Acquisitions Anonymous - #1 for business buying, selling and operating - $5.9mm Revenue CCTV/Security installer in SE US / $6mm Distributor of Women's Fashion - e27

Episode Date: May 11, 2021

Two deals discussed this week:- $5.9mm Revenue CCTV/Security installer in SE US - $6mm Distributor of Women's FashionEnjoy!-----* 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, everybody, welcome back to another episode of Acquisitions Anonymous. We are, well, it's cool. Bill, we got the band back together today. Bill's is back, where's Ali, like, return to the ring. Yep, and I'm back in my office. Our office is open here at Almond's Brand. So life's getting back to normal. And I guess for a listener, FYI, you know, I'm on my travel rig for recording. I'm Michael Gridley, one of the three co-host.

and Mills is struggling with his internet. So he's dialing it on his phone. So we apologize. We will not have our normal Christmas this week, but I guarantee we will make up for it with some badass content. So we have two deals this week. Just a reminder, if you're new to the podcast, this is a podcast where we talk about two or three businesses

that are small businesses for sale each week. And we sometimes love them that we usually poop on them. So it's pretty fun, but it's how we think about these companies that are sale and how we would go look at them if we were going to buy them. So this week, Mills, good morning. Mills, you have both of our deals. So which one do you want to do first? I'll read this CCTV and license plate reader installer. And then maybe if you guys want to read one of the other ones for round two. So we have a teaser on this business. They design, install,

and service CCTV, access control, and license plate reader systems. They're located in the Southeast US. 2021 revenue is the only numbers we have. They're estimating 5.9 million in revenue and 872,000 in EBITDA in 2021. They've been around for 20 years. They have 17 full-time employees. And the little bio on this is the company specializes in the design, installation, and servicing of CCTV, access control, and license plate reader systems. The company also sells body cameras for law enforcement and has a steady flow of service and maintenance agreements, burglary monitoring, and other recurring licenses. Through its brand name state contract, the company has developed relationships with many state and law enforcement agencies, business, and educational campuses, and IT departments. The company's IP camera technology has made it a staple for its growing list of clients. Let's see.

They have customizable brand-diagnostic technology. Their security software works with any brand of camera, and it's fully customizable for each brand or product. It is, they say they have a diverse target market. They generate revenue from a handful of different industries, schools, law enforcement agencies, local municipalities, and some state and federal agencies. They have a growing pipeline of monthly recurring revenue. We don't have a ton of detail on that. But it looks like they're working on developing a new piece of software that's a license plate reader for HOAs.

Then they would, I guess, just set these up in your neighborhood so that you could see who's coming and going out of the neighborhood. But their revenue mix, we have a little bit. The license plate reader installation is about 40% of revenue. CCTV installation is about 35%. body camera is 12% and then there's some other kind of miscellaneous stuff that makes up the difference. But yeah, what do you guys think about this one?

I'm really confused by this teaser. So is this, is this a custom product company or is this just a services business? And like, I guess maybe this is why you sign the NDA, but I'm totally confused by how this business actually works reading the teaser.

Yeah, they do jumble it a little bit. My read on it, what I'm not sure is correct, is that they're probably installing commodity hardware, but they seem to have some sort of CCTV kind of video monitoring software that they claim is proprietary. Maybe they developed it or maybe they white labeled it. Who knows? They also call their revenue segment license plate reader installation,

which again is 40% of revenue and CCTV installation, which is 35% of revenue. But then they spend much of the teaser talking about their software and kind of their MRR. So for me, I don't know, like, is this, is this like an IT contractor who's going to install these systems for you, or is this more of a service provider where they install the system and then reap the MRR for a long time? It's hard to tell. Well, given their profit margin, 872,000 on $6 million in revenue, that is more consistent

