Acquisitions Anonymous - #1 for business buying, selling and operating - A $10mm hard-money lender in Texas - A $2.7mm equipment rental business in CO / e18

Episode Date: February 16, 2021

This week, we examine two listener-submitted small businesses for sale:- A $10mm hard-money lender in Texas - A $2.7mm equipment rental business in CO-----* 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, it's time for another episode of Acquisitions Anonymous. We're back today. No guests, no fancy stuff, but we are filled with listeners submitted deals. We had three this week, and I think we're going to be able to get to two. So one will be me and one will be mills. So I'll go first. By the way, good morning to you guys. Good morning.

Yes, good morning. I'm psyched for these two. These are both super interesting deals and different than ones we've done before. So I think we've got a good episode coming today. The listeners are killing it. I am so impressed with what we're getting in from people. There's some prep work going into these things. This hard money lending business,

like I've done full acquisitions without this much work. And this guy's just talking about it. So good on him. So we'll jump in with this one first. So this is a hard money lending business. Real fast is one of you want to say what a hard money lending business is. I think I learned that later in life. Do you guys know?

Me too. Also, correct me if I don't fully understand it. but basically it's loans for fix and flip housing projects. So if you're, you know, if you buy a house and you're going to remodel the kitchen in the bathroom and flip it, you know, either you can't get a mortgage or it's not worth kind of the hassle and expense and lead time

and, you know, personal guarantee and everything on the mortgage. So you go to a hard money lender for whom you pay way higher rates than a mortgage, but they will get you a loan in, you know, under a week. And, you know,

it's kind of a short-term loan. They expect you to pay it back in six to 12 months. because it's really just a kind of a construction slash remodel loan. Yeah, and they often have big origination fees. So there's like a one or two percent fee, sometimes more at the beginning. And the interest rates, well, I guess we'll see in this business, instead of the 3% you're getting for your 30-year fixed mortgage from, you know, from rocket mortgage, you're paying 13%.

So that's where the spread happens that these guys make their money. So cool. Yeah, that's exactly, I think that's exactly how I understand the business works as well. By the way, I will read the compliment at the beginning of the email that we got from this listener. You guys make entrepreneurship through acquisition so much fun. I listen religiously, keep up the good work. So just so you guys know, you're changing the universe. Amazing.

We've turned something that is quite boring and esoteric into something that is lots of fun, apparently. We're a small subset, which is really the goal, right? Yeah, yeah. Well, I think that's the key to a successful podcast. You pick the niche that you're going to go after and you just nail that, right? And I think we're doing a good job of that. To be fair, we're doing the easy part, right? I mean, we're not actually closing on any of these companies and running them.

So it's real easy from the cheap seats. Yeah, yeah. We're just shooting the shit and throwing rocks. Just move on. Cool. All right. So reading from the submittal here from the listener. So here's the hard money lending deal.

There is no teaser, no broker, no SIM, so no confidential information memorandum on this one. The seller is handling it. himself. So this is a seller, seller brokered deal, basically. They are asking $10 million for the business. It is located here in Texas. There are three employees. The owner claims to be absentee and a person who is the C-O runs the business day to day. So they have a book, so that's their loan book of 22 million, of which $7 million is their equity, and $15 million is off book through other investors. So I read that as they are managing money for other people that they are lending out and then $7 million is their equity. They're basically administering the loans.

Yep. So they don't take any risks if the loan defaults on the offbook business. So they are not responsible for the $15 million that they're managing for other people if there is dead loss or loss on those deals. They administer the foreclosure process on behalf of the investor, but the house goes to the investor. So remember, these are loans to allow somebody who's fixing and flipping or building a house and that sort of thing for a year. These will be a short-term loan. So if there's a foreclosure, meaning that the lender needs to go get the thing, this company administers it, but in the end, they're just a conduit for the portion of their book that is third-party money. Mostly loaned against single-family houses to LLCs, so they're not owner-occupant. So like Bill said,

