Acquisitions Anonymous - #1 for business buying, selling and operating - $30.2mm Revenue Private Label Cake Manufacturer - $4mm Construction Equipment Dealer / e29

Episode Date: May 24, 2021

We talk two businesses currently for sale this week:- $30.2mm Revenue Private Label Cake Manufacturer in the Northeast- $4mm Construction Equipment Dealer in rural Georgia(Spoiler alert: We are worried about both of these deals!)-----* 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 another edition of Acquisitions Anonymous. Today, my goal, guys, I'm your host, Michael Gridley, is to remember my co-host's last name. And it helps that both of them are on the screen. So good to see you guys both. Mills, how are you doing today? Doing great. Fantastic. And Bill is down at the beach.

That's right. Looking at no companies to buy there, is that correct? I'm in Trip Island, South Carolina, looking at the beach and recording a podcast. So it doesn't get much better than this. A darn. All right. Well, I have our first deal, which is actually listener-supported. And as far as they know, is our first food company, unless you count that that bar that we did in Houston way early that was like, oh, my God. This is a podcast about analyzing small businesses that are for sale. And all of us are serial acquirers and sellers of M&A around businesses. So we talk about them. And hopefully the listeners find it entertaining and educational. So that is what the podcast is about. The first deal is our first food deal that we've ever talked about. It is submitted by a listener.

And it says the title is growth financing transaction opportunity. It is a rapidly growing branded pie company. And so the group that is represented as a company called Peekstone, it's an M&A shop, urgent acquisitions, investment banker, business broker, is engaged as exclusive financial advisor to a company called, and this is the code name, Cinderella, a leading producer of branded and private label Freeze Thaw. So that's freezing and then Thaw ready to eat pies and cakes for food retailers throughout the U.S. So I assume that means, are you guys reading that?

Those are the things that they make for grocery stores or different other retailers. They're frozen when they're made. And then the retailer gets them, puts them at room temperature and they're ready to sell type case. Yeah, passes them off like, they were made at the grocery store. Yeah, and so private label means they put the grocery store's label on there. So in this case, Cinderella, which is the code name, not the actual name of the company, because we don't know that yet, makes them, and then the retailer still owns the relationship.

So the end user doesn't know that Cinderella made them. They think that HB in my case or Walmart or somebody made them. So Cinderella's products can be found in over 6,000 grocery and retail outlets. They estimate fiscal year 2021 sales of $32 million, and EBITAS are earnings before interest, tax, depreciation, and amortization of $1.5 million with a three-year revenue compound annual growth rate of 50% plus. So if they're growing 50% euro year, that means basically they were 18, 2330. Is that basically how the math works there? Or is that too low? Yeah, they've grown significantly over the past three years, 50% over year. So growing 50% year over year over three years means you pretty close to tripled in three years.

The company is seeking $5 million of growth financing to enable inventory growth in support of purchase orders. So they're not actually looking for an exit at this point. They're actually looking for somebody to come in and help them finance the business. There's additional information about the business. It's a market leader in single and double-crust pies serving the growing in-store bakery market. They have a nimble product strategy that caters to key customer demand drivers. So I guess if it's no longer apple pie season, you go straight to cherry. Is that what they're saying?

Yeah, or pumpkin in the fall and, you know, if there's some fad pie, they can make it fad pies. Are there fad pies? I don't know. Let's ask the guy with the beard. Mills? I'm not a pie expert. Sorry. I thought you were a resident hipster with a beard.

The hipsters like pie? Is that a, is that a... It would be like if I had like a top knot or like a man... Which I used to have, but I don't... I thought you were the only hipster that runs a roofing company. No, I'm not in. You can, Okra on the weekends, listen to LPs. All right.

Sorry, back to the right. You can't tell if I'm a hipster because I have no hair. So they have best in class products with skilled product development teams. They've been established a market position with significant channel expansion opportunities, strong management, and operational production teams. And they are happy to take debt, so a loan or equity. So somebody buy-in to the capitalization table own a portion of the company, parentheses with a path to purchase.

And then that's about all we know right now from this teaser. If you are interested, please send an email to Cinderella at peakstone.com, yada, yada, yada. So thoughts on this one. Do you want to be in the pie business? Who doesn't want to be in the pie business? On what terms? How expensive are these pies is what we're trying to figure out here? I mean, I'm guessing freeze thaw is not your gourmet pie stuff.

This is the $4, you know, cheap bottom of the barrel, lots of sugar, lots of fat, lots of butter type deal. Sounds delicious. I mean, so the margins, it's $30 million of revenue and EBITDA of 1.5, right? So it's 5% EBid dollar margins, which kind of makes sense here, right? It's probably a commodity food product. It's private label. They're they're eking out, probably a decent, not a great gross margin.

