymous 288

Episode Date: April 12, 2024

In this episode of Acquisitions Anonymous, Michael, Bill, and Heather discuss the potential acquisition of a cleanroom supplies company. They analyze the financials, market dynamics, risks, and growth opportunities associated with the deal. Despite uncertainties like customer concentration and reliance on qualified staff, the hosts express optimism due to the company's steady revenue growth, specialized market niche, and limited competition.Check out the listing here:  https://gottesman-company.com/active_sellers/s-2937-50-tje/Thanks to this episode's sponsor:Are you looking to buy, grow, invest in, or sell profitable businesses?The M&A Launchpad Conference, which is happening on May 11th, 2024, in Houston, Texas, offers a unique opportunity for individuals interested in buying, growing, investing in, or selling profitable businesses. Attendees will have the chance to network with successful business owners, experienced acquirers, and private equity investors. The one-day event features insights from over 30 industry experts who have excelled in acquiring, operating, scaling, and selling businesses for significant returns, including Walker Deibel, bestselling author of "Buy and Then Build." And because you're awesome and part of the Acquisitions Anonymous community, we've got a sweet deal for you: $200 off your ticket. Head to malaunchpad.com and enter the code AA at checkout to claim your discount. 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]

Hello, ladies and gentlemen, boys and girls. Welcome back to another episode of Acquisitions Anonymous. My name is Bill DeSandra. I'm here this week with Michael Gurley and Heather Anderson on the Internet's number one podcast about buying, selling, and operating small businesses. And we are talking about a clean room supplies company. They're around for 40 years. Got a million bucks of EBITDA. And maybe for the first time, nobody can find anything wrong with it.

even Michael does not poop on it. And that is a double entendre if you listened to our last episode. Even Michael does not poop on this one. We actually liked it a really interesting niche. A million bucks a few of supplies for clean rooms. I hope you enjoyed this episode, acquisitions anonymous. If you're looking to buy, grow, invest in, or sell profitable businesses,

guess what? There is a cool conference coming up that I think you'll be really interested in it. The M&A Launchpad conference is happening May 11th, 24 in Houston, Texas. And if you're interested in small business deals, you're going to want to be there. It's a one-day event where you can network with individuals who've been there and done that, successful business owners, savvy acquires, and private equity investors. If you go to the conference, you're going to gain firsthand insights from 30 industry experts

who has masterfully navigated the journey, acquiring, operating, scaling, and openly selling businesses for great profits. You're also going to meet my friend Walker Dybul there. Walker's a great guy who is the Wall Street Journal, Best, selling author of Buy Then Build. And also Walker and the guys over at M&A Launchpad have extended a special offer for acquisitions anonymous listeners. So we got a great deal for you, $200 off your ticket to the M&A Launchpad conference.

So to claim it, all you have to do is go over to MAA Launchpad.com and enter the code AA at checkout to claim your discount. So head over to MA Launchpad.com and enter code AA at checkout for $200. off a ticket. So don't miss out on the conference. One of the big levels up for me is meeting other people in person that are doing the things that I want to do. It's one thing to follow them on Twitter, but the depth you get in person is just so much more real. So if this is something you're interested in, head over to ma-launchpad.com and get registered. They'll see you in Houston on May 11th, 2024. All right, everybody. We're back again. It's Monday. It's Monday, but you'll probably be

listening to this on a Thursday, so who knows. But for us, it's Monday. All right. Well, I brought us a deal unless anybody has any life updates or things they would like to share. Nope. Michael, I would like you to keep this one super clean. I heard last time I was not a part of it. There were some off-color, you know, bathroom humor. And I think that's why we're going to clean it up with a deal that is the side of the opposite of bathroom humor. A clean room itself. I mean, in my defense, I was just talking. talking about some of the inventions to help people lose weight have had really negative externalities, including a fake, like what was it called? Did we figure out what the name was?

Alastra. Yeah, that's right. Yeah, the oil. Yeah, it was designed to replace fat, but it was non-digestable. So unfortunately, the food manufacturers discovered if you can't digest something, it has to go somewhere,

and that turned into people's underpants. So that has not used to anymore. So that's what I brought up. It was part of the deal. We haven't discussed it. It was important. Yeah. So this company surely has banned Olestra from their work sites, given nature of it.

It definitely looks like it. Okay, I'll read this one. It's from Goddisman and Company. And it is listed as available. And it is clean room supplies. So it's an acquisition opportunity in South Central. The company is a manufacturing sales and marketing operation, offering clean room packaging, clean room bags, film, and tubing.