with being a pure services and installer business, of my experience. If these guys were actually a real software business, that it can be much more attractive than that, especially when you're selling some of these big-name clients like they have. I do think this is interesting. I like the end markets. They've clearly found a way into selling to law enforcement and, you know, governments and, you know, these things typically come with long-term contracts or, you know, maybe once they got a preferred provider, it's really hard for your competitors get approved as a preferred provider, again, depending on, depending on the municipality and the type of thing that you're selling. So this could be without knowing more about it. You know, they've been around for 70 or 20 years. So clearly there's some sort of stability here. I mean, you can't kind of like hustle installing cameras in one municipality for 20 years. I mean, clearly they've got some long-term relationships here. You know, I'd be curious how much of these long-term relationships were transferable. I mean, very often, you know, this is the type of thing that, you know, you sign the NDA,

and then you find out the owner has some very specific qualification. You know, it's women, minority owned or something. And you're like, well, I can't buy this business, right? because I will lose all these contracts. So, like, I would want to understand, like, clearly the owner here is carved out an awesome business, but I would really want to understand the transferability of those contracts and whatever competitive advantage they have that is clearly allowing them to win business. Yeah, I was thinking the same thing.

You know, are they a beneficiary of any kind of set-aside contract? Because if, you know, if your local municipality, Charlotte or Columbia, South Carolina, or San Antonio, if the police department needs body cameras, they put out an RFP, you know, and people submit and they bid. And, you know, you're just basically buying hardware and some service. And so the city is, in almost all those cases, they're going to choose the lowest bidder unless it's just not apples to apples. And so you're right. You know, either you're competing on price or you have some differentiating factor. I was with a friend this past week who's a general contractor here in Columbia, and he is a veteran, and he has a service disabled veteran status. And so he does just

insane amounts of work at Fort Jackson and the VA and all these federal facilities. And all of his friends who are GCs can't compete. They just can't go bed on those jobs and still get anywhere close to his net margins. And so it makes a great little business, but you're right, transferability could be, can be a problem. Yeah. And also, I mean, I'd be interested in, how are they selling in? It seems like they're probably this is a business pivoting from install to try to turn into an MRR business. So I would ask a lot of questions around how developed that pivot is at this point. You know, did you just kind of start it six months ago so you could write it in the SIM? Or have you been doing this for a while? Is it

working? You know, what percent of your installs are you able to get the MRR contract on? And I would try to kind of model the company's future projections based on whatever kind of attach rate that you think you can get of this MRR. And hopefully there's a little bit historical data to inform that model. The other good thing is that, you know, these are contract, they're awarded contracts. And so, you know, if the municipality says, hey, we have a, you know, you have a three-year contract to do installations in these areas for license plate readers or CCTV in this business district or whatever, you'd really want to, if you were due diligenceing this, you'd really want to start to parse out how much the sticker shock on these things is

kind of staggering, right? They have $5.8 million in revenue. It could be that $2 million of it is associated with one project, but $1.8 million of that has already been, you know, collected from installation. And the remainder of the contract, the $200,000 remainder is for ongoing kind of service and support calls and things like that. So you really got to parse out these contracts and figure out what's being awarded for installation, which is one time and there's really no recurring aspect to it versus what's what's actually going to be, you know, reoccurring or service related or maintenance related. And depending on the way it looked, it could be very, very attractive, especially if they're probably multi-year contracts.

Cool. So we like it. We like it enough to sign the NDA and get some more information at least, I think. Yeah. Yeah. It comes, I think it comes down to a lot of what you've been talking about, Bill, about buyer company fit. This one may be attractive if you're the right buyer, right? And the number of people in the world who could do it are few and far between probably. In fact, I would argue that if you are a member of a set-aside group, this might be a slam dunk. You know, like if they're winning contracts already without having that in their corner, and you could buy 20 years of credibility essentially overnight,

and all of a sudden you're a member of set-aside group with 20 years of credibility behind you, you could be smashing it out of the park with this business. Yeah. Not that we'll find out, but I'll give you a contrary in perspective. I bet you there is an old white guy that runs this, and I bet you he's been buying drinks at every single one of the police and firefighter conventions for the past 30 years in whatever random state this is, Mississippi or whatever, and Jim is beloved and wins every deal because of those free drinks. That's my story.

And I'm sticking to it. Also possible. Like you, that's something you want to diligence. Like, you want to really understand, you know, and that's why, by the way, it is really beneficial if you're doing diligence, take the seller to drinks. You know, ask them about, you know, put a couple beers in them and ask them about how they got here. You will learn a ton.

