Acquisitions Anonymous - #1 for business buying, selling and operating - $900k Financial Advisory Practice / $6.8mm Underground Utilities Contractor - Ep 43

Episode Date: September 16, 2021

Joined this week by guest Mitchell Baldridge (CEO of Baldridge Financial Services in Houston, TX), we talk two deals for sale:- $900k Financial Advisory Practice- $6.8mm Underground Utilities Contractor in the SoutheastThis is a great one if you're interested in the tax considerations during acquisition of a small business.Enjoy!-----* 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, welcome to Acquisitions Anonymous. We are back for another week of the Internet's number one podcast about small businesses for sale. Each week, Mills, Bill and me, Michael Gridley, get together often with a guest. And we have an awesome guest today. We'll introduce you to him in just a second. And we talk about two listings of small businesses that are on the market. And we talk about them and how we would think about them and how we'd make them work and what scares them and what makes us happy about them. So today we have an amazing guest, Big Mitch Baldridge, straight from the hinterlands of Columbia, Missouri, where he's been at Capitol Camp.

Mitchell, we're so happy that you're able to join us today. Yeah, thank you for having me. Excited to do it. Like I told you, I'm an avid listener. It's the best podcast in America. Perfect. Well, we agree, mostly because we're on it. But, yeah, great.

Thank you so much. Cool. So before we get started, we've got two great deals today to talk. through, but love to give you an opportunity to introduce yourself, your background, you're a baller on Twitter, which is how we know you, besides being a ball in real life. But give us more about the Mitchell's story. So, yeah, thanks. Yeah, Mitchell Baldridge. I'm a certified financial planner and a CPA. I own a practice in Houston, Texas, where we work with entrepreneurs and business owners and general partners of P firms mostly doing financial planning and then tax

planning and obviously going into tax preparation and bookkeeping as well. So we really try to find people who have their life centered around a core asset that is highly illiquid and highly speculative depending on what they're doing. and help them plan around that for, you know, everything they need in their life and business. So that's great. It's what we do. Yeah. I mean, it's one of those things where I always admire folks that are able to be in jobs where they're not only helping themselves, but helping people on a daily basis.

And you're at the core of that with people's financial health and their ability to keep running their businesses to support their families and stuff. So super cool. Super cool. Thank you. Cool. Well, thanks again for being here. Before I turn it over to Mills with the first deal, I have the honor of talking about our sponsor.

So as everybody that's a listener knows, we're on a mission to try to stop losing money on this podcast and break even. And so we're almost there. And today's sponsor is a site and system called tiny acquisitions.com. And, you know, they are a website where if you're interested in doing a small business, a tiny business acquisition, you can go there. They have tons of businesses, thousands they say,

that sell for less than $5,000, really a one-click system where you can go find something, that somebody has already built and then you take it and run it from there. And usually the transaction happens less than 24 hours. So we're very grateful to our sponsor, tinyacquisjustice.com, who's been supporting us over the last five episodes, which has been awesome. So thanks to them. And Mills, over to you with our first deal.

Also, your beard is looking super hot today. Just for those of you on YouTube, you can check it out. I feel inadequate. I also brought my EBIT DAC cup for people on YouTube. it's earnings before interest, taxes, depreciation, and polarization and coronavirus. So you can, we don't have a swag store yet, but if we did, we may have some cups like that.

Just a matter of time. Yeah. Mitchell, man, so glad you're here. We've talked a handful of times offline, and we are doing some, I'll say, kind of theme-specific deals with you today, at least one of them, and the other, we're just going to get you

to give us all kinds of free tax advice on. But you're CFP, and you, own a CPA practice. And so we're going to look at a financial planning practice, which I used to own one and you own one so we can maybe poke holes in this one or say what we like about it. So this is from a very prominent broker listing service for financial services firms, FP transitions. And this is a practice that's in the Northern Bay Area. They're doing $968,000 in revenue. They're asking $2.3 million for the practice. It's a hybrid advisory practice. located in the Northern Bay Area of California. They provide comprehensive portfolio management