The company operates from a 10,000 square foot facility, which at least is from an entity controlled by the owner. So what is it, do we know what a clean room is? Yeah, so a clean room would be like almost like a manufacturing facility where you need no dust at all. So like if you're doing something with very fine parts or, you know, it needs to be lubricated with absolutely no impurities, maybe you're working on the insides of cameras.

You can't have any dust in it. Anything like that would need to be done in a clean room. Got it. Okay. Continuing on, the facility, the 10,000 square foot facility the owner owns, includes manufacturing warehouse and office areas. Offering these products requires a federally certified 209E clean room facility, ISO TC 209.

Okay, so that's some clues about what we're dealing with here. And at least one employee with industry and sales experience, the company has a proven track record supported by 44 years of ongoing business. With its broad range of products, the company's marketing efforts focus on targeting medical and pharmaceutical facilities worldwide. Revenues have been trending upwards at an annualized rate of 50% over the past three years due to an improving local economy. Goddessman here gives us their seller number, S-2937-50 T.J.E.

So that rolls right off the tongue. So financial summary was 2021. they did $2.2 million and $414,000 in EBDA. In 2022, they did $4.2 million, so more than doubled the business, or nearly doubled the business, and did $713,000 in profit or EBDA. And in 2023, estimated by seller,

they were going to do $4.5 million in revenue and $919,000 in EBITA. Other highlights of the business include 40 years in business, a management team in place, and they have reviewed financials. and their SIC code is 5047, 72721. Oh, wow, these guys love numbers.

They do. You know, I like the growth of the business, but God has been got me all fired up, and I thought it was growing at a kegher of 50%. It grew one year of 50%, and then they stretched out the window, and they go, over the window, it grew 50%, but it basically all happened in one year.

So the broker set me up to be disappointed. I would have been impressed enough if they hadn't tried to oversell it in the listing. Yeah, it has a 20% profit margin. It's grown pretty rapidly. I guess I would want to know if there are some customer concentrations, especially when you're serving, you know, pharmaceuticals and medical. Obviously, there are some big companies there, and it's very possible that you have a few large customers, and your growth is really tied and or your, you know, not growth is tied to those customers and what they're doing.

But you are doing something that's sort of a disposable supply. So I kind of like, I like the nature of the business. It seems like it would be, you know, pretty stable in terms of revenue going forward. Oh, yeah. I love this at first glance, right? I mean, you've got a clean room. You know, I imagine the cost of the films. Like what do they say they do?

Packaging, bags, films, and tubing is probably not a material part of your cost structure, I wouldn't think, if you're operating. in a clean room. I mean, it's most likely like utilities, electric to keep all that air totally clean and the labor for whatever is going on in the clean room. So changing your film supplier, if you're happy with them to save a couple pennies,

is probably not worth it. Probably flies under the radar of, you know, things that get bid out every year. It's recurring, as you mentioned to Heather. It has a bit of a moat here with the ISO certification they need to have. There's a lot to like about this. Well, this is one of those

things where any little mistake can ruin your clean room. And kind of the way I like to think about businesses like this are like airplane parts, right? Like the, you know, there's a lot of really big businesses. TransDime is I think the most famous one that's a roll up of airplane part suppliers. But basically what all these folks have realized is you don't want your airplane to crash because you save three cents on a screw. And so what that does is create this real situation where people who buy replacement airplane parts, they're not going to go to a slightly different supplier to save 20% because it's not worth it if your airplane crashes based on a cable snapping or something

like that because you saved a dollar. And I think the same thing happens here with clean rooms. Like you don't want to get contaminated clean room bags. or film that just happens to not, like, adhere correctly. And, yeah, okay, so I think I'd like, I think I'm talking myself into this one. Yeah, if you don't perfectly contain the Alestra, it ruins the whole clean room.

So there can be no mistakes. Well, so I would want to know where their suppliers are. You know, is this a domestic supplier? Is this sort of a distributor that's importing it from China or wherever and has to carry a certain amount of inventory to meet the needs of their domestic customers? I've certainly seen a lot of distribution businesses like that. But I think I'd be a little bit interested in digging into who the suppliers are

and, you know, are there alternative suppliers if there were supply chain issues? You know, I would ask that question, were there's supply chain issues with these products during COVID. I know there were with some plastics. I, in fact, looked at a business where they had to shift to a different compound and find domestic suppliers for that, because there was a problem during COVID. So I'd be interested just to know how stable their supply is and whether they have alternate suppliers. Yeah, because something as simple as changing to an alternative material is one thing if you're, you know, selling anything else where it works just as well and that's fine.

