Acquisitions Anonymous - #1 for business buying, selling and operating - $3.5M of EBITDA selling and repairing gears??? - Acquisitions Anonymous 235

Episode Date: October 10, 2023

In episode 235 of  Acquisitions Anonymous, Bill and Heather discuss an enticing opportunity involving a 23-year-old Gear Repair Manufacturing Company specializing in engineering and re-engineering OEM parts. The company has experienced rapid growth, with projected revenues increasing from $948,000 in 2019 to a forecasted $9.977 million in 2023 and EBITDA growing from $191,546 to a projected $3.4 million in 2023. Despite the impressive growth, the hosts question why the seller is willing to part with the business at a seemingly low multiple. Check out the listing here: https://businessexits.com/listing/gear_repair_manufacturing/Thanks to our sponsor!Acquisition Lab. Acquisition Lab and their team have been longtime supporters of the pod.Created by Walker Diebel, author of Buy Then Build: How to Outsmart the Startup Game, is an accelerator with a highly vetted cohort-based educational and support community for people serious about buying a business.Many of our listeners tune in each week to our deal reviews and want to get in on buying a business but don’t know where to start.Acquisition Lab exists to help people buy a business, navigate all the complexities of the process, and provide a trusted framework, tools, and resources to support you from search to close.If you are serious about buying a business, check out acquisitionlab.com or email the Lab's director, Chelsea Wood, at [e-mail] to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Hey, everyone. This is Bill D'Alessandro, and welcome back to another episode of Acquisitions Anonymous. Today, Heather Anderson and I have a really cool business. It is a gear manufacturing company that has 10x their revenue in five years. They've gone from a million in revenue to 10 million in revenue, and they have 33% EBITDA margins, making specialty gears for industrial manufacturing. Super cool business, Canadian business, and we also have a couple tangents on minority protections debt. things like that, how to finance a deal like this. So without further ado, I hope you enjoy this episode of Acquisitions Anonymous. This episode of Acquisitions Anonymous is sponsored by Acquisition Lab. Acquisition Lab and their team, they've been longtime supporters of the pod,

and they provide a really great service for people who are looking to acquire a business. So it's created by Walker Divell, who's become a friend, the author of Buy, Then Build, how to outsmart the startup game. So Acquisition Lab is an accelerator with a highly vetted, cohort-based educational and support community for people who are serious about buying a business. So a lot of our listeners like you, you tune in every week to our deal reviews. You want to get in on buying a business. You're on this podcast because you're trying to learn how to buy a business.

But if you're not quite sure where to start, acquisition lab is a great place to start. So they exist to help people buy a business and to navigate all those complexities of the process, everything you hear us talking about on the show. they provide a proven framework tools and resources that support you all the way from search to close. They do it. There's a whole bunch of educational material and support. So if you're serious about buying a business, check out AcquisitionLab.com, or you can actually email the program director Chelsea Wood directly. Her email is Chelsea at buy then build.com.

Heather, it is just you and me today, unsupervised. My favorite way. I like it unsupervised. This is fun. I was just saying to a friend that I am, this is like my first normal week in three weeks because I have been at like back to back trade shows. So my email is like a disaster. And you were just saying before we opt on that you were sponsoring a trade show you're going to tomorrow, right?

I am going to the Southeast ETA conference leaving tomorrow. It's this Saturday at Duke University. And a lot of folks that I'm already talking to and working with, they're going to be there. So I'm excited to see people in person for a change. Yes. I think one of that's still like the most magical internet things for me is to get to know somebody on video and then like meet them in 3D and you find out they're usually even nicer and you get to bootstrap. You like have this relationship already and you just get to step right into it. I love it. It is pretty amazing what's happened in the last few years of how we can network this way. It's incredible. And to do all the different platforms and podcasts and things that I do, sometimes people I haven't met feel like they know. me, but I haven't talked to them yet. So that's a little bit weird, too. Yeah. Yeah. It is always just such a, it's such a great way to grow your network and to get to

know people. I actually really, it's definitely weird when people come up and they're like, I know you and you're like, I don't know you at all. But then I realize it's actually awesome. Because as our mutual friend, Brent B. Shore says, it's content's a great way to scale conversations. So I can have somebody come out to me and their questions are always like way better than if they were cold because they've listened to like everything I thought on a topic and have a question or we can just like skip right into the deep end of the conversation because they already have the primer. If you can get over like the initial like your brain wants to think it's weird, but it's

actually great. I love it. That is true. Very true. Yeah. It's fun. It's fun. And I guess this, uh, this will come out after the Duke, uh, ETA conference.