and financial planning services to 172 households or families. The principles of the practice employee team approach so that they, I guess they're trying to tell us, hey, there's no advisor-specific risk. It's not like one advisor holds all these relationships. But they have a personalized wealth management approach. Last 12-month revenue is $970,000. 93% percent of which is from managing $121 million in assets. This is, so what the listing says is this is a sell and stay opportunity because both of the principals and the two staff members want to remain post-sale. The ideal buyer would be a well-established RIA or hybrid firm with at least one certified

financial planner, CFP, that's what Mitchell is, and a proven track record of providing high-touch, personalized both management service to clients. The office space is available for a lease. And there's a little bit of detail here. There's actually kind of a cool amount of detail on this one. So the assets under advisory, which I want us to talk about in a little bit, is $145 million. The assets under management is $121,000. 172 households. So, let's call it maybe about $700,000, average AUM assets under management per household. they're an escort. They have four employees. Two of those are owners. Ninety-eight percent of their revenue is recurring. Two percent is non-recurring. There's kind of a nice chart with some of their

revenue growth. They, in 2017, were a little over $730,000 and have generally trended up since then, but it's kind of been flat for 2020 and trailing 12 months. They give some information about their licensure, which we can get into. You can't buy this type of business. You can't run this type of business without some securities licensure. So they have their Series 7, 2466. They have CFP. Somebody there has a master's degree. They've been around for 42 years.

The sellers are 65 to 70. And they also sell some insurance, life, health, disability, and long-term care insurance. At client demographics, this is kind of cool to see because this is a key question. Basically, 43% of their clients are over 70. Another 44% are 50 to 70, and a few of them, 11% of the 172 households are, you know, under 50. They give a breakout of some of their recurring and non-recurring revenue. But the thing that my mind kind of, my eye goes immediately to Mitchell and then I'll let you get in here is, you know, AUM fees is the bulk of it, the fee-based, which is nice. And I would say that's traditional, right, of a hybrid or an RIA.

but then you have some financial planning, but not that much, $6,700. That might be one or two financial planning engagements. But the vast majority of this is recurring, which is fairly typical. But Mitchell, take it, take it away, man. poke holes in this or, or, you know, clap it along. So, you know, yeah, like you mentioned, I own an RIA, and this is the exact opposite of my business model in the sense that I do not have $1, of AUM, I offer only consultative planning advice and at least today. And so the things that really

stick out to me with this are, like you mentioned, there's no kind of fee planning for people who are obviously late in their life and might, maybe could use some planning, maybe not. the number of assets under management divided by the number of households, you know, it's less than a million dollars. So, and the ages are, I mean, the elderly clientele is also a big, big stick out as far as how are you going to work with these people and transition these people into the next stage of their life, as it were. And then how do you? kind of continued these relationships forward. Mills, you'd probably know better than me,

but as far as the revenue to the asking price, it seems in line with market or appropriate. But just the mix is interesting. What I've seen is kind of one to three times revenue for fee-only firms. Is that consistent with what you've seen? I've seen them go for more than one. I think accounting firms would be,

0.75 to 1.5 revenue in a traditional accounting firm. And then I always think of these financial firms as more than that, getting into the two to, yeah, if you were able to get this for 1X revenue, you know, that's a fantastic deal. And all you have to do is keep the wheels on the track for a few years to kind of get your investment back. depending on how this firm is run, I mean, it's not uncommon for a firm like this to have maybe 40% net margins. I mean, depending on how these guys are paying themselves. But it's not, you know, it's not inconceivable that this business probably, it's tough, right?

Because sellers discretionary earnings isn't the most accurate measure here because you have, you have guys who are practitioners, right, who are running this business and operating it. So they may be paying themselves, I don't know, 150. $200,000 a year each, you probably don't need both of them. That's why they're looking to be, you know, folded into a bigger firm and then can kind of retire out, right? Transition the relationships, hand them off, hopefully keep the book of business. But a lot of these, you know, there's callbacks based on retaining the AUM for a period of time. Also the seller's age factors in and that these sellers are in their late 60s, 70s, and these clients,

are in their 70s, 60, you know, 90% of the client base is the same age as these guys. And they may have all been working together for 45 years. So that's a huge opportunity in that I'd imagine they have some sticky clients who have been with them for a while. I would guess just to speculate that the growth in their revenue has just been tied to secular market growth over the last, you know. So say more about that. That's an important detail, right?