But there are 6,000 grocery stores. Like, there is a market for this, right? So if they've got good customers, like this seems to me like maybe not something you, the grocery store upsets the apple cart on if your Apple Pie vendor is fine. right, you know, they deliver on time. The pricing is good. You got to have this skew. You probably just keep it rolling. The thing that's interesting to me about this teaser is the investment banker has no idea what they want. They go, we're seeking $5 million of growth financing to enable inventory growth and support of purchase orders. But then they also say debt or equity,

parentheses with a path to purchase. So this kind of seems like a management team and maybe investment bank that have no idea what they really want, which is tough as an acquire or investor. because there's just a ton of brain damage. You know, you can waste a lot of time. The thing that jumps off the page for me is they want $5 million of growth financing. And equities on the table, I mean, this would be typically if you're growing 50% year over year, and you really just need a finance your inventory. And assuming this is food, right, it's not what you're sitting on this inventory for, you

know, years and years. So I think it turned pretty fast. You ought to be able to borrow money from some more conventional sources. would think to finance this thing, you're Eva dot positive, you're growing. If it's truly for inventory, this seems debt-financeable. And it makes me wonder why equity is on the table unless they're just dumb. Or they're debt-averse, which I've been writing about on Twitter lately and gets people all whipped up because some people are religiously debt-averse. And maybe these guys are. It's funny, you tweet about the debt-aversion thing. I know we're getting off topic. But I see

the same religious fervor with that that I see with people who are crypto- crypto maximalists. Every time I look at people getting so into something like it's so emotionally attached to that or Tesla or whatever, I just think, man, 70 years ago, that person would have been the most Catholic person ever. There's the people that are kind of Catholic, and then there's the really Catholic people. Like, they would have been the Opus Day end of it, but instead of doing that, they've gone down the crypto hole.

And it's just, it finds that same thing in people. To me, it's just psychologically fascinating. Yeah, it is. So maybe these sellers are anti-debt folks. and so they want to raise equity. But I don't know, maybe there's an opportunity to come in here with some sort of Mez product where they can pay back the bulk of it, but it comes with warrants or converts to equity.

And that's what's tough about this is it's so open-ended. There's so much question on not just the structure, but the valuation and all this stuff. I typically find this just ends in frustration for everybody when the seller doesn't know what they want. Well, and it's this description, I think, and I'm sorry if talking about emails, but this description, like, internally is inconsistent, right? They say, like, we have this really excellent management team and, you know, like, they know how to run a business. Like, they're fantastic, but they don't really know what they want. Like, okay, one of those things cannot be true. And I'm guessing it's the first one. So Mills, Mills, you had something to say. Well, I just think that this is overall probably a bad business. You know, I think that. they probably are not able. My guess is, Bill, if they have Peekstone in their corner or they have like a real lower middle market investment bank advisor in their corner, these guys have probably tried to place some debt for them and haven't been able to. I think with a million five in EBITDA,

I mean, no lender is going to give them five million dollars worth of a credit line or three, right? So the reason I'm saying it's probably a bad business is that they obviously need the money for something. They're saying they need the money in order to be able to float their inventory needs, which we know are not probably six months, right? There's spoilage, even with these things being frozen. To me, it just looks like a really poor cash conversion cycle business, and the working capital needs are outpacing, right, or being basically throttling the business's growth. But this is one of those things where it's like, do the union economics get that much better as they scale, maybe marginally, but not exponentially? Right.

So I think, you know, there's that whole adage. I think it's a Buffett and Munger adage, like, you know, when a great management team and, you know, a bad business get together, the bad business is the one that prevails, right? The management gets drawn down. So they may have a great team and they may have all, you know, done their best to get the business. I mean, 30 million in revenue and 6,000 stores is a really big deal. But I think just from the trappings of what we can see, it is probably very low gross. margin. It's incredibly low net margin. And they just don't have enough free cash flow to actually do what they need to do. And that's why they can't get debt. And that's why they're willing to

go get really expensive equity. The problem is we don't really talk about that many minority investments on here, but you've got to do a different kind of calculus in thinking about, do I actually want to make this investment? Most of our listeners are not in this category. I don't think, but I do think it's helpful to kind of preview it. And that's that people who are doing these growth investments, they're banking on, one, they're going to clip a really, really nice coupon, either prefer, it's going to accrue. And then they're going to have some really, really nice liquidation preference on the exit. So what you're saying, Bill, is very true. I think this is a bad scenario for everybody more than likely, because let's say everything goes super well, right? They

