Acquisitions Anonymous - #1 for business buying, selling and operating - $7.5M of EBITDA making superhero minifigures! Our favorite deal ever? - Acquisitions Anonymous 207

Episode Date: July 4, 2023

Bill D’Alessandro (@BillDA),  and Heather Endresen (@EndresenHeather) review a deal for a company that produces collectible statues. Let us know what you think. Today's deal comes from Axial.  Axial is a trusted deal sourcing platform serving professional acquirers in the American lower middle market.Axial partners with over 2,000 boutique investment bankers and business brokers who use the Axial platform to market their deals to lower middle market acquirers. Sweetspot on Axial in terms of deal size is from $5M to $75M in enterprise value, located solely within the US and Canada. Deal activity occurs in five industry verticals: manufacturing, tech / IT services, healthcare, B2B services, and consumer. 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]

Welcome back to another episode of Acquisitions Anonymous. I'm Heather Anderson. I'm with Bill today and we are talking about a really cool business. If you're into video games, you're going to like this one. This is a really fast-growing manufacturer of collectible figurines, plastic figurines based on video games, comic books, even sports. They're growing super fast. seven and a half million dollars of Ibada. Really interesting episode. Check it out. Welcome.

I am so excited to be here. I'm trying to stay warm in the Southern California summer that we're having here. I've got my warm coffee trying to survive the 71 degree weather that we're having. 71 is cold in SoCal? It's cold. I'm serious. For us, it's really cold. We haven't had sun in a whole month.

SoCal people crack me up. It's freezing. It has this. Oh, my gosh. Six handle. It's 68 degrees. Can't handle it. It's really sad.

Well, you guys, what would you really want right in SoCal is like 78 and perfect like it is almost all the time? Right. That's what we want. That's what we want. But we're not getting it right now. So we're really, really cranky about it. So Heather's in Southern California. I'm in Charlotte, North Carolina.

And North Carolina gets hot. It's 78 today already. It's going to be probably 85 today. And I was going to Canada last week to visit one of our manufacturers. in the middle of the central part of Canada, like the planes part of Canada. But I still thought Canada, it's going to be freaking cold.

Like, this would kind of be nice refreshing. I get off the airplane, it's 85 in Canada also. And I've only brought like jeans and, you know, like a vest and like an idiot, right? And so we're beautiful. But also, I don't know if you've ever been to Canada or even like Minnesota or like that part,

but the mosquitoes were like the size of birds. I had like welts. It was nuts. Oh, wow. I did something similar in Dallas one winter. Coming from Southern California, I just wore what I was, you know, I brought clothes that I would wear here and realized that it actually gets freezing cold in Dallas and I had nothing to wear and it was terrible.

Yeah, you have to think about what the weather's going to be where you're going sometimes. It does. Whenever we talk about Texas, without Gurley here, I'm like obligatory San Antonio is the best, as he would always say. Go San Antonio, yes. All right, we got a cool deal today. This is another one from Axial Market, Axial.net. Not a deal source a lot of people know about.

Everybody in our industry typically goes to like Biz Buy Sell or, you know, individual broker websites. But Axial is a place that I really like to go because they usually have bigger deals. So the way Axial is different is all the deals in Axial have an intermediary. There's usually an investment bank as distinct from a broker. So they're usually more upmarket deals. They're represented by a professional intermediary, which is just really nice as a buyer, to be honest. I mean, Heather, I'm sure you've worked on deals that did not have an intermediary, and then it'll go so.

Oh, yeah. They don't. They don't go very fast either. And these will go a lot faster with professionals that keep things moving really well. At one point, I was trying to do a deal. We had it under LOI. The seller did not have a broker-invest bank or intermediary at all. And it was such a mess because like the buyer did not, or the seller rather, did not understand what it was a working capital adjustment.

Like what, how to present your financials in a way that I could digest them. And then I would present the financials and he would go, those are wrong. And I'm going, that's gap, man. This is how this works. And so it was just, he ended up in this nightmare spot where I ultimately offered to pay for his intermediary. Wow. I was like, I don't care. Here's three intermediaries.