So if you look at the past few years, revenue goes up, not necessarily because they have new clients, but like you said, Mitchell, go on. Well, yeah, I mean, we've been in a 14-year bull market, and these people get paid a percentage of assets under management. And so as the market grows, so does their percentage base of what they get paid. So if the S&P has been growing 15% a year and their historical revenue, I mean, I don't know that their 70-year-old clients are 100% in the S&P, but as the market grows, so does their revenue.

And so on the converse, as the market falls 40% in a year, if that happens, so does your revenue. At the same time, your clients begin to leave and your phone calls start to go up and up and up of you have to provide a lot of, you get to provide a lot of assistance and handholding and care for your clients in a time of crisis. So maybe a dumb question, but, you know, it looks to me like these folks, and by the way, this is not my space. My experience with financial planning is I work with one. So that's it's it. But like it seems like they have this amazing asset of these relationships with these folks who should be doing things like, you know, estate planning, buying insurance, like all that stuff. And they haven't monetized any of that opportunity here. Like how does that go down? I mean, because like my guy, like he's. doing planning and he just happens to sell insurance too, right? And like, you know, that's, that's a good business to be on. Like, why have they gone this direction or is that just an opportunity for a buyer? Well, it's harder to sell life insurance to 65 year olds than it is to sell life insurance to 31 year olds is one issue out there. It's even harder to sell long-term care insurance

to some of those people. And frankly, there's issues with that product. So, and they don't have income presumably when you're 70, so you don't get disability insurance. So the insurance is sold to people our age more so than people in their late 60s because it's a little late. And the gross estate exemption is $20 million for a married couple. And these folks all have a million dollars in investable assets. So, you know, know, they have, like, I would look at this person and go, what is your gross estate? What are you paying for Medicare? How much is in, what is your RMD? Maybe we could take one year where we pay a little tax to reduce your RMD for the next 20 years or try to think of those being required minimum distributions.

Yeah. So we should have totally a lot of time, but yeah, we try and, like we use a lot of lingo, but you explain it just for people who don't know. Yeah. So when you're 70 and a half, you have an IRA, the government makes you start taking a percentage of that IRA so that you liquidate the whole thing by the time you're 124. So, you know, about 2% a year. But again, if you have a million dollars and you have to take 2% of that million dollars as a mandatory distribution and you have Social Security and that's $30,000, you're making $54,000 a year. So this is not a high-touch, high-planning base of clientele. And they're older, and these are not the people who are going to,

whose kids are going to look at this, and this is the biggest pile of money they've ever seen in their life, and they're going to need your advice on the transition. Really, if you bought this whole client base, you would go in and say, hey, the man on buying, this from or the woman I'm buying this from, I want you to stick around for a year and you have to get a meeting with me and every single one of their clients and we have to try to get their kids to show up. And we have to try to build a generational kind of estate plan out of this. And then you

have a sales meeting to every one of these kids. To try and capture the AUM. Yeah. To try to capture the AUM upon death and going forward and to try to roll up the family into your service offering because they just think you have the I mean if you did all that it would be a whole lot of work but you would be one of the best financial planners in the universe because you would be proactive and trying to do real financial planning and estate planning work you know so I'll just say this is the prototypical financial planning practice. Like this is textbook like financial planning in America, right? You have two guys.

They've been doing it 45 years. They're making a really great living. It's not a highly transferable business. But there are asset aggregators out there, right? These folks just go and just build. Yep, LPL financial is a big one. I mean, they're just building their book, right? As much as they can fold in and they know.

there's going to be attrition, and they price it accordingly. But, right, you raise a couple interesting points, Mitchell, like, you don't know, right? Do these older folks that they're working with, they probably don't have relationships with the next generation or the generation after that. If you got in and saw a firm that was doing that continuity across generations, you'd be saying, hey, I could pay up for this. I could pay a premium because I think the revenue, the AUM is going to be stickier. You also just, if you do the rough math, their fees are about like 70 basis points. So like 0.7%.