they're fixing flippers. And then they run a couple loan products. So one is a 10% interest rate that is a three point origination fee. So that means three percent of the loan amount gets charged as a fee when the loan is consummated. And that's a six-month term with one point to extend for three months. So that means that you pay extra percent to get another three months at 10 percent interest. Then they have one that is higher interest rate at 12 and a quarter percent with a two-point origination fee, six-month term, same kind of one-point thing. And then they charge a $1,500 processing fee on top of all loans. So just kind of thinking about the math there, if they were to loan $100,000 to somebody to do a fix and flip, they would charge a three-point origination fee. So $3,000, at the time

the loan is done. And then they would charge $1,500 on top of that for the processing fee. So $4,500 on $100,000 loan. And then interest would be 10% annually. So if you had the loan for a year, you would pay $10,000 in interest and still owe all the principles. So these are interest-only loans. The way I kind of math it out was that those origination fees, it's a six-month term, so you kind of double it to get to an APR. So both of these loan products are roughly 16% APR products, kind of ballpark. And you just got to choose whether you want a higher interest rate in the lower upfront fee

or vice versa. Yeah. At least here in Texas, the maximum non-usurious, so there's a limit to how much interest you can charge is 18%. So just FYI. I don't know what it is in other states, but I know what it is in Texas. So let's see, hear a bit more about the deal. Their default rate of loans that don't get repaid and they have to foreclose on is less than 1%. The seller is motivated to sell. He is a young guy, probably in his early 40s with wife and kids, and he started this business from scratch about 10 years ago. he wants to cash out and go by hunting grounds. So like, I guess hunting grounds like you go shoot things,

deers and buffalo and stuff. Probably hogs, because I think it was in a place where their hog hunting is big. Dude, all of Texas is hog hunting, they're a scourge here. Every one of my friends who is a hunter and has ranches is like, would you like a pig? And it seems like a good idea until you taste it, and it's not that good. seller is open to create a financing, seller's note, earn out, etc. And he said that this deal, the seller said this deal is not SBA financeable. So small business administration loan, financeable because some other person tried to use an SBA loan. And they said no from an SBA

perspective. And that's just because the SBA doesn't allow money lending businesses. It's explicitly disqualified. So that's not really a red flag. Yeah. Cool. Value of the company, value of the equity that the seller has in the business. So that's their own money and it is $7 million. That money is all loaned out at this point. Those loans are short term due within a year. And so the seller wants a dollar for dollar for all of those loans. And so he claims that you would get your $7 million back within 12 months plus interest if you just let those loans mature minus any defaults. So cash flow for the rest of the business is the off the book part of the business. So that's where he's managing money for other people. He pays those folks eight

on their money and keeps the spread. So 4% on top of that of the interest income. And that's how he makes money for the third party, third party money that he's managing. So let's see. So last year, they did about 400,000 in SDE, sellers, discretionary earnings after all of the income and expenses. So their net interest income appears to be, have been about 1.2 million last year. Running the business cost them 800K. And then so he took home 400,000. as a somewhat, somewhat passive owner. And then here our listener thinks that the multiples should be somewhat under four times SDE. So the maximum price, if you take a dollar for dollar on his, the seller's equity would be

$7 million plus four times sellers discretionary earnings. So 8.6 million max. So that's 7 million plus 1.6 million. And so that's kind of where the asking and price is that the listener here is suggesting. The seller's asking $10 million. The seller's asking $10 million. And it looks like our listener thinks it's worth 8.6, four-time seller discretionary earnings.

A bit of discussion here from our listener about risks. Obviously, a repeat of 2008 is a challenge here that they see borrower concentration and mitigation. I would imagine there's a lot of repeat lending that this guy does to the same 10 or 12 flippers that are doing deals. There could potentially be some stuff as he digs into the, loan portfolio that might be sketchy like, you know, brother-in-law deals and stuff like that, that sort of thing. So cool. And then any changes to rules, regulation and mitigation, knowing Texas right now, I don't

think that's going to happen. We have very strong Republican legislature. They're not exactly looking out for the consumer, if you know what I mean. And then closing here, it looks like the listener thinks there's growth opportunity so you could do other loan products, get involved in help with the flippers, you know, turnover deals faster by increasing loan turns, become more of a data-driven business, given that the seller claims to be totally passive. If there was some data-driven stuff here, you could start to do better marketing around that, better underwriting. And he used a bad word here to describe the