Like, formally on my diligence list is go to drinks with the seller. At the place that he chooses, because you can see, like, how many. many people does he know there? Like, you know, because he's going to want to feel like the big dog when he's taking you out. I was with a seller one time and we went to Cracker Barrel. This is, this is where you do your site visits, you know, in the southeast. And he just started walking around and picking up his friends' checks and was buying their meals. And it was a good lens into, you know, what his persona was like. He just walked around the room acting like the mayor. Which isn't necessarily bad. It's just helpful to understand people. Yeah, exactly. Exactly. You want to know.

I have a hilarious, a hilarious alcohol in business anecdote, which is one of my buddies was a CEO and he was his first CEO job. And he told me he'd figured out this magical solution to doing hiring. And what he and his team would do would interview people for the day. They wouldn't really pay attention. And then they would take them out drinking that night and see how the person held their liquor and what they said when they got intoxicated. Literally, that was his entire hiring process was.

How drunk can I get you on tequila? And then what do you say? And of course, I told him that's the dumbest hiring process I've ever heard of my whole life. You're just going to hire a bunch of alcoholics. And anyway, that's my alcohol anecdote for you about music as truth zero. So anyway, back to you, Mills. The last thing I was going to say, which, by the way, that HR policy, I hope is not documented, you know, in any place in the hard, you know, hard document form.

The other thing I'm thinking about, about this CCTV business is that, you know, I don't know anybody who has a business like this, but I've got a friend who listens to the podcast and they own a business that they install and they do retrofits for hotel door locks. So, you know, it used to be that it was all keys. Now it's all cards and it's moving to like, you know, a contactless type thing. Well, Hilton says, hey, we got to change out all these things. And this is the company that comes and puts them in. And they have the hardest time finding and, you know, and keeping the techs who do this because it doesn't require a ton of skill, but you need somebody who is super presentable and is going to be standing in the halls of the hotel, interacting with customers, you know, your customers, customers, and you're talking about people who maybe max are making,

you know, 15, 18, $20 an hour. And that situation reminds me of this business because you've got, you know, somebody who's going to be walking around the central business district of a municipality installing cameras and running low voltage electrical, you know, wires. And these aren't just people that you can, you know, go find, you know, at labor finders for day labor. I mean, you've got to, it's going to take some education and training, but these folks aren't

going to be making, you know, 50, 60, 70, $75,000 a year in all likelihood. Especially these days, labor is a hard problem to solve in any business. You're telling me. Cool. You guys want to move on to number two? Yeah, sure. Bill, you want to read this one? Yeah, I'll take us through this one.

So this one is another teaser. So it is a highly profitable designer brand and wholesale distributor of women's accessories, apparel, and gifts. It's 2021 revenue estimate is $5.1 million, which they say is 24% growth over last year. And their 2021 EBITDA estimate is $1.4 million, which they say is 28% growth over last year. I love that it's May and we're selling businesses on $20. 2021 estimates, by the way. So it says, the company specializes in the wholesale distribution of women's hats, accessories,

fashionable apparel, and gifts. The company also has a developing presence as an internet e-commerce retailer. There's the pixie dust on their listing. The subject is known for its ability to identify trends in the women's fashion marketplace and has leveraged this expertise to deliver trend-setting products to customers. Their primary offerings are divided in five categories. Outerware, which is 24% of revenue. Hats, which is 53% of revenue, other accessories and apparelable, which is 12%, and COVID-related items,

which is 11%. I want to come back to that one. The company utilizes a network of sales reps who in turn establish relationships with boutiques and stores and bring prospective customers to trade shows. The subject also benefits from third-party wholesale and retail marketplaces, email marketing, SEO, and word now. So they say they've got strong client relationships, 64% of sales are from repeat business. They've got an outsourced business model. All manufacturing is outsourced to vendors. They say they can scale quickly without the need for high cap X. They say it's a COVID-resistant business, despite the fact that COVID has devastated many smaller businesses in our industry. Subject performed exceptionally well and maintained flat revenue but improved EBITDA margins in 2020. Initially, the business positioned well for growth in 21-21. As you remember, they project 25% year-over-year growth. So it's nice to know at least they were flat during COVID. So that 24% is not just a straight rate. rebound. They say they've got great evadda run rate, an evadar run rate of 1.18 million,