And that's probably in line. When you say, Mitchell, for this like kind of commoditized, just generic asset management advice. It is. But furthermore, you could try to keep the AUM fee where it is and generate some fees out of these kind of estate plan transition plans as they were and then, yeah, trying to develop some new business.

Part of the reason I don't like this type of business, right, and what I like about what you're doing, Mitchell, is that this could easily be replicated, and it's kind of catching all these guys is like any of these robo advisors, right? Betterment, wealth front, all these. They'll do it for, what, 15, 20 basis points, and you're getting functionally the same thing. You know, you're getting tax loss harvesting.

You're getting, you know, monthly or quarterly, rebalancing, but you're not getting in those platforms the more kind of hand-holding that your model provides, which is, hey, go get the commoditized stuff from somebody else and come to me for the stuff that really needs to be much more tailored. These guys can probably do it, but, you know, what I will say is if you have your CFP and you've been in the industry 42 years, there's a lot that's changed in the financial services industry, right, even in the last 10 years. So they probably don't have the most modernized practice if you had to guess.

This is a, there's a fax machine somewhere in this. And there's a few piles of paper, as we've been told. So, you know, there is just looking at this, though, if I personally were going to go in and take this whole client base and go client by client and build out the whole infrastructure of tech enabling the practice, kind of reorganizing, how we do things and then trying to roll up the generational, kind of every family into my office, I don't think you would,

if you're willing to do all that work, I don't think you need this platform to start to do all that work. Because, you know, not that many people are willing to do that amount of work. So you can probably just go out and start to snowball it on your own. But this, if you're starting with zero, this certainly would put you ahead.

So then the question is just, what can you pay for it? Yeah, is price kind of why you guys think this hasn't traded so far? I just think the risk of attrition relative to, I think it's priced at market or at the high side of fair market, and it's kind of just a legacy firm. That's what they call the tax firms that look like this, legacy firms. And it's just the sleepy old, and there's a lot of risk in the relationships in the, I need to probably keep these guys in my business for a little while, but I need to keep them in as short as I

possibly can just to get the handoff going and to get them out and to get them off the payroll and to, and are they going to, are they going to help me do it or hurt me while I'm trying to do it? So there's just a lot of risk that you've got to price in. Does a deal like this normally get structured with a level of, you know, earn out tied to retention or how does that work? Depends on the buyer. I mean, like, I'll just say these things are a dime a dozen. There are hundreds of thousands of these.

And that's part of the reason why it hasn't transacted. If an aggregator was going to buy this, like they probably don't sit on the market all that long, right? like the LPLs and then the kind of tiers down below that, they'll scoop these things up really quick. What a firm like this really probably needs is a guy, right? A young guy who has his licensure and is maybe working on a CFP and they say, look, we're going to pass the baton to you. We're going to transition all these relationships. You know, you're going to pay us out over time, but you learn the clients, you're sitting in meetings with us, and over a multi-year period, we're going to hand it over.

And the problem with that is that a lot of young guys went that route and still try, right? But they get burned because basically the older senior guys are like, hey, just pay me, you know, $200,000 a year until I tell you to stop. And, you know, like, they're like, wait, what? Like, I could go build my book of business and not be on the hook for this kind of, you know, unlimited liability to you. One of my good buddies worked for his dad straight out of college. at a broker house when he was 22.

And he finally was able to buy his dad out at like 46. And now he's crushing it because he's the only 46-year-old who has this big practice. And then a guy died and he kind of was able to buy his practice. He's the only guy in the place who is in the seat where he is. So he's the second in command named kind of beneficiary purchaser of every single person's practice. in the whole place. So he will own that world by the time he's 60, but he had to work it out. And so, yeah, if I'm the seller, I'm going, hey, I just spent 45 years building this thing. I don't, you're 23. You seem smart, but I don't know if you're a goofball or not.

