Acquisitions Anonymous - #1 for business buying, selling and operating - $5.5M EBITDA Artificial Turf Deal: The Grass Might Be Greener - Acquisitions Anonymous 310

Episode Date: June 28, 2024

In this episode of Acquisitions Anonymous, Bill and Heather review a deal for an artificial turf business with a $5.5 million EBITDA, projecting its value to hit $50 million. They talked about the market potential, the choice of business broker, and what it means for buyers like searchers and private equity firms—many great lessons from this deal. Tune in and enjoy.Thanks to this week's sponsor:Thinking about selling your online business or buying a new one to start a fresh journey but not sure where to start?You should check out Boopos.com, the top platform for buying and selling profitable online businesses. Whether you're an entrepreneur looking to buy a profitable business or a business owner looking to sell with support, Boopos' expert advisory team is there to help.So, go visit go.boopos.com/michaelgirdley, sign up, and get started selling your business or finding your next opportunity todayLearn how to buy a business.If you are interested in buying a business but unsure how to start, you should check Michael's Buy a Business Course. 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]

Whenever you're looking at something like that, be very careful because they have a lot of control over how they allocate expenses. But not in this case. In this case, they're selling you the whole thing, which is great. Yeah. Yeah, that's a good point. They can say, oh, we're selling you the good part. And then they just keep all the expenses and make the bad part look really bad. But then after you've bought it, you realized that you need the bad part. I have seen it exactly like that. Welcome to another episode of Acquisitions Anonymous. I'm Heather Anderson. And today, Bill and I looked at a a really good company. It is in the artificial turf manufacturing, distribution, and installation business. Really interesting integration. I think you'll be really fascinated at some of the thoughts we had about that. Also, it had a really interesting shift in its margin. And Bill was able to

kind of crack the code on what might have happened there. So really, really great episode. I hope you enjoy it. If you like it, let us know. Thank you. Are you thinking about selling your online business or buying a new one to start a fresh journey? But you're not sure where to start. Well, you should check out our sponsor, bootpost.com. Bootpost is the top platform for buying and selling profitable online businesses. They offer financing for buyers who qualify, and you can browse exclusive listings, check out other marketplaces, or submit your own business deal for consideration. Bootpost makes it easy to get financing for businesses with regular income without needing personal guarantees. And this is their biggest advantage. Whether you're an entrepreneur looking

to buy a profitable business or a business owner looking to sell with support, Bupos expert advisory team is there to help. So go visit go. dot boopost.com, and that's B-O-O-O-P-O-S.com slash my name, Michael Girdley. Sign up and get started selling your business or finding your next opportunity today. And remember, that is go. Dot boopost.com slash Michael Girdley. And thanks to them for sponsoring today's episode.

Good morning, Bill. How are you today? I am great. It's Monday. And this was one of those weekends where I was pretty psyched to get back to the office, to be honest. Really? Was it that kind of weekend?

Yeah, my kids were a little nuts this weekend. We went up to the mountains for a night and, you know, two, two and a half hour drives on either side. And just like by last night, I was like, can I go back to the office where it's calm? Where people do what I say, when I say, yeah. Yes, exactly. So it's been nice and calm today at work, which has been a nice change for me. That is good. That is good.

Well, I enjoyed the, I know I've been complaining about the weather here in Orange County. It is still kind of cool. And so I had to go find some heat out in the desert. And I did find a little too much heat. And then I had to come back. Where'd you go? Rancho Mirage, kind of in the Palm Springs desert, you know, Palm Desert area. I have a friend out there that has a second home out there.

It was hot. It was really hot. Do you know about this place in Palm Springs? I visited Palm Springs and somebody told me about this like the Salt Lake or like the Salt Flats thing in Palm Springs. Have you heard about this place? The Salt Flats. I mean, I know about something called the Salton Sea, but I don't think you're talking about it. Yes, that's it.

Yes. Oh, the Salton Sea is weird. So weird. Yeah. So what is the deal? It's like a permanent burning man, but homeless people. I think something. Yeah, that seems about right.