Pick one. I will pay the guy's fee. And they didn't do it. And we didn't close because we just couldn't ever get it done with the guy. Wow. Well, you know, working capital is probably the most challenging part of every deal that I ever work on for the sellers. Even with intermediaries. It's just really, really challenging issue.

I try to tell everybody your deal's probably going to slow down when you're finalizing the purchase and sale agreement if your seller doesn't really understand the working capital peg, which they probably don't. Heather, I'm interested in your view as a lender now, because in my world, which is e-commerce, almost all of our deals, and I disagree with this, I'll say this right at the beginning, but this is the way our market is. All of our deals are done as a multiple of SDE plus inventory, which drives me bananas because you can't buy the business without the inventory, you can't buy the inventory without the business. Why is it priced separately? It gives the seller no disincentive for like vastly running up the inventory account.

Right. It's just, it's not right. Like, it's stupid. And it also makes you think you're paying a lower multiple than you really are. But that's the way that our business is. And so you just have to adjust forward your models. Is that true, Heather, in other small business transactions, or have people finally started to wrap their mind around the working capital pay? You know, the inventory is usually included. So we don't have that, you know, here's the multiple of SD plus inventory. Most are going to include the inventory. Once in a while, you'll see a deal where they claim their equipment is worth this huge amount, which I disagree probably isn't, or I assume it probably isn't. And they want the price plus the equipment.

We can usually talk our way through those. Working capital is the problem. So some will leave it in and some say, no, I'm taking all of it, which means you as the buyer have to add that to the price. You have to bring it in. You have to have some working capital on your balance sheet. So you have to consider it's that price plus whatever working capital you have to put on the balance sheet. And then it just depends.

Are we talking about a working capital, you know, negative, neutral, or positive business because it could be a big number. I did a deal last year that had a huge customer deposit component. customers pay fully in advance, months in advance. And the seller would not let the buyer take any of that, which of course is not right at all. But we sort of backed into the math and said, you know, the multiple seemed really low before. But if we add in the $2 million in that case of working capital that the buyer had to bring in,

it still was a good multiple and it still worked. And so that buyer went ahead and did it. Wow. So this business had $2 million of customer deposit. it. Yes. And the seller wanted to keep that and then expect buyer to fulfill all those orders, of course, post-closing, right? Right, right. Exactly. There's a cost to that. So it was interesting. There was a lot of, we did a lot of analysis around working capital and how to come up with the right number and, you know, future visibility to that on that one. It was, but it was still a good deal

with with the seller taking it all, strangely. The stickiest wicket India work, I think, is working capital. The seller just, I don't think, I've never met a seller who thought the working capital peg was fair. Ever. Ever. Okay. Back with deal, which is from Axial. So this is a leading US producer of collectible statues. Heather, this one reminds me of episode 41, which I think is one of my favorite businesses we ever did. Episode 41 was an online seller of Lego mini figures, like the little Lego dudes. And they had thousands in stock. And like there's this whole industry of collectibles. And they were selling for 10 bucks a figure. And you know, they cost nothing to ship. And they were free from Lego almost. It was an amazingly good business. And I'm hoping this one is

halfway as cool as that one. So this one is a leading producer of collectible statues. It's been around for more than 15 years. And they have pulled iconic characters found on comic book pages, movie screens, and video game consoles from their 2D worlds. and brought them to life in magnificent state-of-the-art 3D sculptures that have a fervent global fan base. Statue, Project statues, limited edition statues, busts and articulated figures, meaning they can move,

are available in a variety of scales and price points predominantly in poly resin or PVC, which is plastics, depicting cultural icons for the worlds are cinema, television, video games, graphic media, and much more. The company's CEO has a majority stake in the business and it holds 80% ownership. So it's basically pop culture stuff. It says the company has licenses with many of the most important brands for the most iconic franchises and characters.

Most licenses have been held by the company for years and are renewed indefinitely. That's very nice. It says Project Statue is at an inflection point. Despite the challenging macro environment, statue has grown significantly in recent years. They're out an inflection point and management is looking for the right partner to help it further professionalize the business and sees a wide range of highly accessible growth opportunities. Due to some biz-dav activities has come to fruition, revenue and EBITDA projections for 23 and 24 have increased significantly.