So now you have to work for me for three years for then me to go sell it to you over five years. So you just had to work eight years to buy my kind of marginal. practice. And so SBA, I mean, you can go finance these things if you have a CFP and 10% down and a dream. But you're going to sign the guarantee and you're going to have to pay the note. And it's going to be a big risk. Then you have to fight the war of attrition relative to the growth of the SBA or the growth of the practice. That's well. Super cool. That's a fun one. Super cool. All right. You guys are move on in number two?

Yeah. All right, I get to read this one. Let me pull it up here on the old screen, and we will get going. So this one is a decidedly different than an RAA practice. It is a profitable underground utilities company. So we wanted to pick something today

that was going to have some stuff in terms of thinking through diligence, especially on the financial side with Mitchell here. So hopefully this one does that for us. So located in the southeastern U.S., they had 2018 to 2020. their average revenue is 6.8 million, with their average EBAA averaging about 2.5 million. And so this company is a specialized underground utilities contractor providing jet vac services,

pipe repair, and lining, and drain testing and cleaning, in addition to a full suite of commercial and planning services to general contractors and property managers throughout the region. The company's growth and success will continue to be driven by their outstanding reputation for reliable jet vac services, hydro excavation, CIPP services, lift station expertise, technical knowledge and accreditation and a strong commitment to customer support. That was a mouthful. So what are all those things? Do you guys know?

What is JetFAC? Well, so like basically this company provides services to aging infrastructure. So SIP is, I think, cured in place piping or something along those lines where they come in and there's these really old pipes and it would be incredibly expensive to, you know, take the pipes out of the building, right, while the tenants are in there. Also, municipalities are doing this exact same thing, like for their sewer infrastructure and water infrastructure. And so I'm not sure. I think lift stations is related to sewer inside buildings. Jetback is cleaning out your lines. Hydro excavation. I think maybe that's

something similar. I'm not totally sure. We should have had a plumber on to talk about this. Well, I'm at Capitol Camp and we just heard Elon Musk. second in command, talk about building those underground tunnels all the way through LA. So I'm the expert on this today. We can dig at a snail's pace. Cool. So it looks like their revenue's kind of been all over the place. 2018, 5.4 million, 2019 jumped up to 7.2.

Running it, what looks like close to 40% EBIT of margins. and then shrunk back down in 2020. I assume that's COVID-related, but they don't really talk about it here. And there, my math was pretty good. EBDA, 38.8% of sales over the last three years, including 2020, which saw spending temporarily slow to COVID-19.

The company's EBITDA margin is exceptional when compared to other companies in the same industry. And I think that's the first thing that my eyes go to on this one is like as far as a boring business, these numbers seem really amazing. Like really good when you're in something with physical products running this high of a gross margin and a net margin. I think the issue with that is that you have an old business, right? I mean, it's founder-owned.

It doesn't say, I don't think, how long they've been around. But you basically have a business that functions with lower overhead than you would want to underwrite going forward. forward. So if you came in and started owning this business, this guy who owns it probably holds a lot of different job functions. Most buyers would not be able to hold all those job functions, nor would they want to. And the overhead would probably need to increase. I mean, I've seen this scenario a bunch of times, and I'm just extrapolating it to this. But it's like the business has not grown their internal capacity or infrastructure to match the revenue growth that's probably happened over the last 10 years. But the owner's like redlining probably in some ways, but still

making it work. And that's why he can stand some of these revenue fluctuations because a lot of it is just fall into the bottom one. And there is that with, you know, one of my buddies who I used to work with at BDO, he's the CFO of this construction kind of real estate development company and the owner is just a 10-Xer. I mean, it's just a $100 million company and the owner just grinds it out. He was doing his own tax returns for, you know, like the guy is an engineering genius kind of obsessive who just does everything themselves. So there's certainly that risk of how am I going to get up to speed and match this person's capacity. The other concern that pops up directly to me. We were talking offline about the, what does the balance sheet of this

whole thing look like in terms of what kind of assets to the, all I see is well-maintained fleet. What does that mean? And all I see is EBITDA, which is earnings before interest, depreciation, amortization, taxes. So how does this thing pencil out once you, and you all have talked about this before. But yeah, once you put the note on and now you're making note payments and then you have to replace the well-maintained fleet and then you have to scale up and you got the 20 employees where payrolls hitting every Friday, a 40% margin business can turn into a negative cash flow business all of a sudden, you know, so I don't know how that. Let's delve into that just for a second, Mitchell, because that's a good point.