business, cover our blank. It's a fascinating. Wait, is this a family-friendly podcast? I guess so. It's good news. I haven't said the F word yet. I think I already swore earlier in the episode. So cool. Yeah. So that's kind of where it is. I know we had a question when this came through and we asked, we asked the listener, so this guy really wants to put money into, he wants to take all the money from this business and put it into hunting lands. And the answer was, yeah, that's what he said. So what do we think about this business? I'll also say one more thing about listener who, A, listener, thank you for giving us so much information. Really appreciated it. But I also loved how, you know, you talk to anyone long enough. and they'll show you a little bit of their crazy. At the end of the last email, the listener goes, but if you're a bitcoiner like me,

then you know the government will continue to print money to avoid a crash. Elected U.S. officials can't let another 2008 happen on their watch. It would be ludicrous of them not to learn less of the past. And I was like, oh, okay. Not relevant to this deal, but thank you. You're a bit coiner like me. The famous last week. By the way, he also says,

Gurdley, wow, I can't believe you responded. I am totally fan-girling right now. So I want that on my tombstone, Mills. When you buy that tombstone company and then when I die and you make me a tombstone, I want that on my tombstone. All right. Mills, what do you think? I have a question on this. So in the detail he sent us, there's mention of $400,000 in SDE.

But then below that, the 2019 P&L section, he's saying cash flow is equal to $2.7 million minus the $8,000. 800,000 equals 1.9 and then adbacks of 255 and he's getting an SDE of 2.155. Do you see that? I'm just not totally sure what the actual amount of earnings of this business is. And we don't have financials. We're just kind of going off what he said. But I'm getting mixed signals. Yeah. I kind of threw that away. That was 2019. All of those loans are repaid, you know, and relent at this point. So I just figured that probably in this business, when you have, have an entirely different business every six months. I'm especially concerned about trailing six

to 12 months. Yeah. 2019 feels like agent history to me. Which would be worrisome, right? If 2019 SDE was at 2.1 million and then he's basing it off 400,000 in SDE. I'm just, I'm wondering, right, there might be some details that we're missing. What's interesting is the seller basically came to us, I mean, the buyer in this case, the potential buyer came to us and was saying, hey, look, here's the deal. I want to get your take. But he's really, I think, trying to figure out, okay, I can't go borrow money from the SBA and I've got to come up with, you know, between $8 and $10 million. And I think it's probably a little bit of a flawed premise because if I were buying this, which I don't know that I would, I think it's a hustle, right? Which is what we called it

at permanent equity for a long time when we saw something like this. It's just a hustle, right? This guy is doing great. He's making a ton of money. I don't know really how transferable or how durable it is. But there's no scenario in which a buyer should go source $7 million of debt or equity financing and contribute it to the purchase in order to get it back in one year. No upside. Yeah, yeah, exactly. No upside. I mean, there's only downside in that, you know, the event of default is there. So what I would say first and foremost is you work out, and he says the seller's open to a creative deal structure, you work out something where he is collecting on the loans that he's issued. So all of a sudden, your purchase price theoretically

could go from $8.6 million to $1.6 million because there's just no reason for you to go source that much equity or debt in order to contribute it into the deal for it to just be erased in 12 months. Now, it does beg the question, right, of if you want to buy this business and you want to continue to do your own proprietary deals, not just placing capital for other people, you do have to have some equity, right? So you can't just go in and buy this business for a multiple of cash flow, and then your coppers are totally dry, and you can't actually originate loans. But, I mean, obviously, that's the way the guy started this business, and he's built up $7 million in equity somehow. But I just, I would say it's a little bit of a flawed premise. Don't buy it for the

inflated amount. Let that guy collect what's owed to him. He originated those loans. He knows the creditworthiness of them. And let him earn dollar for dollar if he thinks that they're that good. Yeah. So. when I see a business like this, I see a gold mine of kind of structuring opportunities, right? I mean, this is just purely money in, money out business. So you can almost make it look like a security. I think, so Mills, you've identified the primary question that this guy wants to sell loans at par and the buyer has only downside and no upside.