But, uh, hope it was fun. Yeah. All right. We've got a very cool deal. We're stealing this one. Michael sent this out to our host's group chat, but then he didn't show off his recording session. So we're doing it anyway. I really like this one. Heather, will you read it for us? I will. So this is on business exits. It is gear repair manufacturing company. The business is a 23-year-old ISO-certified company with global operations and physical presence in Canada and the United States. The company specializes in engineering and re-engineering OEM parts and equipment such as gears, gear boxes, clutches, bearings, and seals. The re-engineered OEM parts and equipment have better materials, applications, and designs to optimize and increase the

equipment's reliability and longevity. Clients experience less downtime, higher runtime, less part equipment replacement, and higher return on investment in plant and plant profitability. They also provide hydraulic and electrical motor work, steel fabrication, and anti-ware coating solutions. The company has a strong reputation, is well established with solid vendors, and has contracts with long-term plants. based on original equipment manufacturers,

the company has only a few competitors. Additionally, the company has low overhead and high profit margins. Project minimums are $5,000, but the average revenue per client can range from $300,000 to $3 million. Wow. There are no specific licensing requirements to own the company, but a mechanical background would benefit the buyer. Yes, I bet it would.

They are asking $12,500, revenue is $7,780,000. And they're saying that's the average of 22 and a 23 forecast. Well, that's interesting. An income, which is also the same average of 22 and 23 forecasts, 2.45 million. Multiple they're asking for is 5.09. And just the revenue trend here, going back from 2019 forward, 948,000, 2.6 million, 3.8.8. million, 22, 5.

6 million, and the forecast is 9.977 million. So lots of growth. They did not give me a kegher, and I cannot do that math in my head, but I think it's quite large. Ibidah has been trending from 2019 forward, 191, 546, 845, 1,489, and forecast for 23, 3.4 million. So huge growth. What do you think? No one has listened to this podcast anymore because they have all ran to go sign the NDA on this business.

I got to say, this one impresses me. So what this business does, right, is if you run a factory or, you know, some kind of industrial facility and you have equipment in there, when that equipment breaks, it costs you thousands or tens of or hundreds of thousands of dollars. hour while your factory is down because you've got all your people sitting around twiddling the thumbs smoking cigarettes you know doing nothing until you can get this this machine backup um and you're you're missing demand and all this stuff it's phenomenally expensive uh so what these guys do is they make replacement parts and it sounds like they make better replacement parts better than oem replacement parts um i love this because this is the type of business that you just would not know exists if you are only on the internet.

Like, if you were just like a regular, you know, searcher guy and you don't know this industry, you could easily miss this giant business right under your nose. So I like that because this stuff is probably not bought online. It's probably bought with a sales team. It's probably bought via telephone. And it is probably overnighted or couriered to wherever you are. Right. It's an emergency if you need this.

It's an emergency. And that's why the margins are. so good. I mean, this is like, not to diminish at all what they do, but this is like a glorified CNC shop, right? And their margins are, what is there even on margin? 33%. I mean, holy smokes, right? And the reason it's that good is because they can charge, what they're charging for is the service level. And I know it works and I know it will fit and it gets my factory back online. And those are good businesses. Well, in reminds me when you talk about the emergency need for this and how that drives these high margins,

it reminds me of a client I have that did something similar in the printing industry. Believe it or not, there are emergency printing projects too. And they were like a 24-7 shop and these printing emergencies they got paid very, very well for and they would career them to the meeting. You know, it was pretty interesting how that does drive margins. So I can see that here. And I can also see the whole onshoreing trend for manufacturing in the U.S. And how that would really drive, you know, growth in a business like this. But, I mean, that's a lot of growth. I wonder, you know, what are your thoughts, Bill, on what would be driving growth like that?