You know, like what you're saying is, you know, the $2.5 million in EBITDA, right, that's the sticker price, so to speak, if there's, you know, $100,000 worth of amortization or depreciation, right, going on, probably depreciation. It might be like fleet related. There could be a million dollar. Yeah. So they could have on December 31st, 2020, but their $3 million well-maintained fleet and all with a hundred dollars down on a note that that is not kind of in this number and then bonus depreciated it that year on their taxes and and paid zero tax and then they add it back on this sim and then

we don't kind of know about we don't know about that right now at least when if you think right like if there's if there's a million dollars right of non-cash expense right depreciation or amortization in a year like 2020 you only are netting 700,000. potentially of something like true free cash flow. And based on buying this business, you know, I don't know what, it doesn't give us an asking price, right? But they probably want, you know, three to four to five times, right? EBITDA, you probably can't make your note payments, you know, not on $700,000 of free cash flow. No. Yeah, just that's a perfect. EBITDA average 2.5. They're going to want $10 million for it. Now you're going to be carrying a

$8 million note that you're personally guaranteed on. And eight million times, what's the lending rates on those things, Mills? Five percent. Yeah, I don't, I don't know, I don't know how it would pencil, but it doesn't, it doesn't give me the warm, you know, the warm and fuzzy feelings. No. All right. You know, yeah, you're, but you're levering up and you're taking some, some risk. The customer concentration looks good. I'm also, you also go into that, how does this guy acquire business and how did this thing get spun up with the original owner? And how do you come in and perpetuate? I mean, you have all that risk stacked on top of the, just how do you finance the thing and make it cash flow. And so maybe Mitchell talk a little bit about,

you know, one company's EBAA does not the same as another company. Ibida. And we maybe should define what Ibida is. A lot of our listeners will yell us if we keep throwing around jargon as, as Mills talked about. But like the one that I think you talked about before was just the danger of depreciation and one company's depreciation being totally different than another's and how that can really come to buy you. Because it's not like depreciation, which is, you know, you're getting to write off the value of assets that you have like trucks or equipment year to year. It's not, it's not, it's not, you don't get that for free. You have to pay for those things before you start depreciating them over the coming years as a tax shield.

So how do you see that happening in practice with your clients or with other folks looking at businesses? Well, yeah. So when people place assets into service, especially short life assets, like not a office building, not a warehouse, but a piece of equipment or a trailer or a tractor or whatever, you can buy that with leverage. You can buy that with a note. So you can go buy a $100,000 tractor and put 10 down at John Deere and finance the 90 with John Deere finance.

That same year, you can go bonus depreciate the entire asset and write it off on your books. So then it becomes important kind of, is this a C-Corp? I mean, these guys have said, this one's an S-Corp. Okay. So, and the S-Corp has its own issues of, are we going to do the F. Reorg thing out there? Or how are you going to buy that stock? Are you going to be stuck in the stock? Or can you buy the assets? So if there's two kind of ways you can transact a company, you can buy the company's stock, which means you then step into their shoes from a tax basis standpoint. So all of their prior tax errors and omissions and sins and for better or worse, you just kind of walk into.

And not just tax. But not just tax. Not just tax skeletons, right? All the skeletons. All the skeleton. Every contract, every warranty, every guarantee, every thing they've ever done is now yours because you own that entity. Or you can go in and buy the assets, which sounds. attractive and most people would want to buy the assets, but you may have vendor relationships.

You may have things out there that would want you to keep the entity. You may have insurance relationships. You may have workers comp. You have a history for good or bad of what that company has done for the last five, 20, 50 years that you just lose when you buy the assets. But when you buy the assets, regardless of the depreciation choices they made, you get to recast and kind of re-depreciate the assets. There's something called a purchase price allocation where the buyer and seller, in effect, come to terms on, I'm handing you $10 million. Two million is for all this old crappy equipment. One million is attributable to the customer contracts, another half a million to this lease and then the rest is all goodwill.