But I think there's a super elegant way to fix this problem because this guy already manages what he calls off-book business. So you, the buyer, and he has an economic model whereby he splits the interest on off-book business, which is obviously straight up admitting that there is value from administering these loans. I mean, that's what his business is. Administering already lent money for other people and keeping a cut of the interest. So what I would do is I would say, great, I'll buy your business. That's $7 million. We're just going to immediately convert it to off-book loans. You just became an LP in my business for $7 million. And I will administer the loans

for you. I will collect them and I will keep the exact same split that you've been keeping on all your other offbook money and I will pay you the exact same split that you've been paying all your other LPs. And if any of these guys default, I give you the house and it's your problem just like it is with all the other LPs. And I think that's a really elegant way to just kind of hold the mirror up to them and go, this is obviously the market arm's length way to handle these $7 million because this is how you're handling $15 million of off book transactions. And I think what's also elegant about this is you have immediately converted this business to an asset-light business. Now you are just basically a loan originator and administrator.

So what I would be doing is diligence, he's got this $15 million of off book. And then you also just picked up another $7 million LP who's going to get that $7 million back and maybe want to relend it. So you got probably, and I know he wants to buy some hunting grounds, but you probably got at least $20 million here of capital that wants to recycle. And if you believe, and this kind of leaves me my other thing that I have a diligence here is, you know, is there a brand at all? Like, is it a hustle mills like you said? Or is this like a brand in his local market where people know him as the local hard money lender and are, you know, keep on coming back to him? If so, what you have is an ability to recycle $20 million at 16% IRA and keep what looks like a third of the income. So you could pretty quickly flip this into a kind of of a loan administrator and just raise more money, raise more LPs, and increase your loan volume that way and need much less equity. So if I were to buy this business and I agree with you, Mills, there's a lot of risk of, is this a hustle or is this a business? What I would look at is just by doing the transaction and immediately flipping it to an asset light model where this guy becomes

a $7 million LP, the seller does. Yeah, yeah, exactly. And I mean, you bring up a good point and he mentions this too, but, you know, this business basically goes away if that $15 million in LP commitments goes away, right? If you, you know, are assuming that's going to transfer and you don't necessarily have contingency plans, you've got a customer base, right, that I think is probably worth something if you like doing these types of deals. You've got people who are coming to you saying, hey, look, when I'm in a pinch and I need $250,000 in seven days, you're the guy I come to because you make my life easy. It's very clear terms. The fees are something that I can underwrite and get comfortable with. But all of a sudden, if your customers are coming to you and saying, hey, look, we did that deal last

year. I need another $250,000 in a week and you can't go source it. Your business erodes pretty quickly. So the investor base in this is incredibly, incredibly important. And I, you know, I just think that's a very difficult thing to diligence. You're talking about probably at any given time, you know, 50 to 100, if I had to guess, loans outstanding at any point, which also brings into the question from a closing and diligence standpoint, the assignment of all of those loans, I mean, that would just, the attorney would love it, right? Because from a deal cost standpoint, I think it's going to be very onerous to assign all those. You'd have to maybe find a workaround for that. Could you buy his entity?

Maybe you could do a stock purchase, but I would be worried about contingent liabilities. I think probably the better scenario is you let, you know, you let all the contracts burn off and all the new ones get, you know, actually done in a new entity. And you have some managed services agreement or something like that. Just the assignment of 100 contracts, 100 notes like this. Oh, geez. Yeah. I mean, you'd be having conversations with dozens and dozens of people. And it just, it would be a huge hang up to close. Yeah, even if the notes are assignable, you still have to have the conversation. I think we're backing into why do loan portfolios trade it at discount? Let me tell you why.

Exactly. And Mills, you know, what you mentioned here, so you got two pieces here, right? You got the $7 million loan book, which I think we solved for. And then you've got the, is the rest of the business, the SDE, actually transferable. And I think Mills, all of your questions are super valid because it's basically a book of relationships. It's a relationship on the LP side. And then it's a relationship on the customer, the borrower side, right? Are they going to keep coming back to you?