they find $5 million worth of funding to help, you know, fuel their growth. The person who writes that check is going to end up, if everything goes great, they're going to do okay. They're probably going to get like, you know, high teams, low 20s, IRA. But then the management team and the, and the owners who own all the comment or, you know, retain the majority, they're going to be left holding a very, very nominal return, if anything. That's the scenario, I think, as it plays out on piece. I got a buddy who was in a similar position of this, similar type manufacturing business. He lost the company to these guys, the MES guys, these loan to own vulture lenders. So yeah, you're exactly right. The terms are going to be so onerous that you're going to be

terrified to sign them. Or you're going to be so stupid, you sign them and your, well, my buddy wasn't stupid. He just was, he was green. He didn't know. So, I mean, I think the second thing I were proposed, and I don't know anything about food manufacturing, because I think holistically about it, this segment scares me. Right? So if you look at the other segments like fresh food, you have some defensibility around that. If you're going to do the little trays with the fruit in it, you should be located close to the distribution centers for the groceries you're going to sell to.

This, it gets frozen. And I don't know if you guys know this, but those little cakes they sell at Starbucks. Do you know how they keep them consistent across all the Starbucks locations? They don't make them in location. They have one plant per cake. They get frozen. They get put on airplanes and they get floating around the country. It is a fascinating thing.

I wouldn't necessarily want to be in that business either because you're hugely captive to those guys. So compared to the other prepared food stuff and the other white label stuff, there's nothing going for you here. Unlike frozen spinach, you can't own the production side. It's frozen. So somebody can ship all the way across the country and undercut you because they're oversupplied.

Unlike the fresh food side or the bread production side or any of that stuff, you know, you don't have the ability to have geography help you. and then you don't own the brand because they're doing white label only. So there's no moat in this business. That shows why there's no profits. Just holistically, like Charlie Munger would hate this business. This is the opposite of C's candy. Yep.

You're definitely competing on price here, which is why their margin is so low. The other thing I'll note, this is just a low return on invested capital business because as Mills was saying, it's low net margin. And then they've got, I mean, we're growing 50% a year in inventory-based business, even if it's frozen pies and you turn it fairly quick, that's going to suck up a lot of cash. And so you just don't, you're not generating the cash to finance your inventory growth when you're growing that fast. And then the other thing that you got to remember out this business is who their customers are. Their retail grocery stores, which you know how fast they pay. That's a net 90

business right there, right? So they're getting it on both ends. They're having to finance all this growth in inventory and they're also having to finance this growth in accounts receivable. So they're having to be the bank to Kroger, right? I don't know who their customer is, but someone like a Kroger. So this is just, I think Mills, you put a direct point of it. This is just a bad business. Like it doesn't make a ton of money and it sucks capital as it grows. So you've either got to dump a bunch of capital in it if you want it to keep growing.

And then at the end of the day, you're left with, if it ever slows down, there's a really low margin business. Or you've got to slow down the growth of it if you ever hope to take any cash out of it. So I think that you're probably right. That's why they need to raise equity or some sort of senior, it's probably going to be preferred or some sort of senior equity junior debt type of financing where I think the lender slash preferred equity guy is going to take most of the economics from the common over time in this business. So before we leave this one, if you happen to inherit this business, how would you fix it?

I would sell it. Actually, yeah, the first thing I would try. is I would try to create my own brands. I would try to own a brand of pies that's unique to me and get those on the shelves. And I would sell the commodity ones, the white label ones at cost. And I'd get them to agree to that by carrying my own brand and putting it on the shelf as well. So I can start to build up some sort of mode around my business because right now they have none. Yeah, I'd also go D to C. If you got frozen ties and the ability to ship them, I'd start selling them online direct consumer. Once you had the brand, it all goes together.

what you said they should get that they should get that guy that's on instagram the bodybuilder who sells the limited edition cookie drops have you guys seen that it's hilarious yeah i'll send it to you but it was on the my first million podcast like this guy's like a crazy bodybuilder like juice head and he basically does like limited edition cookies and then you you like they text them out and they're like okay do you want one of these cookies and there's like 100 000 spots they'll sell them all out in like three minutes then they bake the cookies and they ups them to people and they're like $40 cookies. So it's like the supreme of cookies.

That's basically what it is. That's what you should do here, Supreme Pies. It's the craziest thing I've ever seen. All right. Yeah, my first million pod is pretty fun. If you guys are interested in guys, here we talk about other people's businesses. They talk about new businesses and crazy ideas that they see. So I guess they're on either end of the spectrum.

So let's move on to the next one. Mills, you got one for us? Yep. All right. We've got a teaser for a business. It is a quote, well established. Farm and Construction Equipment Company in the Southeast. That's actually in Georgia.