It is very weird, very weird place. And I think it used to be like a vacation spot of the rich and famous way, way back, like, you know, in the 50s. And then it's just kind of this just a steady decline since then. And it's totally shrinking all the time. too. So it's, you know, the water is is kind of toxic. And yeah, it's like just the salt that's left behind. Yeah. Yeah. So I've heard that like the water is super salinated. So it's sort of like the Dead Sea, but it's also like mostly pollution at this point. So like you don't go in. No. And so like the the sea, this is basically like runoff, right? Sort of. And the and the,

and it's gradually receding. So the beaches or whatever are all like mostly salt. And then like all these homeless people live around it. And then they're like all weirdly bohemian and like. people go tour it and gawk right like i don't go tour it and gawk that's for sure i wouldn't go near it but uh yes i think it's just such a weird place that it is attracting people to come see it uh but it i wouldn't go there uh and it's not near palm springs it's kind of further south um in in more like san diego county i think but it's a weird place definitely if you if you're into weird i guess come check it out but if me i'll be at laguna beach instead Okay. Well, let's see if this segue works. And speaking of places that have no grass at all,

this deal is about grass, is about growing grass and about artificial turf. Well, yeah, what kind of grass? We're not talking 420, right? Right. Right. We're talking artificial turf grass that you would install if you lived in the desert. Maybe it couldn't grow real grass. Right. Right. All right. So I'm going to share the screen. So I don't have a URL for this one because this one came via email. So shout out to Sunbelt business brokers for emailing this to me. So if you're on YouTube, you can see it. Otherwise, I will read you through it. So this is available for acquisition. Project Meadowlark, a U.S.-based manufacturer and distributor of artificial turf with $5.5 million of adjusted EBITDA. This is a big boy.

It makes high quality artificial turf. It's an S corporation. The company headquartered in one of the largest textile hubs in the world was founded in 2019, so not even that long ago in that five and a half of EBITDA, found in 2019 by industry veterans with a goal to provide superior domestically produced products at competitive prices. Today, the company offers a product that is 40% denser that its competitors made from materials that produce a more realistic look than other products on the market. 75% of the product sold is manufactured in the United States,

affording the company the ability to meet customers' needs quickly, fulfilling short-run orders and custom requests that their competitors cannot. The owners own, and this is important, the owners own two distribution and installation businesses strategically located in the Western United States that make up approximately 50% of this manufacturer's current revenue. And they are included in the sale. So what you have here is a vertically integrated turf manufacturer or producer at least and then also distributor and installer. So they distribute or install about 50% of their revenue.

They have a highly trained and skilled team of industry experts. All of them are expected to stay post acquisition. They have the ability to scale production. The U.S.-based manufacturing facility can handle a significant amount of growth with no additional capital required. Okay. Significant growth potential, a combination of increased restrictions on outdoor watering, demand for low and no maintenance landscaping, and a product line that is an easy sell when compared to other lines. This company is well positioned to gain market share in both the residential and commercial sectors well into the foreseeable future. And the reason for sale is the owners want a partner that can help scale the company.

They are interested in rolling equity and also staying on post acquisition. Well, well, okay. Let's run into the financials and then I'll get your take, Heather. So this is 2021, 2021, 2022, and 2020 financials. Revenue was 31 million, then 42 million, and then 36 million in 2020. So revenue really popped in 2022, came back down a little bit in 23. their adjusted EBITDA in 2021, 2.3 million. In 2022, 4.5 million. In 2022, 5.5 million. So their EBITDA margin has expanded from 7.5% to 10.5% to 15% over the three-year window. So even though they had a bit of a contraction in sales from 22 to 23 going from 42.5 million to 36.5 million in sales, their EBITDA went up by a million dollars from $4.5.5.