From 941,000 in revenue, you know, to over $5 million in four years, three years. I think that's weird to me. So this is actually a Canadian business. which all the same trends are true still insuring that you said. It's actually a Canadian business. It says global operations and a physical presence in both Canada and the USA. The thing that surprised me is it says it's a 23-year-old company. And yet, it looks like it was basically started in 2018 because it scales from just under a million in revenue in 2019 to 10 million in revenue in 2023.

So it's 10xed in four years, five years. And what were they doing in the first 18 years? You know, like that is really puzzling to me. I imagine if you got the book here, it's going to be sort of a business pivot. Like either a new product line, you know, they started, they figured out they could make gears or they figured out they could make gear boxes or clutches or bearings or seals or something. They weren't doing before and it just took off. I'm happy to see that it's not just one customer because they said customer value ranges from 300K to 3 million. So it's not just one customer that took them to 10 million, although I'm sure there's a big one in there.

I would want to know what they started doing in 2019 because it's working. Yeah, it might be a salesperson or two. Maybe they hired somebody that really knew a particular industry and said, boy, if you can make these parts, you know, then I can sell that. So, I mean, if it is something like that, whatever it is that drove this growth, you really, as a buyer, have to make sure that it's going to be sustainable for you. If it's that salesperson that I'm dreaming up here, maybe you've got to make sure that you bring them into the cap table or something really solid that they're going to stay with you. Because this is phenomenal growth. And I do think, even though, as you pointed out, this is Canada, not the U.S., there is still this onshoreing need to manufacture in North. America and I would imagine that there's, you know, still quite a bit of growth. I'm also wondering

CAPEX-wise, how they managed this growth. You know, did they have to make, did they have to invest in a new plant or, you know, double the size of the manufacturing? I would imagine so. I just can't imagine that they use the same equipment that they had in 2019 and they're still using that in 22 without any new additions. Yeah, I mean, like these machines, like if you can keep them maintained, like you can crank a lot of gears on. The key is to do longer runs, right? Like, every time you got to reset it up. So maybe they've gotten, you know, they can sell you 50 gears at a time rather than, rather than one off. And, you know, those are kind of the better businesses like this if you can do larger orders. You know, if you, and I just have to sell you

one gear, I got to charge you through the nose for one gear, which businesses do. Like that exists. You know, you need the one gear with the exact tolerance and this is the only place you can get it. it reminds me of my wife used to work at a large filters company filter manufacturer that shall not be named and they ran on SAP ERP and she was on the supply chain side and used the ERP every day and the ERP had been in place for 20 years or something and it was all hosted on site and the hard drive that was running like the array of drives crashed and like they had the data like back up, but they didn't have the drive that you need to, like, run the ERP from. So they paid, like, no joke, $100,000 for one hard drive.

That was probably like a, you know, $5,000 part or something. Tops. They paid an absurd amount of money on eBay. This multi-billion dollar company legit went on eBay, spent nearly a hundred grand on eBay, which is also insane. And then there's some dude, you know, in Iowa or something, just ship them this part. And it got their

ERP up and running and it was key. But it was because their whole multi-billion dollar business was stopped for like two days while they waited for this thing to get here. So 100 grand, whatever. Yeah. Well, and you've got to have the sales, whatever

the reach in place, I should say, you know, for people to know to call you when they have that emergency. I mean, cost some money too, right? So maybe it's not the salesperson that I dreamed up, but maybe they put a wholesale infrastructure in place so that those businesses know where to go when they have something break down and they're just grabbing more of that market share. It's really fascinating. I wonder if this is the founder, a 23-year-old company or if somebody else bought it in 2019. That could have happened as well. But I do think the multiple is pretty fair. I'm jumping to the

multiple too early here. But like you said, everyone probably should sign this NDA, especially if you have a mechanical background, which they do point out, this is manufacturing. You've got to know, probably this is best for someone

who's an engineer has a really good engineering and manufacturing background because I can't imagine this is easy. These parts have to work. They have to machine. And you've got to employ technical people and all that.