The company has leveraged its proven success in video game characters, and they've recently opened up a brand new line of business, providing statues of game characters for video game collector packs to the video game publishers that are purchased either shrink-wrapped or digitally. The growth of premium poly resin statues is driven by new characters for a variety of licensors and the company's debut in sports figures, which represents a gigantic, untapped opportunity. Delivery of units for the first video game publisher deal is expected in June of 23, which

is right now, as we're recording this, at which time TTM revenue and adjusted EBITDA is projected to be $16 million and $6.6.6 million for TTM. So hefty and great margins, 16.7 million in sales, 6.6 in EBITDA. Absolutely killer. there's a spider on my microphone. It was like an inch from my face. Can you see it? I can't.

Oh, yeah, I can. Wow. This is dangerous. I didn't know this was dangerous work until now. How did that happen? Let me find a way to mash this guy without smashing him into my foam here. Okay. Are you okay?

I'm okay. I have survived. All right. Spider has not. Okay. Okay. So I don't know if they'll leave that in or not. Okay.

Diving back in. So importantly, by simply bringing order of fulfillment for its online sales in-house, management estimates that the company would grow its adjusted EBITDA significantly even above what is forecasted. So that means they use a 3PL currently. And it sounds like an expensive one. This company is based in the U.S. the southeastern region. And here's the, here's the stats.

In 2021, it did $8 million in sales. In 2022, it did $8 million. In 2023, it did $20 million in sales. And in 20, they're estimating $20 million in sales, 23. And in 2024, they're estimating $24 million in sales. I assume this is the aforementioned video game stuff coming to fruition. Right. They're gross, this is crazy.

Their gross profit is about 45%. And their EBITDA has gone from in 2021, 1.4 million. In 2022, 2.4 million in 2023, they estimate it will be 7.5 million. And in 2024, they estimate 8.6 million. And those are EBITDA margins of about 35% if you were keeping track at home. So lot to see here. What is your first take, Heather? Well, my first take is they are expecting, you know, more than doubling of their sales, of their top line, while also improving margin, which is huge. That's a huge undertaking there. And they're trying to sell it before that big video game deal, you know, really heats up or gets going, is it sounds like they say they need to kind of, they need help. They need further professionalization.

This is now getting maybe bigger than the founders dreamed of and maybe they know they need somebody else to come in and do the things that they're not great at. That's what my first impression is. There's a lot going on when you're growing that fast. Yeah, this is not. So the founder, I assume the CEO is the founder considering he owns 80% of the company. And I will say, like, it's not totally solid a hope and a dream

because they said that delivery of units for the first video game publisher, is expected in June 2023, which is right now. And that takes TTM revenue, EBITDA, to 16.7 million and 6.6 million, which is like almost to their 2023 projection of seven and a half of EBITDA. So, like, I think this is happening right now. One thing that I would be really interested to see is the balance sheet on this thing, because this is a manufacturing and inventory-based business for the most part, and it's growing super fast and those things suck cash because your inventory just inflates, right? As you've got,

even if it's the same as a percent of sales, your days of inventory are the same number of days. It's a much bigger number. So I wonder if part of what's driving them to sell the business or raise capital here is a working capital. It could be. Yeah. And just like our discussion earlier, working capital can be really tricky. And anytime you have inventory of any kind, it gets even more Turkey, what are their inventory management processes and systems like? You know, how good a track do they have on this? Can they really tell you where everything is and how many days turn it is? Is there any obsolete inventory? It feels like you would have an obsolete inventory with this kind of product because I'm just, you know, the popularity of certain figures may go in and out and you have to

judge how much to produce of X figure. I don't know the names of any of these comic kind of thing. So sorry for those who might. But, you know, I'm sure there's a lot of just kind of gut feel that has to go into that. So you could end up holding some inventory that never sells or that you have to sell at a discount. Great point. I saw a business for sale once. It was a Halloween costume business. And they had something like a million dollars of inventory. And when you looked at it, like 80% of it was from, you know, old Will Ferrell movies that didn't hit and weren't, never even more pop, you know, like they were never going to sell his inventory. No one ever wanted it. Or, you know, like from the meme Halloween costume that was four years ago that's not funny anymore,

you know, or whatever. You know, like Hillary Clinton emails Halloween costume or something. Like, no one's buying that anymore. You know. Yeah, I had a deal kind of different, but it was the threads, you know, that go into the textile industry. And we kind of realized there was a chunk of inventory that was never turning. And so we were like, I think you have some obsolete inventory. And they said, no, no, no, we save them for decades because the colors eventually come back. You know, they're out of style colors. And, you know, they'll eventually come back.

