Acquisitions Anonymous - #1 for business buying, selling and operating - 75% profit margin Business Accelerator (the most profitable business we've ever reviewed!) - Acquisitions Anonymous 283

Episode Date: March 26, 2024

In this episode of Acquisitions Anonymous, Michael introduces a business model he dubs "sweat equity capital," which involves providing consulting services to businesses with growth potential, with payment linked to the client's success through revenue sharing. Heather and Michael highlight its impressive profit margins and services offered, such as digital customer acquisition. The hosts delve into the complexities of the revenue-sharing model, considering potential challenges and ethical implications. Beyond the business discussion, they touch upon broader issues, including the shortcomings of the education system and challenges in structuring effective incentive plans for businesses. Thanks to this episode's sponsor: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.Acquisition Lab exists to help people buy a business and navigate all the complexities of the process, as well as 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, [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]

Acquisitions Anonymous, Michael here. Thanks for joining us. Today, I am the Uber business nerd, right? I love talking about business. I love studying business models and understanding how they work. Today, I brought a deal that is from Axiol, which is doing a great job presenting deals really well, especially those bigger and more interesting ones. And this is a deal I've been sitting on for like two weeks, and we've been canceling recordings.

I just was desperate to come talk about this business because it's just so fascinating what these guys have done. And they've taken what in a space typically is horrible, like small business consulting, and figure out how to make one of the most profitable businesses we've ever seen. So I think you'll enjoy this. We dug into it. Heather and I, and here is the episode. 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 Dybul, who's become a friend, the office. author of Buy, Then Build, how to outsmart the startup game. So Acquisition Labs 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 turn in every week to our deal reviews, you want to get in on buying a business. You know, 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 talk 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 acquisition lab.com or you can actually email the program director Chelsea Wood directly. Her email is Chelsea at buy then build.com. Hey, Michael. All right. Do you think this episode's going to get us into as much trouble, Heather? I think we're going to stay out of trouble this time. I think we're going to. I feel confident about that. We did have some controversy this week, didn't we? Yes. Well, we found a listing on a broker's website, and we covered it on an episode.

And then somebody in the press for that specific industry used the listing to figure out what company it was. but the broker had not intended to make it public. They mistakenly put it on their website and we found it. It was with all the other things. It wasn't like, it didn't have confidential written on it. It was like they had their letterhead on it. So it was just like a standard listing like we normally do. And we just like talked about it.

And so anyway, like then that industry started to have like some reporter figured out which company it was, wrote an article about them being for sale. and then like the company got like really, I had to come out and put out a statement they weren't for sale, even though clearly they had been for sale because the broker had done it, the broker had just publicized the listing. So anyway, that's how it went down, right?

Yeah, I didn't know the part that the broker inadvertently put the teaser on their website. That seems like a pretty big mistake. That's what it seems like to have it to me. Anyway, we don't hurt anybody's feelings. We don't know anything about these deals. before they show up in our inbox. We intentionally call it acquisitions and items because we don't know anything. We don't sign Sims.

We don't disclose any confidential information. And that's by intent. So anyway, yeah, so we'll just move on from that one, I guess. It was pretty interesting. And to your point, I think we make this point a lot. A lot of teasers aren't anonymized that well because the business is easy to figure out which one it is. I think that's just the nature of the business. It's hard to list some of these businesses anonymously

and tell you enough about them to get you interested. Yeah. Yeah. It seems like about half the time we forgot who it is. Yeah. So it is, what it is. Okay, so I've been one to do this deal, Heather, and I brought it today. I've been wanting to do it for about two weeks.

So I'm excited to tell you about it. And I consider this business, a business model I haven't run across before. And I don't know if you knew this, but I'm a total like business nerd. Are you aware this? I did know this. I think it's fun for me. I actually did. Yes, it's pretty obvious.

I picked up on it. You know, like dead giveaway, sucker. So when I run across a business model that I haven't seen before, I get really excited because I feel like it's a treasure hunt. And so this is just that. And I consider this business to be like sweat equity capital. That's the best way I would describe this, sweat equity venture capital. So it's just a bizarre kind of thing.