with an EBITDA margin of 26%. Strong growth, no debt. So what do we think about this one, guys? All Thrasia, time to roll the sucker up. I'm just kidding. I don't know. That's an inside joke. Thrasio's a group rolling up fulfillment by Amazon businesses. Yeah. I'm actually not sure it is an FBI business. Yeah. That's what I was just trying to figure out. So it looks like on this revenue mix, you know, in 20, let's just say 20, 40, 40% of their revenue was offline wholesale to boutiques.

Yep. And then 28% was online wholesale to boutiques. So they really, they're predominantly a B2B distributor. Yes. And they're just a middleman for hats. Yeah. And in 2020, it's only 12% of the revenue was Amazon and 4%. was online retail. So 16% of the revenue in 2020 was online and the rest of it is is offline,

chain stores, big box, and wholesale to boutiques, which is interesting. And kind of impressive, they were able to maintain with that market, especially selling these products into retailers, which are like leave your house products, hats, you know, fashion apparel, that they were, that they were able to maintain flat revenue through COVID. I think part of it was they clearly added 11% of their trailing revenue is COVID-related items, which helped, which you got to respect to hustle. But, you know, I wouldn't, I wouldn't be very rosy in my projections for go-forward on COVID-related items. So you got to remember as a buyer, you're now buying a trailing number, which is now 10% inflated because they were selling COVID-related items. So I would be pretty quick to adjust that out

when I was doing evaluation. Yeah, there's no way you're selling $500,000 worth of masks in two years. Right, right, exactly. And maybe they'll be selling more hats. Like, that's great. But I just would really make sure to understand that. As a meta comment, I mean, both of these teasers came from the same group, the same broker group. And these are not good teasers. Like, these are really, like, they're so confusing.

It's almost like they have the most junior person in the office throwing like a word salad up on there with very little specifics. because you can say things without saying things, you know, in these teasers, and this does the opposite. It just says everything, but then therefore says nothing. Well, they hit all the buzzwords. Yeah, it's very word salary. I do appreciate that they've got some grass. I mean, it's not often you get customer market mix, geographic market mix, services revenue mix, and a teaser, you know, which I appreciate. So basically, the visuals are good, but the words are pretty brutal.

So if you think about what this company actually does, they are saying that they have some kind of edge in being able to not necessarily dictate trends, but read trends, because you think about what they're actually doing is they've got to go to a manufacturer, decide that they want to purchase lots of hats based on the style of the day, right, or the month of the year. And then they have to, they're taking financial risk because they're saying, hey, look, we're going to buy 5,000 units or whatever it may be. And then they have to go turn around and go to these boutiques and they have in-house salespeople who are going to, they say, you know, there's 4,500 active accounts. And they call in these boutiques and say, hey, look, trust us, this hat's going to sell.

And we want you to buy it from us. And they've got to do that, you know, hundreds of times, arguably, to get rid of this inventory that they have. To me, it seems like, you know, a little bit of a fragile place in the value chain. the boutique is probably not going to go direct to the manufacturer because of minimum order quantities and stuff like that. But what if you get it wrong? What if you choose the wrong style? What if you, you know, what if all of a sudden your customers are going, hey, you told us this was going to move really well and that this was something that was going to be really hot? And we're, we bought 100 units and we're still holding, you know, 98 of them. All of a sudden, that's going to

impact your ability. It just seems very, very fragile or very, you know, prone to being fickle. At the end of the day, they're just, they're buying something, taking some financial risk and being compensated for that. I can't figure out how their margins are so high if they are sustainably this high. If I had to guess, they're basically buying this stuff from China. These guys are basically arbitraging China. And it's all these, you know, kind of small mom and pop boutiques who don't have the know-how or the scale to source in China. And they're bringing in, you know, probably broadly unbranded stuff that's on trend and they're buying it from China, they're bringing it in