I think, so you spoke to the multiple. So the multiple you might look at and go 5x and you go, it's a little high like versus the deals we typically look at, but it's not that high. And also this is a damn good business is growing. But then you realize that it's even better than that because they have averaged 2022 and 2023. So this is a 5.1x multiple on 2.5 million of EBITDA. But actually, it's going to do 3.4 million of EBITDA. So if you pay the asking price of $12.5 million and you actually get. 3.4 million of Eva da as is forecasted for the year. That's a 3.67 X multiple.

So this is a business that has 10xed in five years. And I can't say it shows no slime of slowing down because it's not seen the SIM. But this business is 10xed in five years and they want to sell it for 3.6 times. So in my view, one of two things is happening here. One, they know something you don't, right? Or two, they have a really big. bad intermediary. The thing I will say is this is from business exits, and I actually know the guys at business exit, and they are not morons. So I know them personally. They're not morons, usually. So I immediately go, what do you know that I don't know? Right. You know, I want this is unsustainable. Every single deal, you have to come at it with some skepticism. You, you, you know,

do definitely have to do that because, yeah, this is very perplexing how they, how this even happened with their numbers since 2019. And why would you jump off this gravy train now? You know, you've got a great thing going here. Why would you be selling in at that multiple? So, yeah, very, very interesting. I would definitely want to see this STEM. But I think there's potentially a very good deal here. Yeah, and maybe even a great deal. You know, there could be a minority deal here, too. Like, if you get into this, you figure out, is for real. You know, you go to the founder and you go, look, either sell me 51% or sell me 49% depending on, you know, what you feel is right. And stay with the business and like,

let's take this from 3 million of EBITDA to 10 million of EBITDA and sell it again. And you'll make four times as much from your half that you kept as you did from that you sold me. And we'll all win. Yeah. If this, I would, that's the deal I would want as the founder too. I mean, this things are rocket ship. You know, sell half of it for 10 million bucks, take some money off the table and just try to go to the moon. Yeah. I think that's a very smart play. And I think a great way to sort of derisk it a little bit for both sides, you know, really, for the seller to get a little more upside and some help getting there. Maybe they just want some help getting to the next level. And we do see that a lot. I always cringe a little bit and keep the seller on that notion because

there is that whole, are we going to get along? Are we, you know, we're, we're going to have to work really closely together and make big decisions together in unison. And that does not always work out. I think we all know stories like that. And it's really hard to size up that type of relationship in the period of time that you have between, you know, getting a deal under LOI and closing it. You know, you've got a lot of other things to do besides just get to know somebody. So I always think that's a really challenging thing and really great to see when it does work out. I think it does work out a lot, but it takes people being, you know, flexible and professional and, you know, just you have to have a lot of good character traits to make that work.

You do. And you also have to, and this reminds me something that we're talking about, in addition to all the human factors like trust and, you know, kindness and all that stuff, which are totally required, I believe that type of deal also requires and almost always does include a pretty strong minority rights for either if the founder sells 51% and keeps 49% he needs to have some pretty strong minority rights and vice versa if you're the investor, especially if you're the investor and you're bringing the capital. You'll often see things like even if you own only 30% of the business, like the 30% shareholder has to approve all distributions, has to approve

pay for the CEO, has to approve all cap-ex above a certain amount, has to approve all borrowing above a certain amount, et cetera, et cetera, et cetera, I guess board seats. You know, there's, there's a lot of ways to strengthen minority positions to protect yourself. Because going, going into a minority position in a business with no protections like that, with somebody you barely know is a little scary. It is, it's kind of like a pre-up. Yeah. Because what if we don't get along? We got to, you know, we got to have some controls in place. And I think, you know, I've, I've seen deals where just negotiating the operating agreement in those controls and restrictions, gets a little dicey, you know? It gets a little uncomfortable, you know, and you've got to strike the

right balance even with those controls. But very interesting, like I said, I'm always amazed that the stories that do work out, because there's so many ways that that could potentially not work out. I think this is a good business for that, that if we know what the seller's motivation to sell here is, and this doesn't, do business exits folks usually tell us that in their teasers? I don't think they, I don't know them that, that well. So I can't answer that. But they didn't tell us why. No, they didn't tell us why.