But given this seems to be semi-regulated at least, you know, you can't just change to another plastic that is good enough. Even if it is good enough, if it's not on the approved list, you probably can't use it. So changing suppliers, it could be harder than seems, given the regulatory impact here. Right. And I guess it's the type of plastic that's going in because I guess they are manufacturing these supplies. So excuse me, I think I thought they were a distributor, but they are a manufacturer. But even so, they've got to have materials going into that operation that, you know, they're dependent on a supply chain somewhere. But I like this business so far. I also, like I said, want to know why it grew so quickly and, you know, what's driving that and whether if I'm an owner, I'm wondering, you know, is this the time to sell or why wouldn't I just kind of hang on and keep growing?

Yeah, well, it is, it says it's 44 years old. Like, I would be willing to believe the guy is retiring, assuming it hasn't changed hands in the middle. So he doubled it in the last two years before retirement, which I guess, you know, that does happen. But there's some, there's some, questions I would have there, 40 years, and finally they doubled it. Sometimes that happens because one or two big customers are like calling and saying, hey, we need to go from $200,000 and purchase this year to $2 million. Can you take care of it? And the person goes, yeah, sure. And then ships them all the stuff they need.

And especially this is, this feels kind of half distributorship or two-thirds distributorship and like one-third manufacturing. The manufacturing almost feels like what the window guys do. This was something I learned recently. I don't know if you guys do this, but every time you see somebody that's like the name of the business would be something, glass, like so-and-so glass company, they don't manufacture any glass,

and typically they don't even cut it. That all comes pre-cut from the factory. What they do make are window frames, because every window frame is typically different depending upon the installation. So it wouldn't surprise me if the manufacturing that's going on here is just them like getting a, old roll of plastic and turning it into bags, for example, that level of simplicity.

So they do have 10,000 square feet for $4 million in sales, which implies maybe there's some stuff going on a little bit more sophisticated than that, but that's not a ton of room. Yeah, that's not that big. What do you guys think about the seller owning the facility that you're in and continuing to, it seems like? Let's talk about sale leasebacks. Oh. No, I think it's really interesting, Bill, because it creates an opportunity here, and I've seen and read about other people doing it where you try to buy both the land and the business from the owner.

And then the move is you fund, to some extent, your portion, your buying of the business with the buying of the building and leasing it to a third-party investor. So basically, the way that mechanism works for the listeners who don't. know, you can go sell, you can sign the lease with your building and then go sell that building to an investor and basically end up with more cash than you bought the building for. And so a lot of people do that scheme when they're buying a business plus the real estate is get rid of the real estate and turn it into a lease premise by doing a sale at lease back like that. Yeah, but I think the seller is already knew all that and has pulled that off because it says the company operates from a 10,000

square foot facility, which it leases from an entity controlled by the owner. So I, I think the owner may have listened to your podcast already, Michael. Or what is often the case is this particular 10,000 square foot warehouse property is owned by an LLC that the person is, the owner has created. And it happens to be like half the cousins and all brothers and sisters own portions of the LLC. I've seen that before. I've seen that a lot. A lot of SBA loans are used to buy owner-occupied real estate. and the SBA changed the rule a long time ago.

You used to have to be mirror ownership to the business. And then they changed the rule and said, you know, the hold co of the real estate could be owned completely differently if you want it than the business, as long as the business is guaranteeing the loan. So you do see a lot of family and friends or other folks brought into the real estate hold co.

What happens, what goes through my mind whenever I look at these listings and they say that the real estate is owned by the seller, I want to know whether the rent or occupancy expense has been normalized in the EBITDA that we're looking at. Because a lot of deals, it's not, meaning the seller hasn't been charging the company market rent. It's been well below or sometimes even over. And then the broker doesn't adjust it in the advertised EBITDA. And you have to find that later and find out whether EBITDA is going up or down based on paying market rent.

do you think there is any concern here that if, you know, let's say you can transact it and that's all taking care of and even if you don't have to worry about any of that? Do you have any risk here that now your landlord knows the financials of your business intimately and exactly how much you can pay? And, you know, there's a certain transparency there. He probably also understands intimately exactly how hard it is for you to move. Because I wonder also if this stuff needs to be manufactured or kidded or whatever they're doing in a clean room space. So I wonder if this 10,000 square foot is a clean room. So, you know, maybe it's just a whole pain in the butt to move. Would you worry that just your landlord has way too much insight into your business?