to $5.5 million. So this business is represented by Ronald Altamariano from Sunbelt Business Brokers of Atlanta. You can find him at sundeltlanta.com. And yeah, so a lot to say here, Heather. What do you think about this? This is a fascinating business, especially like the thing that jumps out at me first is that margin expansion. You know, I really want to know what happened there, how they were able to improve the

margin because at this level of sales, what 36 million and 23, a 15% margin, you know, is pretty healthy. That's, that's, that's, that's pretty nice. But especially because it grew even when top line contracted. So curious, you know, I'd want to know the story behind that and how sustainable that is going forward, of course, because if they can keep those kind of margins, you know, this is, this is a pretty interesting business. I also found it interesting that they talk about that, in fact, it's headquartered near

a textile hub. And so I guess the manufacturing process of this turf must be very similar to fabrics, right? You're sort of weaving. I think it's kind of woven. Yeah. Like you weave the fake grass blades like into a substrate. Yeah. Kind of tie them off. Yeah. Which makes sense. And that they've sort of got a really dense weave, I guess. So this is a higher quality product. I like that too. I like when you're serving sort of the high end of the market rather than the cheapest low cost. And I think if you're manufacturing domestically, you kind of have to, you know, you're asking for a higher price point because your costs are a bit higher. So having better quality is, is good. What's interesting is this is, I guess it's somewhere on the East Coast. I'm, you know, the brokers in Atlanta. So I'm assuming it's

somewhere, you know, North Carolina, Atlanta, somewhere in there. And being in California, this, the growth of turf kind of started a few years back because we were in such a bad drought. And lots of people decided, you know, they raised the rates of water. And so people finally just decided, I'm getting rid of the lawn, the real lawn, and I'm going to put in this turf. And so I saw a few businesses go up for sale in the last few years that had this kind of hockey stick growth. So I kind of wonder if it's kind of regionally, you know, happening differently at a different time, you know, in the Southeast than what it has already happened here. But we learned a lot as we went through that cycle because you have to be careful,

artificial turf can burn your feet. So when you go out on a hot day and you walk on the grass and it feels nice and kind of cooler on your feet, that doesn't happen with artificial turf. It can actually, you know, it sort of starts reflecting the sun and can actually burn you. So there's a lot of kind of lessons learned people put some in and how to take it out in certain areas. And, you know, there was a lot of learning how to install it right and get the drainage right and everything. So I like these businesses, at least in drought areas. I don't know. You're southeast-based. I mean, what do you think? Are people putting it in because of the same

reasons? Some, but not nearly so much. So what I think is interesting that you touched on, but I want to really highlight, this business, if it is based in near Atlanta, North Carolina, where I live is a huge historical textile hub. If this is in fact an East Coast business, I think the most interesting thing about it is that they do 50% of their revenue through their own captive distributors and installers that they specifically mention are located in the Western United States. Oh, right. Because what you mentioned, Heather, is the turf market is a lot bigger out west because

there's just not as much rain. and also because they're not enough rain, there's a ton of water restrictions. So, you know, I used to live in Denver. Also, like, people in Phoenix definitely know, like, you're not allowed to water your grass for whole periods of the year. You have water rations. And the amount that you're allowed to water your grass is, like,

not enough to keep it alive. So there is a ton of artificial turf installed in residential and commercial settings where you would normally have grass, like on the East Coast, where there's just enough rain to keep it alive. Okay. The West Coast is a much bigger market for this, kind of as a grass replacement. On the East Coast, you just see this for like, I don't want to mow my lawn. Or like, I get too much shade here and I can only grow spotty grass.

So, like, you'll see it occasionally. But like, you go to Phoenix, almost every house has it. It's just a staple because grass is not really an option. Like, your options are turf or, like, rocks or, like, mulch or, you know, something like that. So if I had to guess, Heather, you mentioned the margin expansion. If I had to guess what's going on is they started, this business started in 2019. By 2021, they have 30 million in sales. And they're doing a 7.5% margin.

