Acquisitions Anonymous - #1 for business buying, selling and operating - A $5mm Grandstand Installation Company in Midwest / A $780k Bookkeeping and Accounting Firm - e25

Episode Date: April 13, 2021

Joined by our special guest, Hayden Cohen of Effectual Ventures this week.We talk about two small businesses currently for sale, both listener submitted:- A $5mm Grandstand Installation Company in Midwest - A $780k Bookkeeping and Accounting FirmEnjoy!-----* 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, is this thing on? I think it is. It is. Here we go. Welcome to the podcast. It is Acquisitions Anonymous. We're very excited to be here. I'm one of your co-host, Michael Gurdley.

Bill, as always, is with me today. Delessandro. By the way, one of our listeners, DM'd me and was like, you need to list everybody's last name. It's like, why is that important? How many to put Bill in Twitter and figure out who this is? And what's spelling my last name?

At Bill D.A. and so and then unfortunately Mills had a personal issue who's who's our third co-host and hero of the podcast and he couldn't make it today. But we do have an amazing last minute stand-in guest in the form of Hayden Cohen. And Hayden, you want to take a minute and kind of introduce yourself and what you do today and why I made you come on this podcast? Yeah, for sure. I'm Hayden. I've been working with Michael for six months on a project we're calling Effectual Adventures. So I've been helping out with the Toro Coffee project that he's posting about on Twitter and some of his other personal stuff. And then we're working on starting some businesses together. So he asked me to be on, bring the beginner's mindset to the podcast.

Glad to be here. Glad to have some hopefully not dumb questions. I think there is, as Bill said when we were doing prep, there are no dumb questions and we're excited that you're here. And now I'll be up late tonight trying to figure out if you're doing this because you feel like I made you or you really wanted to. So hopefully you really wanted to. You could always say no to me. Cool. Well, we have two deals today.

They are both listeners submitted. So which one do you guys want to start with first? Grandstands or the CPA form. Let's start with Grandstands. This one's unique. All right, so Grandstands. So Grandstands is a business that is located in Pittsburgh. This was sent to us by a listener.

It is basically a company that designs, and installs as a contractor, those grandstands that you see inside of, you know, sporting events or anything like that. So from a size standpoint, they do $5 million in revenue. We just have a teaser. Their free cash flow is a little bit over a million.

So $5 million in revenue, and they generate about a million in cash a year. And EBITDA, it matches cash flow, so about a million. So $5 million top line revenue, a million in terms of profit. So company is about 15 years old now. They are a highly reputable designer, specialty contractor, and installer of grandstands for high schools, universities, and minor league sports.

Additionally, the company has general construction capabilities and is very profitable niche market and is expanding into broader construction roles going forward. They are an authorized retailer for a brand called GT, so Golf Tango Grandstands products, and they are able to procure leading products to better serve its customer base. I'm reading from the teaser here. So strengths of the company are superior industry reputations, strong customer and supply relationships, exclusive brands, regional name recognition, comprehensive industry expertise, and a solid management team. And the broker, shockingly, believes that it is well positioned for continued growth. Some of the things the broker likes about the business, zero employee turnover in 15 years,

which is worrisome. Makes me wonder if they have a low standard of employees. It's a stable, long-standing business, very well-known. Management is willing to stick around and help foster transition, though it sounds like they want to move on at some point. More on reputation, more on relationships. They also have existing customer bases in terms of athletic complexes and stuff like that. Let's see what else is here.

And then the broker thinks that, of course, the thing can grow very rapidly after acquisition to increase revenue and profit, including leveraging the company's proven reputation, to pursue and penetrate new and existing markets. And then growing in terms of EBITA growth rate has compounded 56% in three years. So this is a business that's getting bigger. And the broker likes that it is a capital light business. So the need for capital expenditures is minimal going forward. It looks like the manufacturer makes these things.