I think it's a good point. And you, and really more, more over, they know your financials. That's one thing. But the inability to move is a much bigger thing because that's a lot of leverage, you know, in terms of what kind of rent they would charge you. If you go to get SBA financing, you know, the lender's going to balk. at anything where the seller's trying to kind of gouge you on the rent. So you kind of have the bank on your side in that case, you know, of saying, no, that's too high. We want this to sort of be a

market rent. But I will tell you a story, kind of a funny, not funny story of a deal that I helped a borrower buy a couple of years ago. And the seller owns the real estate still does. They rent it from him. And he had some excess space where he had a tenant. And the tenant moved out. And this particular seller was one of those that had a really tough time letting go. So they had a lot of challenges during transition to make it clear that he was no longer running the business. And yet to this day, he opened his own office in the tenant space and comes to work every day at the building where the business is located, even though he sold it two years ago. So there are lots of things to think about with your seller becoming your landlord, things that you might not. Things you don't

think they're put in the contract, I can't have you as my neighbor. That's right. Either. Oh, boy. And but Heather, so the SBA does protect you here, right? Because you're going to need, let's say you got a 10-year SBA loan. You're going to need a 10-year lease on this space, right? And to your point, the SBA is going to make sure you don't get absolutely creamed on that negotiation. So it is likely that at least you don't have a problem for 10 years. Right. Right. That's correct. And so, you know, when you get financing, there's a lot of little protections that you get that you might think about. And, you know, and maybe this, maybe the seller would eventually sell you the real estate. Sometimes the buyers will enter a lease option. So they'll, they'll get a 10-year term on the

lease, but they'll have an option in five years or three years to go ahead and acquire the real estate at a set price. And I've certainly helped a lot of clients go ahead and buy the real estate in two or three years when that comes up. So that's, that's also a nice way to look at something like this. I would think you'd want to own, if this is a clean room, and I think, I think, I think, Bill, you might be right. It's probably some pretty specialized inside. You probably want to own this eventually or at least have as much control over this property as you can.

You know, this topic also brings up, I think, a key negotiating point when doing deals is it can be really handy to have a third party bad guy. So, like, I have been in deal and the SBA in your bank is like the perfect third party bad guy. So, like, I have had sellers trying to negotiate, you know, I was doing an SBA deal. seller trying to negotiate like wild earnouts and things like that. And you just go, sorry, SBA regs don't allow earnouts. You know, I'm like, I'm sorry that is incompatible. Like, banks says we can't do it. Like, it's not me. I would love to do that. Seller, I agree.

Sounds reasonable. But the bank is, it's a hard line. It's not even, I can't convince them. It's in the SBA docs. Yeah. Right. Sorry. And that just kills it dead. So it's, when negotiating a deal, it's really handy to be able to pawn it off on the bank sometimes. Yeah, absolutely. And, and I, and, And oftentimes you're absolutely correct. The SBA has rules and regulations. And, you know, all the deals that get SBA financing have to fit within those. And it does make for a little bit more of a homogenized market. I've certainly done deals outside of SBA where anything goes, sort of.

You know, at least there's not rules governing it. And it does get a little hard to understand some of the more complex structures that buyers and sellers end up coming up with. sometimes they're just a little too complex for the deal. What do you guys make of this, what appears to be a throwaway line at the end, but I think is interesting. Revenue's been trending upwards

over the past three years due to an improving local economy. What do you make of that? Yeah, that word local is the thing that makes me interesting. Yeah, because I would think their customer base, up until you pointed that out, I was thinking that they could ship this product all over the country and they weren't really very geographically constrained.

but this kind of brings that into question. Maybe they are serving just sort of a local market. Maybe they've got a lot of pharmaceutical clients nearby. I'm not sure what the local economy would have to do with this. Does say this is in South Central. South Central where? South Central where? South Central United States, which typically means tax.

Oh, is that where it is? I don't know. I mean, God has been companies in New York City, but I think it's part of the network of international network of M&A business brokers. It's like South Central L.A. It's run by the gang. Yeah, we have a South System here.

Yeah. You don't want a business there. Yeah, if you're going to. I mean, this might be a different kind of Walter White-style clean room if it's based in South Central L.A. I don't know. Oh, my gosh. But what this tells me is,

maybe there is a local bit to it. Maybe it's, you know, we in the past have done like kind of these just in time distributors that even will set up like vending machines on site in manufacturing facilities where you can buy a ranch or a tool or something. And it becomes very like, my full clean room is down for want of $10 of film. I need it delivered right now, right? Which can end up being creating what doesn't seem like it needs to be a local business, turning it into a local kind of delivery just at time, you know, value.

type business. So I'm interested to know if that is why they say local here, if they just happen to be really good at local sales. Because if there's nothing that has to be local, there's a huge expansion opportunity. If it does have to be local, I'm not saying there isn't still. But then you've got to think about expansion a lot differently. Well, they say that they're targeting pharmaceutical facilities worldwide. And then they mention local. So maybe local meant domestic economy? I don't know. Those two sentences together are very confusing. Yeah, seems weird. I don't know. I'd have questions. But I like the business. I mean, I think this is worth a look. Clean rooms are not going anywhere. People still need them.