They tell us the state. The 2021 estimated revenue, which Bill made a note about this a couple weeks ago, but we're already using 2021 projections in May. I think that's a little bit aggressive. But estimated revenue in 2021 is $4 million. 2021 estimated EBITDA is $269,000. This company supplies and maintains farm and construction. equipment. It maintains a large supply of inventory and parts and provides service for a wide

range of tractors, construction and farm equipment. In 2020, management estimates that revenue was generated through the following channels. 62% new equipment sales, parts, 23%, used equipment, 8%, and service is 7%. 50% of their revenue comes from farmers, 25% from government entities, 20% from hobby farmers and 5% from construction companies. So not really that much construction. It's all pretty much farm equipment like tractors and probably mowers and things like that. Company has a recurring customer base of over 1,000 clients and an 80% rate of recurring revenue.

That is misleading. We can talk about that. They are, let's see, they've been around, wow, 59 years. That's pretty impressive. They have a strategic location. one of their key success drivers is that they're located in close proximity to key markets. I'm not sure what that would be. I'm just thinking, like, being close to Atlanta, if they're in Georgia,

being close to Atlanta is not necessarily their target customer base. So there's probably something to that. But they say they have a diversified customer base. Their top three customers made up just 20% of annual revenues. And historical sales growth, sales increase from $3.3 million in 2019. to 3.9 million in 2020, and then they're estimating relatively flat from 2020 to 2021. So that's at least encouraging.

The company's unadjusted current assets were 1.7 million and current liabilities were 293,000, representing a networking capital figure of 1.5 million. Their growth opportunities are to develop sales and marketing and geographic expansion. So when I see that, You mentioned the networking capital is always a pay in the ass in every transaction. So when they say unadjusting current assets, so that means they're just carving out what they're owed by customers and that sort of thing.

But there's no, like they're not putting permanent assets like fixtures and computers and all that kind of stuff in there. Yeah. So I think inventory for them is probably, it's probably interesting. They say they keep a lot of inventory on hand, which is problematic from a working capital management standpoint. But like if they're selling, I don't know, John Deere, Husk Barnah, or any of these major suppliers, then, you know, they're probably using those companies in-house financing as well as third-party financing. But, you know, it's like a car dealership. At the end of the day, you as the dealer, you're going to have to take possession of a fair amount of inventory.

the manufacturer is not going to just let you, you know, ride off of their inventory in perpetuity. They want you to share some risk. So those current assets is probably, it's probably, you know, whatever equipment they have in stock for the year, I'm surprised that their current assets could be that high and their current liabilities could be that low. So that's something I would really want to dig into because that doesn't really add up to me. It may be kind of some short-term leasing or short-term rental obligation that they have. I don't know. I don't know.

That doesn't quite click for me, but I'm sure there's a reasonable explanation. So in this business, there's not floor planning services like the auto dealers have? They're right. Yeah. My understanding is most of them are borrowing. You know, there's an intermediary that buys the inventory, plans it for them. They pay interest on it. The manufacturer gets their cash flow.

Planning service gets interest. and the dealer gets to be asset light. Is that not done in this space? Based on what they're saying about their balance sheet, I mean, I don't think they have one and a half million dollars worth of parts. Some of this, I think, is actual physical equipment. So I don't know. I mean, I hope for their sake that they're not having to constantly pony up cash

because, I mean, if you think about it, they basically have, what, six years worth of free cash flow, sitting in working capital. That's abysmal. I mean, that just tells you that if you buy this business, right, even if you get the working capital, then as the business grows, you're just going to have to redeploy, right?

More and more of your free cash flow, several years worth of free cash flow into the increase in inventory that you're going to have. There's something that's a little bit wonky about this. Let me suggest the thing that my hypothesis on what may be wonky about this, and maybe it lies in the word unadjusted current assets, assets. If they are, as you hypothesize Mills, holding assets that are in fact not inventory,

I wonder if this is the undepreciated value of whatever assets they have, which is why they say unadjusted, which would also kind of line up with your typical broker-seller trick, which is they try to get you to buy everything on their on their balance sheet at full value. Right. So it's possible that the depreciated value of this stuff is significantly less, which, on one hand, you're like, this is BS because you're going to try to make me buy it at full value. On the other hand, it makes their cash conversion look a little bit better. Yeah, yeah. I mean, what's interesting about these businesses is that they're very necessary.