They're an exclusive dealer of them. And then they installed them using their staff and their designers and going on from there. 16 people and the owner wants out because he is he or she is 70 plus years old. And that's what we know about this one. So what do you guys think? Let's start with Hayden. I don't want to, I don't want to poison the well here. Hayden, what jumps out at you? The first thing that I think about with this business is how often are people installing grandstands and then in terms of their revenue builds? How much of it is services based just on a project basis and where are they making recurring or reoccurring revenue. I can't really think of tons of things beyond continual

service of the bleachers that they're installing. Well, one thing that occurs to me in having sat in bleachers before, especially fiberglass ones, is they have to be renovated on a regular basis. These things are getting beaten down in the sun. You have very chubby Americans sitting on them. You know, they're not lasting forever. So I think this is, this is most likely a reoccurring business where you're having every five years, you know, being able to bid on the replacement of these things, but definitely not a recurring business. Now, I do wonder if there's some sort of maintenance or anything like that that's part of it, but given modern construction today, I would be surprised. I also wonder about kind of service radius, like how many bleacher installations are there

kind of per capita? You know, I would think one of the ways you've got to get bigger is you just got to be willing to drive farther and farther. And I also wonder if maybe GT grandstands, maybe you have a territory. Maybe you can't go outside the territory. Maybe they got other distributors in Philly or in, you know, in Ohio or wherever. So I wonder if like this kind of, I wonder if this just is what it is, you know, like you do all the grandstands in the Pittsburgh area. And it's like a really nice, you know, you're the go-to guy. Every GT install grandstand is Pittsburgh is you're maintaining it, you're replacing it. Once every 20 years when they build a new stadium, you're clear choice, you know, and it's kind of a nice gig. So GT grandstands is actually in, they're out of

Florida, decidedly not that interesting of a website. And I didn't really understand this until I looked at their website. They don't, they don't only do the seats and the stuff above. I guess this photo that we saw here in the teaser is these chairs and the grandstands actually just put into concrete. The other thing they do is, you know, the kind of the metal, like if you're erecting grandstands from the ground surface, they do that as well. So like the high school footballs kind of field, like a high school soccer field kind of where they just set them on the grass next to the field. Exactly. So the IBMs and all the angle frames and all that kind of stuff are part of it and then those things above it.

So here they have a picture of one that's 16 rows, two double stair towers, and a 216 feet size grandstand for $1975. Given how expensive it looks like these projects are, just looking at some of these example grandstands, like that looks like a $2 million grandstands. stand. I wonder how many, like, now that I look at this, I'm like, wait a second, this is a pretty small contractor. If they're only doing $5 million in revenue.

Yeah. Two projects a year, tops? Yeah, like with 16 people, like that, that has me worried. So I would definitely look into this one in terms of how many customers and jobs they're really doing because if you have two jobs a year and you lose one of them, that's pretty, pretty nasty with your, for your bottom line. The other thing that kind of made me pause reading his teaser, as you said, EBITDA has compounded, what, 57% over the past three years?

Which means, I mean, that's significant EBITDA growth. And he's owned this company for 15 years. So I immediately want to go, what changed in the last three years that it started growing so much? You know, are you lip sticking this up for sale? Or did something fundamental change in the market? And that's good for me, the buyer? You know, I'm not saying it's negative. I'm just saying that's something I would immediately want to understand is clearly there's an inflection point.

And in this case, the inflection point is probably going to be a year or two earlier than the trailing financials that they give you. Because typically you're going to get two or three years back. And it sounds to me like something happened probably three to five years back. And I'd be asking about that. It's also interesting on the GT website, which I pulled up, given their dealer for these guys. GT does two things very interesting on their website. One, they don't talk about how they have any dealers

whatsoever. And two, GT on their website tries to sell you, bleach your installation, project management. GT is on their website competing with you as a dealer. Well, they could be selling the lead. I hope so. Yeah. So hopefully

that that's what they're doing. This business that we would be buying kind of has no customer facing and maybe all the leads come from GT and they get farmed out to us. Yeah. That would be the charitable interpretation. All right.

So, Hayden, you ready to be in the grand stay and installation business in Pittsburgh? Not yet. Not yet. I'm definitely concerned about the customer concentration like you brought up earlier, thinking that I'd really want to understand, you know, what the customer profile looks like and how often they're doing this, doing installations. It feels like it's got to be pretty tough.