But I know there's some other people doing this because I've seen it before. I just didn't know it was more of a thing until I saw this listing. So let me read this listing to you and then we can decipher what they do because I think it's fascinating. So the title for this, it's from Axiol, is a business incubator and accelerator with high value patents and strong recurring revenue. In 2023, they did $5.8 million in revenue and $4.3 million in profit. eBay.

Wow. I'm pausing there for you to, do you need to sit down, Heather? Yeah, that is unbelievable. margin. And at that level of revenue is incredible. I don't think I've ever seen anything like this before as far as the margin. Yes. Yes, well, let me tell you about it. Okay, this company is a dynamic force. Okay, anyway, that's 74% or something like that. Profit margins. This company is a dynamic force in the realm of business growth and development, specializing in a blend of patented technology, custom web design, efficient CRM implementation and SOPs. The company propels businesses from

nascent stages to remarkable monthly earnings in the millions. Its customer base encompasses everything from startup businesses to enterprise-level companies, including several high-profile clients. One very notable client has grown from $2 million a year to generating $68 million in sales last year, with many clients and long-term contracts that include a revenue share component. The company has a tremendous recurring revenue steam with an AAR of approximately $5 million. The owner works less than 10 hours per week handling relationship management calls. onboarding new clients and managing staff. In-house employees hold positions in data modernization, project management, administration,

quality assurance, and development. A deep bench up contractors are utilized depending upon the needs of projects at any time. Having grown predominantly through referrals, the company has had minimal marketing spend, which provides a huge opportunity for a new owner to scale the business with paid ad strategies. Building on its solid performance and well-established foundation, the business is perfectly poised for growth. Benefits. Turnkey opportunity, market dominator, extremely high margins, 75%, great reputation,

patented technology, extremely high value retainer contracts, United States location, and there's an NDA available via link, and yeah. Client care, it's listed by client care website properties. They've closed two deals and marketed 218 here. So I wonder if this link works. It does not. You know, this is like consulting, but with revenue share, consulting for small businesses. So they're focusing on, you know, these companies that have great potential for growth because they're still small.

And they're doing consulting in a way that I wish the big consulting companies could do, which is, you know, they only get paid if they're successful revenue share. And obviously, they're very successful. So I love this model. At least that's what I think it is. What do you think it is? that is exactly how this works so they they will go to you and let's say let's say you own a business and consulting right and you're struggling to grow what you do is you go to these guys and this is where it gets a little little there right you go to these guys you will typically pay them some

cash and then what they do is they require you to give them a cut like a royalty on growth that you have above that. So, for example, they will go to you and say, you go to them and say, okay, I need you to help me grow my gym business or my professional services business or whatever, and you disclose to them where your business is and what the state of it is. And then they will help you and consult with you to grow that business. And as you grow that business, they will take a cut of the growth. And oftentimes they will also take a fixed monthly retainer to pay their expenses.

Wow. So I first saw this model because there's a couple of creators that do this. Oh, interesting. It's almost like it reminds me of like a contingency lawyer that they're not going to take on your case if they don't think it's a winner, right? And I would think that this is something that would apply here as well. If they're really going to make most of their money on revenue share rather than fees no matter what happens, they're going to be selective, I would think, about the clients that, the client engagements that they take on, which is really interesting. They've obviously found which ones have that potential that they know they can help.