and they're distributing it. They're buying in large quantities, selling in small quantities and giving these boutiques access to China, even though these boutiques don't realize that that's what they do. They probably don't ask them any question. It's probably not so on the nose as we give you access to sourcing in China. It's just that we have a catalog of cute stuff and it's reasonably priced. So if I had to guess, that's probably why their margins are decent. I mean, 25% even down margins is pretty solid. If this comes, this comes again, I think, to buyer business fit. Like, if you love women's fashion, you're going to love this business. You know, this is going to feel like playtime to you all the time. Just like looking at business at women's fashion,

you know, buying it in Asia, you know, importing it to your warehouse and then selling it to all these boutiques. If you enjoy maintaining relationships with a bunch of boutiques, you're going to fricking love this business. If you hate those things, you're going to hate this business. So Gurley, I think this is perfect for you. Dude, I love, I love fashion. As you can tell from my outfit today, you're like, you guys are like him wearing pants. Oh, yeah, I'm also the guy to go to the bar and just show up at every convention. It's the best. I love all that. The previous business, too. So one issue that you raised, Bill, so yes, that's their business model. But what comes along with that, right?

Part of the double-edged sword is that if you are going to take that arbitrage opportunity, the cost to you as the business owner is you have to go spend a bunch of money in China and then wait for those goods to arrive and then send them to your customer and wait for your customer to pay you. So one, I think their working capital cycle is probably horrendous. And then two, they've got this amazing amount of financial risk. The EBITDA looks good, but I would argue that probably a third of it to maybe a half of it is tied up in just their working capital cycle, buying inventory, waiting on it to get here, sending it to customers, waiting on them to pay you. If you really push on their statement of cash flows, the EBIT may be real, but the timing of when you're able to get it and how much money you'll be able to extract out of the business in the form of free cash flow is going to be much smaller than the EBITDA number here.

Yep. This is a business to look at any inventory-based business. You're going to want to look at free cash flow, especially as you grow. I mean, as someone that owns an inventory-based business, I was actually working with somebody who was buying an inventory-based business that was growing really fast last week. And he goes, holy crap. He goes, every year, by the time we pay taxes, and then if the business grows, we've got to buy more inventory, there's $0 left at the end of the year. Because they're spending 50% of revenue on inventory growth. and 50% of revenue on taxes, and boom, you're broke. One thing that I think their model has these, it says a sophisticated network of sales representatives, which leads me to believe they're using manufacturers and third-party reps, right, those guys that are all over the place and selling and representing 50 or 60 brands all at once. So I think that's another risk with this business. You have to understand, while the teaser indicates that they have to have.

strong client relationships. What does that actually mean? Are you highly dependent on these independent contractor sales reps who aren't only selling your product? Are you highly dependent upon them continue to recommend that? It feels like a risk there. Yep. The strength of those relationships is definitely important.

Yeah. And you're basically, you know, the game is we need to get in this reps catalog because they're in front of 3,000 dutique owners. And if we can get in their catalog, then it's just like hitting the jackpot and we know we're going to get volume. Well, how do we feel about this one?

Your enthusiasm is palpable. This business scares me. Can you imagine somebody paying four times even off or something like this? Yeah, I can, honestly. So I think this is one of those, like this is CPG, which both of you guys kind of hate but doesn't scare me as much. If for someone that really likes this industry, again, we only have a teaser. There could be a lot wrong with it. as a business that throws off $1.4 million a year.

And I will say if you're not growing, your cash flow situation is way different, right? You may have some capital tied up, but you can actually take capital out if you're not growing and your inventory balances are growing. So I don't hate this if there's buyer business fit here and you really like this industry and there's no turds in the punch bowl when we see the sim.

Like I wouldn't run screaming from this. Like if this fit me, I wouldn't run screaming from this. I would get the sim. Yeah. Yeah. I agree. I mean, it's just a big if.

This isn't a fit for me, so I can't imagine taking that step. But also, you're right, CPG scares me. So that's why we've got to mix of folks on the podcast. I love it. I love it. All right. Well, I think we're good for today. We've been beating these two up.

And good job, Mills, bringing both of these. Well done. Anytime. All right, guys. All right, guys. Catch you next week. Good job. We'll get this one edited up and out to our loyal listeners and fans.

All right. Oh, both of them.