There's more stuff in your favor of getting domestically done in the United States. So we've got that going for us. It's in the south, ideally not South Central L.A., but South Central someplace else. which continues to be the growth in the United States. Yeah, and it's super boring. Like, seemingly a corner of supply for most people that they're not going to be shopping around for new vendors. It's probably, and it seems like it's pretty hard to get into this market as well.

I mean, you have to be federally certified as a clean room facility, and then you have to have somebody who's been in the industry to get the license for it. Like, those are all very good things. Some good moats and good tailwinds. Absolutely. You know, that raised a point, at least one employee with industry and sales experience,

I'm assuming it's not you, buyer. So there is probably someone or hopefully someone that's not the owner that's going to remain on staff. You could end up in a pickle pretty quick if that person resigns. So I would have, I want to understand the ranks to make sure I, the owner, had a path to becoming a qualifying individual, you know, over a certain amount of time. So I was not forever reliant on the one guy on my team. that now post-transaction makes me eligible for my license, and you better put a pretty nice retention package in place for that guy, that close.

Absolutely. Or bring them into the cap table. We work with a lot of businesses that require license transfer plans, and we coach folks through that. And there's a lot of ways to kind of take care of that person. And one of them is just to give them some equity in the deal, you know, make them part of the business. But the downside of that is you don't necessarily know this person very well yet,

other than the fact that they have a license you really want. So you're not sure how compatible you're going to be with them long term, but I think that is a key point to this deal is retaining that licensing. Yeah, I like it. The fun thing about this deal is it's, and it's kind of where it's making for an interesting episode for us, is it's just there. Like, it's not,

there's nothing much to debate about this business, which makes it like an attractive thing to buy. Like, if you talk about, do you want this or do you want a freaking worm farm in Oregon? Like the worm farm in Oregon, tell me, I mean, you guys can back this up. It's a lot more fun to talk about the worm farm. But this guy, whoever guy or gal and family that's been owning this clean room supply business, they're probably seven years old. They've owned it for 40 years.

They have no debt. They have managed to hire a management team. They probably own one, if not two vacation homes, one of which has a boat in it. And they own it all straight away. And they've just had a nice life. and there's something to be set for just a boring, a boring, non-controversial, not a pizza boat located in the U.S. Virgin Islands business.

I agree. I mean, the only thing I would want to know as far as, like, does this continue forever? Like, what is this business moat? Like, if it is local and the film needs to show up in an hour or my clean room is down, that's great. But there's got to be upmarket competition, right? You've got some of the big industrial distributors have to do this.

like Granger's got to do this. You know, even U-Line, you would think may do this. You know, I want to understand if I was in, my business would be under threat from those guys. Maybe those guys don't want the tiny accounts that I have, but even still, that doesn't make me super comfortable because all that takes is an initiative at Granger and they're coming for you. So I want to understand why, why the big guys don't want this business. So here's my thesis on that.

My thesis on that is two parts. One is $4 million of sales is not worth Granger. That's a Tuesday morning at a Granger facility. The second thing is if you're going to be delivering clean room supplies, it has to come from a clean room facility itself and be handled differently than Granger or any of these other guys are going to do that. And I think that's a moat here that keeps these big guys out of your way. You also have some constraints on growth because of that same point.

That's one other way to think about it. as they've grown a lot, how much more capacity do they have in that 10,000 square feet? Because once you reach capacity there, you probably have a pretty high cap-x, growth capex cost to either expand or build another manufacturing facility that's also a clean room. So that's also one thought to, you know, to throw in there. But there's very little not to like about this business and a lot to like. I agree with you. Yeah, I'm into it.

Someone get the book. Tell us what we're missing, but it sounds great. Let's do it. All right. Well, we'll wrap up there. Any other deep thoughts? Otherwise, we'll move on. Wrap it up.

Someone tweet us if you do this business. I love it. If you buy this, we'll come visit you and we'll walk into your clean room with like dirt all over our shoes. With elastic chips and two pairs underwear. It'll be fine. Let's go.