And it's, as you said, also, Males, impossible to diligence that. It's just, you just got to see if these people come back. Because a big part of it is trust. Like, when you need a large bit of money at a user's interest rate, you know, you really have to trust the guy lending it to you. And, you know, if you don't trust him, he takes the house you're working on.

You really got to trust him. So, I mean, I think this is just ripe for, again, another structuring to mitigate your risk. This is pure earn out. I mean, I would say, like, you know, the SDE part has got to be almost entirely earn out until over a year or two. It doesn't have to be a long earnout

because you'll know in 60, 12 months after your whole loan portfolio turns over a couple of times whether this business transferred successfully. So I would structure a short one to two year earnout for nearly the entire purchase price. And I would say to the seller, look, you're going to get your $7 million back plus some of the interest in six months.

And then you can get the rest of this purchase price in 12 to 24 months, assuming it goes well. If it doesn't go well, you know, you didn't have a business anyway. And I think under that scenario, I like that. I mean, the thing is the seller is a deal maker, right? So he's going to conceptually, I think, be along for that type of scenario more than just a guy who runs like an electrical or electrical distributor or something. You know, I mean, just some normal kind of non-deal related person.

So I think you're right. I think there is a scenario there. You could also, in that case, you could afford to pay up, right? There's probably a way where you could show him a path towards, hey, you are going to get $10 million here. You're going to get the $7 million that you collect. You're also going to, I'm going to pay you, right, maybe even double what I was willing to pay you before if I can pay it over the next three to four years. There's probably a home run scenario for the right buyer to do that. And I love being able to tell a seller, I'm willing to pay exactly what you're asking, but we're going to do it under my terms. Except the price. I set the terms. Yeah. Awesome. Cool. This is a fun one. You want to move on to our second deal. Mills, I think you're doing that one, right? Yes. Yep. So this business,

we got sent by a user. It's on Biz by Sell. And it's an interesting approach from the broker. So this is an equipment rental business that is in Colorado. It's doing about $2.6 million. Or no, sorry, asking price is $2.6 million. Revenue is just over $3 million. And cash flow is $760,000 a year. There's about 2.3 million of inventory. The real estate value is said to be about $2.2 million, and there's a substantial amount of FF&E, probably all this equipment that the business has to own in order to turn around and lease it. The business has been around since 2003. The interesting approach by the broker in this case is he gave a very, very detailed description on biz by sell that has a lot of his just, commentary about the deal, about the seller, about why the deal hasn't worked in the past. And it's probably one of the longest descriptions I've ever seen on business by sell.

Not joking. So I'm just going to read a little bit of the beginning and you'll get a flavor for it. And then we can we can kind of dissect from there based on our review. So right out of the gate, the biggest reason this business is still available is that the seller has made the sale of the business contingent on the purchase of the real estate at the closing also. For the first time, he has agreed to allow the property to be leased. Since this is a location-driven business, buyers for this type of business typically want to buy the property, so the seller will allow the buyer to have both a long-term lease and exclusivity to buy the

property for up to two years post-closing. We still think it makes a lot of sense to buy the property also. We are unaware of a better location. The earnings make this an inexpensive business, but he has to sell based on his age, health, the amount of time spent, and Alaska, mining, et cetera. The business is being offered for the current value of all the assets. The total current value of the vehicles and rental equipment is $2.3 million, which he gives the exact figure, but I'm just kind of rounding here, which are the foundation of the total value of all their assets of $2.7 million, which also includes furniture, office supplies, small tools, parts, and other shop supplies. He will offer the company for below the current value of the assets

at 2.6 million. 2019 revenues of 3 million with 760,000 in earnings. 2018 had revenues of 4.4 million and 953 in earnings. And maybe I'll just leave it there. We can kind of cherry pick some of the things that really jump out in this very long description. But what do you guys think about this from just at face value? Can you please talk about the broker's what he wrote in here about, I made the seller do this and I made the seller do that.

like this is the strangest broker I've seen. So basically the broker starts to describe how he's giving business advice to the seller, which I understand, right? He's trying to be helpful and he's saying, hey, look, there's room for improvement here. But throwing your seller underneath the bus and then, you know, driving over them and then backing it up and hitting them again, I just feel like it's a weird way to engender trust in the person.