I mean, they're totally vital. I mean, the municipality is probably not going to go straight to the manufacturer unless they're buying like a dozen pieces of equipment, right? They're going to go to the store and they're going to have like a purchase requisition from the municipality. saying, hey, look, we need two new mowers. And they're going to do that locally. The problem is, is that, like, I mean, geographic expansion for this business, there's no way, right? There's just no way that because they're probably in a relatively smaller rural area or kind of medium-sized rural area, if you go to the next rural area over, there's a guy already there selling these things. You know what I mean? Like, geographic expansion into what? Somebody else already has that territory,

because it's a dealer network. And the only way you can expand geographically is probably by buying that guy's dealer territory, in which case you're going to have to grow into this increasingly inefficient capital-intensive world. Are these guys exclusive for any brand? I guess it's interesting they don't talk about that. That being a legit dealer kind of seems like a good moat to have.

I mean, what you see, right, is like on one end of the spectrum, guys like Caterpillar, right? There's a family here in South Carolina. They have the entire state. That's usually the way it goes. And those things, I mean, they, you cannot pride them out of their cold dead hands. Those families will hold on to those things, some hell or high water, unless they just chronically underperform and then there's probably some callback. So the big names, they, I mean, they are massive, right? The families that own and control those, they're statewide, They're very multifaceted. They have really legit balance sheets.

They're doing a ton of service work because, like, for Caterpillar, you have to have their own parts. It's very hard to use aftermarket parts. But so there's exclusivity there, right? You can't buy Caterpillar in the state of South Carolina unless you're buying it from the Blanchard family. Now, if it's, you know, John Deere, I don't know, right? It might be that there's certain tiers of products because you can buy John Deere at Lowe's. But if you need to buy a John Deere tractor, like a full tractor, it's probably, broken down. It's not statewide. You know what I mean? It's funny. You mentioned that. We have a group

that owns most of Texas, and they also own the San Antonio Spurs. Yeah, exactly. And some banks and, like, a lot of other stuff. Yeah. The funny thing, though, is supposedly that family, you think they would be really wealthy? The patriarch of it, he actually found some lady who's more rich, richer than him. I was like, well, how does that work? So and there, but to be, they're great community people, really sweet. I mean, great, great people who have a lot of money totally deserve it. So, but just funny, funny thing about what what a level of franchise that's in high demand can do for you. I looked at several years ago, a sim, I mean, it was a, it was a large, it was probably, it was five to 10 million and even not easily, but it was a statewide, you know,

territory of, you know, one of these kind of big household names. And it was another part of the country. But I mean, these things, their balance sheets were incredibly complex and very unwieldy and just not that high margin. Right. I mean, this thing was probably doing five to 10 million in EBITDA and it was, I think, 175 to 200 million in revenue, if I remember right? Wow. And the balance sheet was just incredibly cumbersome. So, I have a friend who owns a business kind of like that. I think I've maybe said this quote on here before, but he equates

it to like picking pennies up in front of a steamroller. You know, like it's kind of fragile. It's a little bit gyssey. Yeah. Well, and I would assume they also do a lot of stuff to make it. So the EBITDA is very low, but the free cash flow is slightly higher, right? So

they get earnings out of the business in creative ways, especially when they get to that size. They're privately held. Cool. So we hate everything. today. Is that how we're going to go about life? Full Alanis Morissette. That's what we're thinking. Isn't it? No. Okay. Too old reference today. Too old to be a reference for you guys. Oh no, I'm like the oldest guy of the podcast. No, come on. Alanis Morse.

Yes. Do you guys have like 20-somethings that work for you and you're like, have you ever seen the Big Lebowski or like Pulp Fiction? They're like, what? Oh, dude. No context on Salute your shorts the other day. I dressed up as Butnik. at work and just no one got it at all. I was like, oh, man of my old. All right. Well, hey, so in closing listeners, we lose money producing this podcast. If you're interested in joining, becoming one of our 16 other,

joining our 16 other patrons and supporting the business, we would love to be able to keep getting these edited by a professional editor and make ourselves sound as hot as we do in this post-in-edited version. And also, if you're interested in sponsoring the podcast, podcast, we are now taking sponsors. So DM or email us on Twitter and we will be happy to talk to you about that. So any other stuff from you guys before we wrap it up? We have some exciting guests coming up. I think you've tweeted about this. We have some fun ones and I think we've been able to find they're going to bring some deals, but we also have some kind of in the queue to be able to talk

about that are pertinent with some subject matter experts. So those are always fun. Oh yeah. Well, and that's also open invitation. This show is the best if people send us deals they want us to talk about. consider it free consulting. And so send them, we're happy to keep them anonymous. Or if you want to come on and talk about something you're looking at, we would love to do that on the show. So DM us, email us, and be happy to go from there. So great job.

Happy Friday, guys. We'll talk to you soon.