Yeah. I mean, you definitely could have some of the feaster famine situation of contracting, rank because you're project-based in terms of how your revenue comes in, how do you not have a down year, right? And I have friends that own specialty contractors like this. And some years, it's total feast. And some years, they're like, hey, I need a loan. And it's rough. Yeah. Interesting. So that's a fun one. Turns out you can make a buck in America a lot of different ways. So that's my favorite part. Isn't that cool? Like, looking at these deals, you're like, it's a business that makes a million dollars a year just in Pittsburgh. And they put in

high school grants. That's a job. This guy's 70 years old. That's his business. I think that's so cool. I love to see these things. Yeah. Well, and then he also gets the privilege of making sure 16 people get their paycheck every

two weeks. Congratulations to him. He's a job creator, 16 jobs in Pittsburgh. So if you had to kind of guesstimate where something like this might trade before you dig into it, what, what y'all's gut feel? I would actually guess lower than you would think. there may be some kind of committed pipeline.

I bet this stuff doesn't just come out of the woodwork and you install it the next month. So I bet it would trade for kind of the value of the pipeline plus a little bit. Unless there is some sort of you just can't get this GT grantstands license from anybody.

Unless there's like real value in that and it will transfer. And by the way, this is almost like buying a franchise. You would need to be really sure that the GT grant scan license was going to transfer as part of the acquisition. If that is a stronger moat than I think it might be, then this might trade for a little bit more. But I would guess kind of 2x is probably where it would come

out. What do you guys think? Hayden, what do you think? Yeah, my initial thought was around maybe the 3x EBITDA, multiple. You know, I'm looking at the portfolio on their website. And if you think that they're getting revenue consistently every year through maintenance or renovations of their existing portfolio, and there's some consistency in cash that they generate. And they're probably developing new projects. You can think that it's a sustainable business. But definitely want to understand how their EBITDA grew so much over the past few years before kind of committing to that evaluation.

Yep. It's interesting. If you type into Google GTE grant stands for sale in Pittsburgh, I don't know if this company even has a website. Yeah, I think they might just be back end for GT. I think GT is just sending in the leads and they're doing it. Yeah. All sounds good.

Oh, man, this is from our buddy, Faraz Ali, by Biz Sell. He's like my favorite broker because he's just got like the funniest personal photo. Look at me. Look at me. I'm wearing a tie, but I didn't button the top button for my photo. He's probably listening. He's awesome. We do like you.

Your Sims are great. Yeah, you're right good Sims because I just get to read them on the air and don't have to do any work. It's fantastic. All right. Yeah, I was going to guess, just like you said, I really want to dig in to understand how predictable is future revenue. And that would cause me to be anywhere from kind of one to three times, you know, the SDE, sellers discretionary earnings. So pretty fun. All right, we'll move on to the next one. I think we kind of don't hate this one. Don't hate it. For the right buyer again, like if you want to live in this area and you want to, you're probably not going to 10X's business. But if that's okay with you, rock and roll. I'll tell you it's a better business than being like a resident.

residential small-time home contractor. You'd rather do this any day of the week. Okay, so moving on to number two, we have another listener submitted deal, and this is from a self-funded searcher. I will kind of go through, and this got submitted to us over a month ago. So we have, or not over a month ago,

about two weeks ago, and we've gotten some updates as it's gone along. So if this kind of sounds like a little story, it's because there is a little story. So I got a DM from this guy, he'll remain anonymous. He's a self-funded searcher, so a guy out looking to buy a business using his own money and asked him to send me the teaser and that he had information he has. And he said, he didn't have a teaser because he found this deal through cold outreach. And he said, but if I was a broker, it would read,

this deal is an accounting and bookkeeping firm that has grown studly since 2017 with key employees in place, recurring revenue and a 20% net profit margin. The owners are ready to retire and have not been involved in billable work for the last 18 months. So it's an accounting and bookkeeping firm. High level details. In 2020, they did $780k in revenue, so $780,000, and sellers' discretionary earnings was around $156,000. They do all of their work from bookkeeping and accounting. They do not do tax or audit. So they are not a full service CPA firm. They have stable clients and a solid team in place. The searcher said that he started his offer. at 950k with 10% down, 15% owner finance, and a 75% SBA loan.