We're like, well, you know, the way we're going to look at it, it's obsolete. We have to take it out. Yeah. I have bridged that in the past by saying, fine. I will keep it. I'm not going to buy it from you, but I will keep it for one year or two years in the warehouse. And if it ever does sell, I will pay you for it. Oh, that's a smart way.

Right? So, like, I'm not paying up front, but like, you can hold the lottery ticket. You know, I would still be glad to sell it because I'll make money. You know, I'll pay you what its cost is and I'll make revenue on it. So there's spread for me. I'd be glad to sell it. You would be glad if I sell it. But I can't take that risk.

I can't just buy you out of all of your terrible inventory decisions, you know, up front. Right. But the key when you do a deal that way, though, is it needs to terminate at some point. Because if it's not moving and it's sitting in your warehouse, taking up space or at your 3PL and you're paying them storage fees. Like eventually you're going to want to dispose of this stuff. Right. So the way I structure it is like, look, I didn't buy it.

It's technically not mine. So at the end of the two-year period or however long, you seller have the option. I will either one, mail it back to you wherever you want it to go, whatever storage unit, whatever, you know, I haven't paid for it. Fine, I'll send it back to you. Or if you decline that I send it back to you, it becomes mine. and becomes mine basically lets me throw it away, free and clear, right?

Because it's mine, I can trash it. So it's just, or I can sell it or whatever. That's how I deal with obsolete inventory. Yeah, I like that. I like that. Well, back to this deal, I think on the inventory, needs to be somebody who really understands the different characters and things that they're manufacturing.

You kind of have to be immersed in that world to understand what is popular and what might not be popular. That would be one thing. The other thing, I guess I always think about motivation to sell. And I think that's what surprises me here. You just got some great business development hits, right? That's what they're saying. And obviously they worked at that.

They're just now realizing not only this astronomical top line growth, but also improving margins. So why sell now? That makes me wonder, like there must be some logistical problem or concern they have that's sort of driving their need to do it now. Yep, I agree. I would wonder about, I want to talk to the CEO and founder about transaction timing. So one thing that's important note, though, is since this is an axial deal, and I, there's

kind of this hint here that says the company's CEO maintains a majority stake holding 80% ownership, that suggests to me that he might be willing to stay and they might be willing to, you know, he might be willing to roll up to substantial part. Maybe he sells half. de-risk takes some money off the table and sticks around. So it could be, this could be as much of a capital raise as a sale, which is what, you know, it's a little bit different. Like you also notice that there's no listed price when we do deals from Axel, right?

Because this is like a big boy deal. You know, all offers are on, it's like in commercial real estate, like anything that's for rent is also for sale and anything for sale is probably for rent. Just kind of come with your own deal structure because there's sophisticated professionals on both sides. That's the vibe I get here. that like you could offer them a price for the whole business. I think if you were to offer them a price for the whole business,

it would probably have to be based on a forward ebit dot number. Or you could offer them, you know, some sort of minority deal growth equity style. Yeah. I think you're spot on with that. It sounds like they want to stay, but they want to bring in some money and they want to bring in maybe some talent to help them through the next phase.

They're more than doubling. And it's pretty exciting time, I'm sure, but also, you know, a lot of management challenges going on with that. Yeah, I mean, this thing's a rocket ship. Even before the video game collector packs kicked in, it was one four of EBITDA in 2021, and it was two four of EBITDA in 2022. Right.

So they improved their margin on flat sales, which was pretty interesting. What drove that? Was it just a different product line that they brought in? Really interesting. Well, it could be scale. I mean, this is, to some degree, a manufacturing business, right?