They've got the right, you know, contractors they can bring in, particularly for that industry. Really, really cool. I kind of love it. Yeah. So there's, I think it's cool too because it aligns interests, right? I think there is a way that I've seen this go wrong, which is like when you have a situation like this, you often, there's a lot of incentive for the person on the side of the accelerator side to take advantage of people or to be disingenuous. There is a person who does this that is a creator and they say publicly, they invest in your business, but then when you talk to them, they give you this deal. Ah, I help you. That is where, that is where, that is where that kind of stuff. And so that's one

challenge with this kind of space, and that's the first place I would go if I went and looked at this business as a buyer, is what have they been telling people? Like, what kind of, what does the sales funnel look like? Are you above board with what you're doing? And I know another guy, I ran across him about a month ago and try to understand his model. And he's building a hold co this way. And basically the way it works is like, I'll provide you this stuff. I will guarantee your results. If I succeed, I get to keep equity in your business. If I fail, I give you the equity back. So that, like, that feels better to me because he's up front and he creates a win-win and a no-lose for the client. So I think there's something to that that as long as it's done,

and maybe this is just the same thing with every business. As long as it's done with integrity, cool. But, like, there are some freaking scumbags out there. And unfortunately, I think a lot of them are in this space. Very good point. So I mean, like, is the $68 million client, a $68 million sales client, are they happy, you know, if that's their superstar or are they kind of upset that they signed on to this deal, even though they got to $68 million, maybe they, you know, maybe they didn't think it was all attributable to them or, you know, or they're stuck in this contract, whatever.

But to your point, like, how happy is everybody that's had success with the deal in the end? Yeah, I did run across another person who was doing this business model, but they were doing it for people trying to build their coaching businesses. Like a lot of coaches are good coaching or good coaches and they're good practitioners coaching, but they're not good business people, which are really two different things. And I don't know if you've noticed this also. There's a lot of coaches, business coaches especially who have zero interest in actually running a real business. Well, that's the same in medical practices. Yeah. It is a fascinating thing to me.

There's a significant correlation. If you look at the very most high profile like CEO and business coaches, most of them basically have zero interest in running a real business. It just seems like the last thing they would possibly want to do. Yeah. They're into the practice, the practice, not the running. Every time I've run across somebody who's like, a super high profile coach, like they have the CEO coach, they have zero interest in actually building a business around it. Somebody else in the background has been doing it. It's kind of like

Huberman, you know, Huberman, the healthcare guy. Like he loves to nerd out about health care stuff. There's another guy who has a business partner who appears to be the one that really likes business. Well, sometimes that's the way you need the partnership to be. I think I've seen that in the veterinary space, where folks have been able to come in and buy the practice, let the veterinarian roll over some equity for the bigger exit at the end. And vets are excited to get rid of the management of their practice and give that back office all the away to somebody else to do for them because they became a veterinarian because they love what they do, not because they love spreadsheets and accounting and managing people. So I think

there's a lot of businesses like that where the owners didn't really want to be a business owner. It's just kind of the way that the industry worked, but that's not really what they wanted. Yeah, so the beautiful thing about a business like this is, you know, and I tried to call it sweat equity capital before. I don't know. You got to help me with the name. If you got a better name, like let me know. But like you basically get the upside of what venture capital gets, right, which is venture capital places all these little bets in companies. and then one of them becomes a home run. Right. So I've started and managed a few venture funds in my career

and still working on them, by the way, like, what, it's a hits driven business, right? Like we have one company that, well, we had two of the ones we invested in that eventually became unicorns were valued over a billion dollars. Like they were like 95% of our returns. Like the two, it's a hits space business.

And so you get kind of some of the same thing here, which is you get to place all these bets into these little companies. And then one of them becomes a guy going from $2 million a year to $68 million in sales. And like, let's say you have a 25 or 20% royalty on that growth, like you're killing it. Now, it's probably not that high because $2 million to $68, 25% on that growth is, you know, is much more than $5.8 million at revenue. But you see kind of the math there, right?