who is built and created the asset that you're looking at. So he's basically saying, I made the seller get rid of his floor plan for the new dealership sales because a new buyer could not get a bank loan approved. He's just, he's, the commentary he's giving is really kind of bizarre, but it starts to verge on the fact that the broker has maybe gotten very involved in coaching the seller, getting involved in day-to-day operations, changing the business model, even it seems like a little bit, which just all the sudden my alarm bells are going off, going. How far has this broker gotten involved and how much has business operations changed? I wouldn't be the one to change them if they need to be changed. I don't necessarily want to

see, hey, we got five years worth of history, but by the way, the last six months are materially different. And here's all the changes we've made. That just tells me, if I go in and run the business, the team is going to be exhausted. And it's going to be like, you know, they're whipsawed from all these changes. One data point, and I thought Glenwood Springs would be over by Denver. It's not. Oh, that's western. It's far west.

It's far west. So when they talk about this being very location dependent, I think what that means is, this is the only equipment rental place out in the middle of BFE, so we don't have a ton of competition. So that is something worrisome about this business. Well, he actually says that, that there's no other equipment rental for 20 miles. And this part of Western Colorado, Glenwood, there's a lot of oil out there. It sounds like from reading the description, you know, he's selling into a very, or he's renting

into, I should say, a very specific industry. And he even mentions kind of growth opportunities of a pipeline coming through the area, et cetera. So I think you've got to real, I mean, Mills shaking his head. Like, you know, we're like, I think we've read enough news headlines about how easy it is to build pipelines. If I had a dollar for every time I was pitched a business that was basically riding coattails on the energy industry, I mean, it's great, right? And it can be very, very good, but it's totally boom or bust.

And you look at what happened over the past few years with just the price of underlying commodities and how that impacts the ability for some of these major pipeline or, you know, exploration and discovery businesses to spend on CAPEX. and I mean, I've seen it in dozens and dozens of companies financials, that they are just making money hand over fist and that it evaporates really quickly. So I just, yeah, that's why I was shaking my head to be a milly. I also like that, you know, talk about everybody shows you they're crazy if they right, go on long enough. This broker went on for a while and revealed that the owner spends five months a year

gold mining in Alaska. and that is by the broker's assessment why the business is depressed and could do so much better. And I haven't seen the financials, but I would be willing to bet there's an ad back in here for improved SDE if you do not spend five months a year of gold mining in Alaska. There might also be some gold mining trip expenses on the P&Ls. I would bet. I would bet. I love that the broker too says equipment companies are typically, quote, fun businesses to own. I don't know about your idea of fun.

But here we go. Yeah, no kidding. To talk a little bit generally about this kind of equipment rental industry, so he's basically, and you see this all the time when people are selling asset-heavy businesses, they will list the value of the assets. And they'll go, look, you know, you're buying this business for the value of the assets. And then you get in there and you realize that all the dump trucks are 20 years old and, you know, they're going to have to be replaced in five years.

And he's carrying them at purchase price or valuing them at purchase price. So whenever you buy an asset-heavy business, you really got to get in here and go, what are these assets actually worth? Now, what did you pay for them? What are they worth today? What do they cost to upkeep? And then also, when, when, not if, when is the big bullet coming down the line where I have to replace all these assets? And what is the purchase price of those? And how does that fit into my model? So it's very easy to go, oh, I'm buying a, get the business for free, buying the assets. That is obviously never the case. It is interesting. The lead here is different than what they actually do. If you look at this, it talks about this being an equipment rental business. It is equipment rental plus equipment sales, plus equipment service, plus a customization business, which they will actually produce custom equipment to rent to these folks in the oil industry. So given this scale, you know, this looks like I would dig into understand. Is this one of those businesses actually a potpourri of five different things?

rather than what the title claims to say it is. Yeah. Bill, you bring up a good point too, just going back to that, because it's a matter of timing, right? This seller has probably been great at getting all of the life out of these assets. If you're in this business, that's what you have to do, right? If the asset has a five to seven year life, you're making really great money if you can get 10 years worth life out of the dump truck or the scissor lift or the boom or whatever it is.