And then he gave us the 2020 P&L. So I'll pause there before we kind of dig into the P&L. Like the deal structure. A little SBA. So SBA loans are small business administration loans. They are personally guaranteed. So he has to put some of his own money down and he's got to borrow the rest and pay it off over time.

One thing that I think that's interesting. So again, he's going to 75% debt from the SBA, 15% owner finance and 10% down. What folks that haven't done SBA loans might not always know is that sometimes if you're, if you need to count the owner financing as equity, you need to be on what's called full standby for 10 years. So you can't even get any payments. It just has to be like mezzanine, pick only accruing debt, full standby for 10 years, which is the which is the term of your SBA loan.

So if you can get your seller to do that, which I have only seen happen, I think, once, because that is some very unattracted debt if you are the lender, if you're the seller. But if you can get your seller to do that, the SBA will count that as equity. So in this case, I don't think he had to do it because he's got his 10% down. But in some cases, you can actually put down almost nothing if you can get the seller to agree to that really aggressive seller. So just an interesting wrinkle on the SBA process. very cool. You said you love the deal structure. I looked at that and immediately thought that the original purchase offer was really high. I think it was 950. What do you look at there that that makes

you think, you know, that's a good deal structure, good deal. So I like the structure. I didn't say anything about the price. I mean, I like that he's only having to put in 10% equity. The seller is willing to basically roll land 15%, which tells me that the seller has some confidence. in the ongoing prospects of the business. And then he's able to get an SBA loan, which he's going to have to personally guarantee, but the terms are fantastic. So I think from that kind of structure,

that I feel very good about the structure. Of course, if the price is 4x too high, that blows the correct structure out of the water. So I think maybe we'll talk about price when we learn a little bit more about it. Yeah, I agree with you, Hayden. Totally. I'm like, oh, this is expensive. Cool.

So we also got sent P&L. So last year was $780,000 in total income. Payroll was $430,000. So this is services firm. So all in in terms of cost of goods sold. So what it cost them to deliver the services was $511,000. And then they had a bunch of GNA stuff on top of that, which was another $117,000. Their net ordinary income from the business before other expenses, which we'll dig into here in a minute,

because this where it gets interesting, was 150,000. So before kind of oddball stuff, they just high level, they did $780,000 in gross income for the year, cost them $511,000 in variable costs to do that. So computers, internet salaries, payroll taxes, all that kind of stuff. Then they had a bunch of other GNA stuff. So that was $117,000, which means after the $7,000 revenue came in, that net ordinary income of $150,000.

Then below that, they have a bunch of other rando stuff, which starts to get me really worried. So they have, for this CPA firm, they have $11,000 in farming wages and materials. Feed and seed. This is a CPA firm. This is stuff I expect to see in a cattle farm. Weird penalties, meals, travel, utilities, interest expenses, automobile expenses, life insurance. I'm guessing maybe they're trying to add this stuff back in. Yeah, I think they're trying to bridge to, like,

like an SD number here. Yeah. And then they add all those new expenses in, and then they put in 112,000 in PPP loan forgiveness. So after these rando expenses come in, then the PPP loan comes back out and they ended up with $155,000 in net income after all that's said and done on the official P&L. The other thing that's wacky about this is for being a bookkeeping firm, these are not the best financials I've ever seen. There's some random, like, do you guys, could you guys put a little bit more detail in this so we can understand it?

No, no, we're a bookkeeping firm. We don't do books. Yeah. I don't know about this one. It's also a super competitive space. Yeah. Like, yeah, it's semi-sticky. Like, you don't want to leave your bookkeeper.