You just got to pick one winner and be right once and suddenly got a great business. Right. And that's great for the business, like for whoever would own this business, but it can be tough for the clients because that means, you know, depending on how their math works, is it like venture capital where they only need two or three home runs and it's okay if the rest fizzle? Because you don't really, as a client, that's not too exciting. I want a high chance of success if I sign on with you. So, and I'm sure that's part of the sales pitch. You know, they've got to be able to show, you know, out of our last 50 clients, you know, the average success was X. And also, since it is kind of, I like your term actually, sweat equity capital. I get it and I like it. And since that's sort of the, yeah, I like it. That's the game here. That does require work. I mean, that means it got to bring in consultants. We have to use our brains and think about understanding each of these businesses that they take on. I would think it means if I own this business, I don't want to take on clients that I don't have, I don't believe we can

really make them grow so that we're not wasting spinning our wheels and wasting our precious time on projects that aren't going to pan out. So if that's true, then I really like this business model because, again, it's sort of like the contingency lawyer. They're only taking your case if they think they can win it. On the other hand, maybe they're ignoring some of their clients that they're not that enthralled with. You know, that could like you said earlier, it could be taken advantage of, you know, do they invest more time and effort in the ones that they start to see, you know, getting traction and do they maybe not do as well or pay enough attention to the clients that are still not taking off? That would be interesting to know, too.

Yeah. I mean, you definitely have an adverse selection problem, right? Where you're worried about, like you're talking about, you're worried about, are you going to keep treating the underperforming clients well, right? And I think in a lot of business models, that becomes a challenge. You know, like when we had our coding school, there were people asking if we were going to do income share agreements. Are you familiar with those? ISAs? Hmm. No.

So it was this idea that was supposed to revolutionize, revolutionize basically the way education was going to work, which is today, you know, you trust the brand of a university. You're in theory going to get job skills, right? And then they give you a deployment and they say, good luck with life, right? That's the way college works. And you pay all this money up front. The risk is totally on the student. And so the institution itself doesn't have a lot of incentive to operate.

to optimize for outcomes, right? There's no financial incentive. They're optimizing for diplomas. So the idea of ISAs was kind of this idea that a school would take, you know, a venture bet in students and align interests better and bring them in and say,

okay, we're going to give you the education for free or at a small cost, but then we went on the back end, which is you agree to pay us a share of your increased income above a certain level for a number of years. And the school could end up ahead and the student ends up head

and the employer ends up head, everybody wins. And that seems all great, right? Like at first glance, it's one of those things that you examine, you're like, oh, this seems like it aligns interest

much better. But then when you double-click on it, you have to think about, okay, well, what other incentives does this place on the school? And one of them is just like you're talking about, if you're going to have a student in there who potentially is going to be harder

to get a job or to teach stuff, like you're going to focus on the easy students who are more talented, who you've admitted. So it ends up being to some extent potentially unfair to the students in the program. Whereas if you're paying tuition,

you want to graduate everybody because you want to, and you want to teach them things and get them there. So you're going to work harder for those underperforming students. So it's that idea of you have to just think about what happens to the underlying,

you know, incentives. And it's not just first order incentives. It's second order incentives that can also be terrible and worse than the solving, worse than the first problem. Right. And there's no perfect incentive plan, however we look at it in any business, even for, you know, businesses who try to do them for salespeople.

In banking, incentive plans for their salespeople just got more and more complicated to the point that they really didn't know even what they meant anymore, you know, what they were going to get paid for certain things. And I think that's sort of, that's sort of an inherent problem. alignment is what everybody wants. You know, that's where the magic is, but it's not easy to structure things. And there's a lot of unintended consequences when we set up incentive agreements sometimes. And that's a good one.

I never knew about that about the education system. That is really fascinating. It is, well, it's consistent with why, I mean, education's really screwed up. And it's also really hard because people are involved. And that's anybody who is a school teacher, or a professional educator now, like after having gone through,

you know, an experience in that business, I'll just tell you, it's just really, really hard. And our educators deserve a lot more support than they're getting. And everybody poops on college. I'm like, if you're going to poop on college, you should go spend some time,

hang out with some 18-year-olds. Let me know, try to teach them anything. And, yeah, it's not going to work if you just give them some YouTube videos, guys. And that's what every neck beard, like in their 30s, who's 10 plus years out of college, college is like, I can learn everything I need to on the internet. It's like, of course you can.