the issue is even if you can squeeze a little bit more life than he has out of it, which is not the trade that I want to make because that guy's way better at it than I am. It's only a matter of time. All of a sudden, you have a $700,000 EBITDA business. And guess what? When the new dump truck has to be purchased, when the new boom has to be purchased, when the new forklift, like you're coming out of pocket or you're going and trying to finance that. My guess is this guy probably has not financed that much,

just because most of these older kind of baby boomer owned, businesses. They pay cash for this stuff. It doesn't bother them. They want to know that they don't have this debt hanging over their head. So their margins are awesome because there's no interest expense and there's no principal amortization on the asset. All of a sudden, your $700,000 in EBITDA goes down to maybe $500,000 or less, right? I mean, I looked at a business not that long ago here in the southeast. They were doing $1.2 million in revenue. Three years ago, they spent $2.8 million on heavy equipment in one year. There's just no scenario, right, that I want to be in that squeeze.

And my guess is that on equipment rental, it's going to be the exact same way. I think a way to normalize that would be you essentially have to totally re-forecast the financials. But I would go back and say, what did you pay for this? And then recast the financials as though you had financed it and kind of estimate a terminal value. And you recast the business as though all of these. assets were financed because that's probably what you're going to do when you when you

rebide we have to replace the assets and so understanding what the business looks like if he didn't own all of his assets free and clear and they were financed then you figure out a terminal value you know kind of at the end and that might be some you know actually the value of the equipment but you're going to be able to then understand how much principal and even principle and interest payments you have to kind of take out of your cash flow and by the way this i know it's a brand at permanent equity is big on this, the difference between EBITDA and cash flow. This is a business that needs to be bought on cash flow, not on EBITDA because of the heavy equipment, the interest to finance it, or the depreciation, which is a proxy for having to rebuy it every so often.

Yep, yep, exactly, exactly. Yeah, EBDA minus CAPEX in businesses like this, the delta is just significant and severe. This is, you hear this kind of anecdotally with different things, but another area where my alarm bells are going off is how much the broker is telling you how good this deal is. Now is the best time to buy this business. This business is such a great deal. You know, like, it's just, it's like that idea of if somebody's telling you how many times they're trustworthy, like you kind of start to call into question, why are you emphasizing your integrity stuff like, you know? And that's kind of the feel I get from this. It's like there's a lot of smooths going on. Yeah. I forgot who it was, but there's the, why am I the lucky person question

you should ask yourself? Why am I the lucky person to get to buy this? Like, make sure you understand what that story is. And if it doesn't make sense, maybe you should think twice about the deal. Yep. Yeah, exactly. And I want to say, like, we're, like, we seem to be asking a lot of questions. Like, equipment rental businesses can be good businesses. It's just entirely about whether they're run professionally and all the assets are accounted for properly. And the purchase price is fair. and structured correctly. It's not that these are bad businesses. It's just that there's a ton of gotchas. There's a ton of ways to hide the ball in the financial statements of businesses like these that you need to be savvy to. Well, Ann, you're competing against there are known national

competitors. Equipment share, which is based out of Columbia, Missouri, where permanent equity is, they've got a great business model, but also United Reynolds. I mean, United Rentals is maybe not in this specific town, right? But they're all over the place. And they've got, got a much better, more sophisticated financing arm, and they can go borrow for way less. And so their costs and their overhead is going to be less than yours, and they can probably afford to charge less. And they're just better at maintaining and managing the fleet of assets that they have. I just, I think it's a very, oh, it's just kind of a scary proposition to me. Let's take this. This is back to the dumpster rental business, right? If you, if you are interested in

this business, go back a couple episodes and listen to our dumpster rental business. business episode where we talked about, you know, how you have to manage these asset-heavy businesses. Yeah. Yeah. If you're a good operator, it's not a bad place to be. So I dig it. Okay. Well, I think we did awesome today.

I am surprised that we like the hard money lending business better than the equipment rental business. But after after action, I think it makes a ton of sense why we liked one better than the other. All right. This was a good one. See you. See you. Bye.