So in their third year of business. Now, I think at that point, they're probably still staffing up. I mean, to go from zero to 30 million like you're aggressively trying to hire. There's plenty of places to blow out, you know, mistake. screw up and mess up your margin when you're growing that fast, right? You're trying to get ahead of that growth. I also bet at some point between 2021 and 2022 when they saw that big jump in revenue, I bet that is when they opened the distributors and the installers. I bet that is when they went vertically integrated and that's what popped their margin from 7.5% to 15% because they stopped

losing margin to all the other distributors and installers and started capturing it, which pop their revenue from 31 to 42. And then I'm betting they probably figured out they were losing money on a bunch of business. And then they pulled it back a little bit, but that popped their margin went from 7 and a half to 10 to 15. And their revenue went from 31 to 42 to 36. So I see getting into a new channel a whole bunch of volume and then realizing they were doing some of this unprofitably, pulling back the unprofitable stuff. And so their revenue was still higher, but then it exploded their margin further. You know, you are a smart person. Bill, because I think that seems about right.

That makes a lot of sense. And I missed the part about the installer and distribution network being in the West. So yes, this now makes perfect sense. They're probably in North Carolina, I'm going to guess, you know, in that textile area. They, I would bet the founders kind of come from a textile background and said, you know, we can make this turf stuff that's selling really well, sold it through a bunch of distributors who were taking too much of the margin. and figured out how to distribute and install themselves,

which probably is the easy part of this business to some degree, especially if you're representing a really high quality product. So, yeah, I mean, I like this business even more now that you kind of expose that side of the possible story here. I think it's, you know, it's got a lot of potential. I'd want to know how much of the West are they covering and could you really grow that distribution channel? That seems like that's where the margin is and that's where the growth potential really is.

Yeah, that to me, the most interesting thing about this whole listing is peeling back the onion on the captive distribution and installation. And kudos to the owners, the sellers here, by the way, for including those businesses as part of the sale. All the time we will see listings and it'll go, oh, also your biggest customers are our sister companies and we're not selling those. we're just selling this one. And it's like, oh, so you mean this is the bad business that you don't want to be in? And you want to hold the other good ones and outsource basically the bad part of the value chain to me. But kudos to these sellers for not doing that and for kind of including the whole vertical go-to-market in the listing. I have seen that done the opposite way and it didn't work out, like where a seller had sort of two sides of the business and said, well, this other side's not that profitable.

We're going to sell you the good side and shut down the not-so-good side. but what they had done was allocated, they misallocated expenses, you know, on purpose to pump up the margins of the one they were selling. So I'd say whenever you're looking at something like that, be very careful because they have a lot of control over how they allocate expenses. But not in this case. In this case, they're selling you the whole thing, which is great.

Yeah. Yeah, that's a good point. They can say, oh, we're selling you the good part. And then they just keep all the expenses and make the bad part look really bad. But then after you've bought it, you realize that you need the bad part. I have seen it exactly like that. And the one thing I learned about that situation is no matter how much diligence you do,

the seller is in control of those allocations. You can't really diligence your way out of something like that if a seller wants to do something like that. So just be careful on carveouts of any kind. But yeah, but this is good that it's not a carve out. They're giving you the whole thing. Now, it's a pretty good size too. I am a little, a little concerned that they only started up in 2019. You know, it doesn't have that history.

It does sort of make the numbers a little messy to your point. You kind of have to know the story each year of all that growth. But, you know, it's five years old, I guess, at this point. That's, that's probably okay. I think that's okay. Yeah. I mean, what I would want to understand right away is what is their differentiator. They found something.

I mean, they were able to scale this thing from presumably nothing, although maybe It's one of those. We started it, but we contributed the assets of three different, you know, each of the three partners. One of them was a manufacturer. One of them was a distributor. And like, boom, you got 15 million in sales day one. And it's not really a new business. But let's say that it wasn't that. To scale to 40 million sales in five years, you have found a market in efficiency or a differentiator or something that people have got to have. So I got to understand first and foremost what that is, you know, how you scale so fast. And is it protectable? Or are you going to have a ton of competitors, copycats?