You're in question. Yeah. Yeah. I mean, there is enough here that I would be super interested to talk to this founder, assuming it is the founder, or at least the owner, and figure out what's going through their head. I mean, you alluded to it earlier and Michael is fond of saying this too, but, you know, anything like this, the answer is that the question I always ask,

rather, is why am I the lucky one who gets to see this deal? Right? Like, this seems like a slam dunk. Why am I the lucky one that gets to see this deal? I also, and no slight to the business exes guys, but like this is a business with three and a half million dollars of EBITDA growing like a rocket ship, like an industrial industry. They should have an industrial investment banker representing them. And they will get a much higher multiple on forward 2024 projection. Right? Right. It would have been presented differently than what this teaser is. It would have gone to a different group of people, not just on the internet like this. I agree.

That's always an interesting sign. I always think about that. And, you know, when a business owner has done such a great job of building and growing a business, and then maybe don't do the greatest job selecting the person to represent them in the sale. It's always a little strange. Like, you figure they're good at picking vendors. They have to be. but maybe this is just so foreign, you know, this whole notion of M&A that they often don't make the best choice for themselves in terms of who represents them in the sale.

Well, I think what they often do is they literally go to Google and they type sell your business, right? And because that's all they know to do. And the whole like investment banking Wall Street world is extremely opaque from the outside. Like you really need a referral. I wonder if it's on purpose, right, because they want to do only bigger enterprise deals and it's kind of a filtering mechanism. But it can be very, very hard to even know that you don't just hire a broker. Because like, here's my take on like brokers generally.

Like there are good brokers and there are bad brokers. We have established that. But there is like a broker valuation range that is like in the three to five X EBITDA range. Right. And brokers don't sell stuff. for more than that because they've never done a deal higher than 5x EBITDA because they don't have any industry expertise because they're usually generalists right so if you go to a broker you are going to get priced between three and five times EBITDA almost always right even if it's a great broker

and they can and plenty of businesses by the way most business were sales deserve to be priced between three and five times EBDA right so this is not inherently a bad thing um but if you are a business that does not deserve to be priced at three to five times EBITDA. And you hire a broker who prices everything at three to five times EBITDA, you're going to be underpriced. Good point. Yeah. That is an interesting perspective. I mean, it's good for buyers, right? Because this could potentially be a great deal. I'm always reminded of a deal where it was turned out to be a really great company and a great deal for the buyer. And it was one of the worst sims I've ever seen. And I don't say that lightly because I've seen some bad sims. It was like typed,

like on legal size paper, like it was like a form that they typed in. It was absolutely ancient, horrible thing. But underneath all that was actually a good business that was just poorly represented and a great price. Yeah. Yeah. I mean, we basically, and I could say this now, I've owned it for five years. Natural dog company, I feel like we stole it from the person we bought it for. I mean, we've talked about a business that's 10xed since we've owned it.

And, you know, she had just a regular broker representing her, right? Could have hired an investment bank and sold it for much more. But that's alpha. That's why you slog it out with all the brokers, you know,

as a searcher. Right. You know, if you only looked at investment banks, everything's priced to perfection, which is what you want as a seller, but not as a buyer. Right.

Right. That's the fun of the small business market. It's inefficient in a lot of ways. This is one of them, but there are other ways that it's inefficient, and there are definitely opportunities in that inefficiency, for sure. So either this is underpriced or, and I think this is probably the case, because the business exit guys are not idiots, there's something, like when you sign the NDA,

you're going to find out that this is not sustainable, I think, in somewhere. Doesn't mean it's not worth signing the NDA, though. I'm super interested by this one. Yeah. All right. Anything else on this one? No. All right.

We'll wrap it up. I hope you guys loved this episode of Acquisitions Anonymous. If you sign the NDA on this one, let us know. Can't wait to learn more about it. I hope you enjoyed it. See ya. Yeah.