I mean, so these are plastic, figures, right, that I'm made from PVC and poly resin, which means that they're just poured in different molds. But like, you could be getting some scale on buying the plastic. You could be getting some scale on, you know, heat it all up and just change the mold. So maybe it looks like a longer manufacturing run to the manufacturer. You know, it's manufacturing. I could definitely see some scale. I could also see hitting a scale inflection point and being able to change contract manufacturers to someone that could do larger runs and give you better pricing, it was no longer a short run guy anymore. I could see this business having margins and improves the scale.

I mean, that being said, 35% EBITDA is nuts. So good. Yeah, absolutely. Absolutely. And just, like you said, the fact that they're already at 16 million right now in June. So really, almost, they're only expected to go to 20 this year. So, yeah, they're making. most of the year by now. Yeah, their 2022 was $8.3 million, and their TTM is 16.7. I mean, they've doubled already in six months. It's really, this thing's a rocket ship. It's very cool.

And who do we think their customers are? Who are their customers? Well, they say it's some video game publishers, but I also think it's, I get the sense this is a D to C business mostly that's selling online, that's selling, you know, they might have some in some retail. I mean, you know, I'm not sure. but it seems like they're opening this new avenue, which is selling the figures to video game publishers that seem to be kind of then packaged together and then the publisher sells it at retail. You buy the whole, yeah, kit together and you get that.

But do people, you know, what is the demographics of the people that want these figures? I mean, it's not just children, right? Well, as you said in the pre-show, it's not just children anymore. It's, you know, a ton of adults own these things. You know, I think it's like a lot of the adults that grew up with these characters as teenagers are now 35 and have money and we'll spend, you know, 50, 100 more on the right collectible. Yeah, really interesting. But do they trade them? Do they actually collect and sell?

Is that the way this goes? Some, but I think there's a lot of people that are just collectors, you know? I bet the lifetime value is still. Yeah, put it on display. I mean, like, I don't know if you've seen these pictures on like whole, people got whole walls, you know, whole and they're all, you know, in the original box and like it's, I mean, these are collections, right, that you will see displayed in people's homes. I'm assuming these are, they use the word premium and high quality and limited edition and stuff. So I assume that these are nice. And I mean, the price points on these can be hundreds of dollars. Wow. And when you consider that they're made of plastic, which costs pennies, right? You see.

start to see I have 35s, I'm even though margins, right? Yeah, it reminds me of beanie babies where people were going crazy and spending ridiculous amounts of money for junk. Well, that's, there you go, though. Like, that's the big risk of this business, right? Like, you want to, like, is this being, are collectible figurines, beanie babies, or not? Yeah, that's what I'm wondering. Right. Is there a point where this is, you know, goes from being really great to lame, no good? which is why I love the guy is selling it right now. I mean, I don't know that I love it as a buyer, but like, I get it. Like he is, could he hold it for another year or two and probably get more?

Yes. But also, he's going to get a pretty good price even now. And he's going to de-risk substantially. So I don't blame him. Yeah, that makes a ton of sense there. And it's probably bigger than he ever dreamed. Oh, yeah. He probably is writing a wave that he didn't expect.

One of the things I really like about this business is that it is branded and licensed. So they've got, it says they've already got all the licenses in place with all of the big franchises, characters. I mean, I assume Disney is on that list, you know, all of these. These are not easy to get necessarily, these licenses, right? They usually come with minimums and risk, you know, you got to, you pay X percent of sales or half a million dollars a year. even if you don't sell anything. And they don't just take anybody, like you have to get approved.

They only do so many licenses in mini figures in each industry. So the fact that they have this is definitely a moot. Yes, but now he says that there was something about them being renewed indefinitely. You know, how does a company like this risk losing those licenses? Do they just become more expensive each year that they renew if something is more popular? How does that look? So I think they've got to be locked for a while, and then there's probably options to renew indefinitely. So I think the company can keep saying, yeah, we want to take another year of risk.

We're easily clearing our minimum, et cetera. You kind of renegotiate it. I think the deal here is they cannot be terminated by the brand. You know, the brand can't run pull these guys, which you have to if you're going to build a business around it. And the fact that they're renewed indefinitely, that's not always true. Like you can get a three-year license and no guarantees. Yeah. I've seen some like that.