As soon as everybody else, all your competitors and everyone else in the value chain sees how you're doing it, they're going to come in and weave theirs tighter and it'll be all be the same or whatever it might be. So I want to understand the protectability of the secret sauce that helped them ramp so fast. Assuming that kind of checks the box, they've got some unique production capacity and I don't know what it is. But this idea of the 50% of their revenue goes through the distributor and the installer that they own is so interesting on a lot of levels because it teaches you about the value chain of this industry where that there's clearly a manufacturer, this distributor, and there's an installer. And you're basically going to get a window by diligent this business into the economics of each of the three pieces of the value chain, the installer, the installation, the distribution, and the manufacturing. And that kind of clues you into where all your expansion opportunities are as well, right? Like do you, 50% of your revenue is going through your captive channels, right?

So one way you could grow is scale those captive channels, right? Can your distributor distribute to more installers? Can your installer acquire more customers? Right. So you could try to expand that way. Or you can say the other 50% of my revenue that doesn't go through my captive distribution installation network, how do I grow that? do I need to find more distributors? Or do I just pop my business again by vertically integrating

the other 50%. Maybe it's in different regions or, you know, different types of projects and you just, you know, gradually take the whole whole value chain all the way to consumer. So I think understanding that is the key to understanding this deal. Yeah. And it sounds like they're looking for a buyer who understands that even better than they do, you know, because they're saying, you know, look, we've scaled up to this point, but our reason for selling is we want someone to come in who can take us even bigger. So they're looking for someone who's got, I mean, they've done a fantastic job to your point of figuring a lot out here. But they want to bring on a partner that's, you know, can even think bigger and help them expand that way. It's interesting.

Yeah. So they've got, they got five and a half million of adjusted EBITDA. Let's assume the adjustments aren't too egregious. So you got five to five and a half million dollars of real EBITDA. I'm a little surprised to see this business with Sunbelt, you know, like with a business broker. I mean, this is at 5 million in EBITDA, this is a private equity scale deal. Yeah. Right.

They are looking for a private equity deal in that they are looking for a minority or majority capital partner. They want to roll equity and they want to stay on. I mean, that is just screaming for private equity. That's the private equity dog whistle if you've ever heard it. Like we're looking for a partner to help us scale. We want a role and we want to stay on. Yep.

That says we want a private equity firm. Yep. It's just interesting that they would use a business broker out of Atlanta. You know, nothing against our guy here representing this, but like this seems like you would want an investment bank. Yeah. And sometimes some of these independent business brokers, I don't know this one. We could look them up.

Sometimes they have come down market from investment banking to be more independent and to kind hang their own shingle with Sun Belt or Trans World or one of those. And sometimes they can get these kinds of listings because they do have that experience. I learned from a fund that I worked with in the past how they sort of sorted business brokers. They sort of had their little algorithm that they'd build and they would look at the type of background that they had previously as well as the types of deals that they'd listed. And you'd find actually within those small business broker network, sometimes some people with pretty good sophistications coming down market to do smaller deals. And then they can still get these nice size listings as well. But it is curious.

I agree with you. So for what it's worth, and again, not trying to bag on our guy Ronald at all, I looked him up on LinkedIn. I don't see any of that. I don't see like former investment banking, former private equity. Not that he's not an impressive guy, I'm sure, but I don't see any of that, you know, I've come down market from bigger deals. Interesting. So I wonder if this is, and I hesitate to even say it out loud, right, lest I summon the stampede of searchers. But like, I wonder if this is like business broker caught a tiger by the tail.

You know, like sophisticated or unsophisticated seller should have hired an investment bank, instead hired their local broker, local broker, not a bad guy, going to do the best he can, but like because of that, it's probably going to be undermarketed. You're probably not going to have the hundred private equity firms bidding on it that you would, had they hired an investment bank, and it might actually be getable for, you know, I don't want to say average, because it's got five million needed to do so you're going to need some capital here. But it might actually be getable because of the seller's choice of intermediary. Yeah. I mean, that could very well be the case, and we've all seen it happen that way before. You know, this is, this is a good,

Speaking of searcher, this is a good deal for a traditionally funded searcher because they can bring in, they can bring in that capital. They've got the deep pocket investors. And they've also got sort of the network of other traditionally funded search companies that might sort of, they might be able to tap into some value add investors that could really help a searcher scale something like this if they hadn't done it something like that before. So yeah, to your point, private equity folks aren't usually looking at Sunbelt listings. So this is flying under their radar potentially, and that's missing the market that it really should be going for.