And so then the new buyer gets to kind of do whatever they want to do. But back Gurdley to your kind of pointing out is we just have kind of incomplete information on this sim because when somebody tells you EBIT dot and it's a trucking company versus is they tell you EBITDA and it's a consulting firm, one's asset heavy, one's asset light. You have no idea. You would presume that if a financial planning firm is running 40% margins, 37% is going into the owner's pocket. Whereas if a construction company is running a 40% margin, they have a more complex balance sheet. So yeah, yeah, you just, you have to go dig into the financial model of, If I pay $10 million for this, what's it going to cost me to service the note?

And how much cash do I need to bring to the table to grow this company? Yeah. Yeah. Mitchell, do folks engage you for accounting, like, due diligence, help or services? Yeah. Some of my clients have. And some people have. It's not something I do that much, kind of one-off.

I mean, there are accounting firms that all they do is transact. action, due diligence. And, you know, I will get on a one-hour call with you and talk you out of any deal you bring me is my, it's probably what I would do. So yeah, full, full disclosure. I've never seen a deal I liked. No, actually, I've seen a couple, but, you know, I'm biased to no. I'm just thinking about these two deals we're looking at, right, and the complexity of their bookkeeping. You know, you, with this particular business, right, you've got this kind of big, multifaceted balance sheet. You've got, you know, a bunch of different customers who are paying you on terms, right? You have an AR function, an AP function. You probably have 52 pay periods a

year. You know, it's, there's a lot, right? There's a lot of different elements. Yeah. Whereas the, you know, the financial planning practice, you're probably getting paid four times a year. You're debuting the AUM fees right out of their account, and that's 98% of the revenue, there's not that many transactions, right? Just when you look at their chart of accounts, it's probably a lot simpler. You know, you're probably paying your employees once a month, maybe twice a month. There's only four of them. I'm just thinking about the relative complexity of the bonds between these two businesses, and they're very, very different. Well, and with the financial firm, you're buying the revenue, which is paid from a broker-dealer, presumably, or,

or if they're an RIA, it's paid, it's swept from the Edward Jones, it's swept from the platform, the Fidelity account. And there's going to be a Fidelity report that reconciles back to the bank account and you'll be able to trace revenue very, very easily versus if you're buying a home service business company and the owner's putting money in and they're pulling money out and everything's going every different way and they're not exactly organized and they're paying for their kids braces out of the thing. You have to do a lot of work to kind of unwind the books just to get to the point where you can start to, you have to say, what am I buying? I'm buying recurring revenue and I'm buying these employees. So is anyone paid directly with

cash. I need to figure that out. Is everyone on the payroll? Okay, I know what the payroll is because ADP runs it. With the money that's going in, I got to go deposit by deposit and suss out. Did the guy pull 30 grand out and then put 30 grand back in? And is he calling that 30 grand, he put back in revenue? What is true revenue? So I'm buying now revenue minus direct labor.

And I'm going to have to now rebuild GNA to get comfortable with. with underwriting the kind of future cash flow that I'm buying. Yeah, yeah. Man, that's interesting. It just kind of helps peek behind the curtain of how different, you know, how different these two would be. Yeah, they're very different. Thanks, Mitchell.

I'm glad you got to join us, man. This has been really fun chatting with you about these. And how can folks, well, let me say just really briefly, thanks to Tiny Acquisitions, our sponsor for sponsoring us for these past few episodes and hope folks will go check them out. Mitchell, how can people keep in touch with you and what can they do to be in your world, so to speak? Yeah, yeah. I keep threatening to do a mailing list.

But the easiest way to find me is Twitter at Baldridge CPA and look at my pin tweet and look at the long threads that I've built over time. That's a great place to start. Awesome, man. Well, thanks again for joining us. I'm really glad we got to do it. It's good seeing you again. Yeah, yeah. Like I said, I told Bill, who I saw the other night, this is one of my favorite podcasts.

It really is. It's such a cool niche. So good on you guys for doing it. And if Bill misses again, I just want to spot. I'm going to just slip in. I want to be the third co-host. So I love it. We'll definitely have you back on. Awesome. Thanks, Mitchell.