But what happens when you get stuck? Well, I just go play Minecraft. Of course you do, because you're stuck. So anyway. Well, my best friend is a, is a teacher and she will love this part of the segment. So I'm going to make sure she watches. Maybe she should come on and I can mansplain her. So it is a tough business. Yeah, it is a tough business. Yeah, it is definitely not, Not easy. Not easy. So it is really, back to this business, it is really interesting. I'm trying to figure out the breadth of their service and maybe for her or for whom by reading into this.

So it says again here, specializing in a blend of patented technology, custom web design, efficient CRM implementation, and SOPs. The company propels businesses from nascent stages to remarkable monthly earnings in the millions. I think these guys really focus on digital customer acquisition. If I just read how this works, right? Blend of patent and technology. So that means they probably have built some software to automate building things like web pages, ads, all that kind of stuff.

Like they know how to do spend and all that kind of stuff. And then it says here that they have in-house employees hold positions in data monetization, project management, administration, quality assurance, and development. So to me, it seems like they have a lot of expertise on how to programmatically go digitally get customers for people. And then they deploy that for customers and basically become your outsourced growth team, bring you leads, and then they get paid from it. I think it's great. I think it probably works well for certain industries, though. I've got to believe they've got some specialization in certain types of industries and not others. And so that would be interesting to know what sectors do they serve and how do they select, you know, or do they turn away clients and how do they select the ones that they decide to take on?

Yeah, and it probably seems like that's one of the two ways of business like this can go. You can do it for an individual industry. And I know there's been people that do it for coaching as we talked about, gyms, consulting. those seem like ones where you have lots of small, underfunded suppliers and you go offer them this kind of stuff. And, you know, theory creates a win-win. But then I could imagine you, I've seen also people that, as I talked about,

that Holdco guy who are doing it basically at a higher level and providing more generic like Fix You type services across all types of industries. And maybe that is more what's going on here, which it may well actually i don't think that's where it's going on i think this is digital customer acquisition with with upside and risk sharing and but i think they do it for all kinds of businesses the way they describe it here everything from startup businesses to enterprise level companies you hire these guys they go bring you leads i mean they've been very successful when did this uh did they

say how old the company is you're kind of curious about that i don't think they said uh nope no they didn't so that's another question i have you know there They're definitely the headline revenue and EBITDA is amazing. I really would love to know the history. Yeah, and you could do a rough math on what they're paying and expenses. Like they say they have staff, you know, in these five different areas plus freelancers. But if revenue is $5.8 million and EBIT is $4.3 million, that means in theory they're spending $1.5 million on team. So that's not that many people when it's all put together to spend $1.5 million on expenses.

You know, once you run an office and you have seven people, maybe, eight people, like that's the only way to get to those kind of numbers. That are sell drugs. We could do that too. You never know. You never know. But yeah, I would love to know how quickly they got to this level. You know, how long do these contracts last?

You know, for this $68 million customer, how many years are they tied into that revenue sharing? Is it forever? You know, that would make a big difference in valuation, you know, what the length of the relationship with these clients is. And the history is always just telling. I just love to know how they got to where they are and how quickly that happened. Yeah. So this is a cool one. I want to dig into understand more about this business.

I think I may sign the NDA, get the SIM. I think so. This is definitely worth it. Yeah. Yeah, this is a business nerd. This is definitely one I want to dig into and understand it. But before that, I'm definitely recording a YouTube video on this one. It's just like the craziest business I've ever seen.

It looks awesome. Let's ever go. Okay, well, this makes you feel better because as I told you, I have wanted to talk about this business for like two weeks, and we've canceled a couple times because everybody's been busy. And I was like, as a business nerd, this is the, coolest business I've seen in a long time. And there's just something to, something to know about this. So, yeah, business nerds unite.

Woohoo. Bill would have liked this one too. Too bad Bill's not here, but he's busy doing Bill stuff. Cool. All right. Well, I think we'll end that there. We'll put the link, try to put the link to this teaser on Axial. And, man, I got a, we've had two for two today on recording Axial and Acquire.com. Both, like, just keep coming up with interesting listings that are well written. Like, they just make our job easy. So thank you guys. Yeah, awesome.