Yeah. I've seen some from, you know, the sports side where the licenses are, it felt a little scary because they could be pulled at any time. Yeah. Yeah. So these sound like they're stronger than that. The nice thing also about this versus sports is like Captain America can't like get canceled. You know, he can't like, do, he's a fictional character, right? He can't, like, get drunk and hit his wife or something.

Like, an athlete can, right? Right. Like, you build your brand around an athlete who, I mean, tears his ACL, does something, cancel, like, whatever. And through no fault of your own, your business can go put. Mm-hmm. Yeah. These are always going to be their character.

They're going to be exactly what you expect. It's just a matter of whether that character continues to be popular, I guess. That's really it. Yeah. Right. Interesting. So, Heather, how would you value this thing? oof, this is a tough one.

It's way bigger than what I normally think of valuing, but high growth, and they're definitely going to want to trade on that future, you know, ebada that's just starting to hit, and you don't know how sustainable it is, right? So, I don't know,

seven and a half million. I hate to guess right here. 10? Is that too high? You think it'll be valued at 10 million? No, I was maybe 8x. Oh, 10 times. Oh, 8x. So 8x 7.5? So 60 million? It could. I was going to say close to 100 million.

Oh, wow. Yeah. I mean, I think given the growth, given the moat, that it's licensed, it's contractual, it's B2B, It's growing fast, value chain in place. I think they'll get valued on 2023 forward EBITDA, which is going to be seven and a half. And I think they'll get north of 10 times. So I think it's 75 to 100 million. I guess if you believe in the growth story, that could make sense, right? You only need one private equity firm that buys it.

That's the thing about this stuff is you only need one true believer. Right. Yeah. And there's probably a private equity firm out there who. already understands this space really well, already has a thesis around it and can see the growth potential that these folks see. And yeah, it's probably there. I just, this is a new world to me. I don't, I don't watch these kinds of, I'm not a comic person. Yeah, well, I mean, it's just the growth makes it so hard to value because, you know, like TTM, TTM is 6.6, right? But six months ago,

TTM was 2.4. So, you know, your TTM of 6.6 has six months of not usable numbers in it at least, right? Right. Yeah. What scares me about the valuation on this if I was a buyer is that, you know, how long can, when something grows this fast and it's based on sort of trends, you know, what people like, I just wonder how long does that last? 10 years of this EBITDA, that's a long time if you paid even 10X.

10x is scary. But like at the same time, culture shifts. In theory, they have the licenses. They just start making different ones. Different ones. Yeah, that's true. Right. You know, like they've got the channels.

They've got the relationships with the video game publishers. Like, so if you're a video game publisher, right, and these guys hammer out really nice resin statues, delivery them to you on time. And, you know, the publisher's making $5 million a year on it. They're fine buying those. Yeah. Yeah. Like you come out with a new game, you just call these guys again.

And you're like, here's the character files. Make these characters. Like you're now our preferred vendor. Like, why would they switch? Yeah. Makes sense. To me, this is with this kind of businesses, you're not in the Marvel business or whatever. You are in like a B2B sales channel value creation business where like you're the guy.

This is in some ways it's similar to the, uh, the promotional apparel. business we did a couple episodes ago where you just become the guy like when the company needs t-shirts like you just get called yeah if if you can get in here like when marvel needs mini-figures they call you you know you just make the mini figures you don't got to come up with the next comic book character or any of that you just wait for marvel to have a hit and then they call you and you deliver on time with high quality et cetera and you just keep it going well yeah makes sense It's going to go for a lot, I'm sure. I could see valuation on this thing sniffing $100 million.

The guy probably won't sell all of it, right? Maybe he sells half of his ownership at that valuation, you know, rolls equity and keeps on going. This is a cool one, though. It is. Well, should we wrap it up here? Let's wrap it up. I love that one. Thanks to Axi for sending us this one.

Super cool. Yeah. Thanks, Axial. What a cool one. All right. That'll do it for another episode of Acquisition. Anonymous and we will see you guys next time. Bye.