Right. And so, like, you're looking at this deal. So this got five, five and a half of EBITDA. I mean, I think this thing's going to get, you know, close to a 10x valuation, probably. I mean, just it's growing like crazy. It's big enough. You know, they think it's probably going to keep growing. I assume there's some runway here.

So this is a $50 million enterprise value. you deal, you know, maybe you buy 60 or 70% of it. So you probably, it's probably 30 million dollars of capital in, maybe 40 million on the high side, 30 to 40 million of capital in. You're probably not going to want to use a ton of debt here because you're trying to expand. Like maybe you use five or 10 million bucks of debt. Yeah. But you don't want to like lever the crap out of this thing because it's a growth business. Yeah. And you may, so I don't think this is going to get a ton of leverage on it. So, I mean, you need to come up with, this is a $20 million equity check. Probably. And man, it is just perfect for private equity. But, but like if you're a,

if you're a searcher, I mean, if you're traditionally funded, like, yeah, you need a $20 million of capital behind you. And what's interesting is, I wonder if you don't come in and be CEO in this case. I mean, you got, it says it's founded by industry veterans who want to stay on. Yeah. You know, so maybe as a searcher, you find a way, have you ever seen that, Heather, where a searcher does a deal and is not CEO? I've seen it done and it didn't end up well where the seller stayed on in more of a technical role. So they were no longer CEO, but they were sort of over the main product of the company. And the searcher came in as CEO kind of purporting to take over all the administrative headaches from them. But they didn't get along and, you know, it didn't work out.

So, and ultimately the investors, the traditional search investors fired the searcher CEO and brought in somebody else who had more direct industry experience and was more compatible. So I think that can be risky. But I think the search, the traditional search world is kind of open to different structures and leaving the founders in place if it feels right. I mean, it's not how they usually would do it, but they are open to it sometimes. Which is why this just feels like private equity, like even like an independent. sponsor. Like if you could, you got no, some very rich people, you circle up 20 million bucks and you kind of put together a one deal fund and buy this thing, you know, leave the management team

in place, buy 60% of it. I think you could do very well with this one. Yeah. I like it. Yeah, I like it. So this is a good one. Anything else on this one, Heather? Yeah.

All right. Awesome. I like it. I would be interested in getting in the book. I think this one's going to trade. for sure at probably a very nice price, assuming there's not like some. What would cause is I think not to trade is if you found out it was somehow dependent on like one of the co-founders also owns a manufacturer or something.

And these guys don't actually own any of the IP or they're totally dependent on that one manufacturer and they've got a sweetheart deal. And it's, you know, as soon as that changes, this business loses a lot of value. I think that's the thing that would kill this. but if they've got like a real, you know, they actually control their value chain, I think this should trade. Yeah, absolutely. I agree with you.

It depends, like anything, depends on what you find out in diligence. But from what they presented here, it looks like a really good company. Maybe already it's already trading. Maybe. I bet there's a lot of interest on this one. Yeah, I'm sure. Especially after this episode comes out. Yeah.

Okay. So if you guys like this one, I want to make an announcement, which is that we have redone our website. acquisitions anonymous. So thank you for our long-time listeners who have been very patient. We get a lot of emails. Hey, have you guys ever done something in the structural steel industry? I'm looking at a deal. You know, we try to remember and send people links. But our new website has all 300 plus of the deals that we've done indexed by industry on our website. So if you go to ACQUAnon.com, which is our website, you can go to the episodes area and you can sort by industry. So if you're looking for an e-commerce deal and you want to hear me run my mouth about e-commerce

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And you can find all of the episodes. So thank you to Gustavo from our team, who made that happen. Please go listen to our back episodes. I think you'll love them. Follow us on Twitter and get on an email list so you can be one of the first to hear about new episodes when they come out. And again, all the new ones are tagged by the industry. So you'll be able to see at a glance exactly what we're talking about. So thanks for listening today.

Thanks for joining Heather. And that does it for this episode of Acquisitions Anonymous.