But have you ever met anyone that's, super happy with a bookkeeper either. I feel like everybody's like kind of, you know, one eye open looking to see if maybe there's actually a bookkeeper that's great, you know, they could switch to. And everybody eventually ends up getting big enough to higher counting full time in house and then they're happy. So I would just worry about, you know, and there's no contracts. Like you don't sign like a, you know, your deal with your with your bookkeeper. So I'm just a little, would be a little worried about this industry broadly. Yeah. Well, let me, we have one more submission. So the, the, the, the, the, the, the, the, the, the, the, the, the,

The searcher gave us his analysis of the deal, which puts some color in. So let me share that. So, you know, this business, in theory, did $155,000 in net income. He thinks the strengths of the deal are healthy recurring revenue. So you have these clients that are pretty sticky and stay with you, despite being somewhat unhappy, to your point, Bill. They have senior team members in place. They're already virtual. Remember, they had $70,000, I think, in rent last year. Potentially they could get rid of that. He thinks there's an opportunity to upsell to fractional CFO and consulting services. The searcher himself is not an accountant, but is somebody who thinks that he has

strong B-to-B services, sales, and marketing jobs, so he can go and sell the stuff better than the seller's good. They are getting good rates, $85 to $125 an hour in terms of what they're billing. And then he thinks that they can be a good referral source from CPAs just because they're bookkeepers. And there's no offshoring. So he thinks that if he goes offshore

could really improve margins. Risk of the deal, searcher is not an accountant by trade. Searcher does not live in the same city of the office. It's a family business, so there could be employee chair and post acquisition, not a lot of cushion for debt service if the business declines. And he also noted that there are a number of highly funded startups, Pilots, Zendu, others in this space trying to tackle small business accounting and bookkeeping.

I can't tell you we use Zendu for a while. Hayden's got an expertise in that. It's not so great. But, yeah, I mean, it's probably not significantly different from other bookkeeping. services. Question. It says on the risk here, searcher is not an accountant by trade and searcher is not living in the same city as the office.

Is our listener here investing in a search fund deal here or is he the searcher himself? He is the searcher. Okay. So he's just talking about himself. Yeah, he's going to search this and run it. Okay. So he's about to become an accountant.

He may not know bookkeeping, but he sure shit will soon. Yep. Which is fine. I mean, I don't think it's crazy to buy a business. you know, as a searcher that you're not super well-versed in, not as long as you were committed to getting well-versed. You know, buying a business and industry that you hate and want nothing to do with, that's probably a problem. Yeah. On those risks number three and number five, it being a family business with concerns about churn after acquisition and competition with startups that are just

going to grow and spend more and more in marketing really concern me with this one. I think they outweigh a lot of a lot of the pros that they're mentioning. And I would not be so worried about it if there wasn't a big trend happening where more and more of this kind of bookkeeping is turning into like a mullet business where you have a team of Filipinos doing all the back end work and then you have one guy in the U.S. who's the face of the whole thing and like either this business is going to have to go there or that's the future. I love that phrase. That phrase hilarious, a mullet business. It's business in the front party in the back, baby. Yeah, so much software debt has gone that way. So much.

Yeah, so I mean, that's the other, I'm glad he already sees that because that's where this has to go. I mean, unfortunately, kind of lives up to the thematic idea that if your job is standardizable and can be done over the internet, like start thinking about career 2.0 in the United States or be willing to work for a list. It's coming. I would also ask questions about X strategy on this one. You know, this is a professional services business at the end of the day, and sometimes they can be hard to sell. So I would on the way in want to feel pretty good about the fact that there's a market to sell this thing in five to ten years or that I actually want to be in the accounting outsourcing business for the next 30 to 40 years. and am I comfortable with what the industry is going to look like in 30 to 40 years? Can I even predict that, et cetera?

So I would be thinking about exit on the way end of this one. Yeah. Well, it strikes me that he is valuing this business at a price, which looks to be about six times N-OI, six times EBDA. He is valuing it, is my math right there? He's paying $9.50 and it does $150 in profit, right? Yeah, unless there's some major adbacks, we're not saying. Yeah, and that's with the PPP loan forgiveness baked in as well.

Yeah. So he's pricing it like it's something that's going to be an indefinite semi-permanent revenue stream when, I'm not so sure, right? That's really where digging into how sticky are these customers and how likely are they to stick around and how likely are your margins to stay there. That's the bet he's making here with the amount of time that, I mean, basically that's the time frame in which he's underwriting this deal, that kind of multiple. Again, you can't, like, if he wants to be an accountant, you know, or there's, there's something here that we're not seeing, but I agree, it seems super rich.

For 950, like, I would go, why not, and he's good at sales and marketing, why not, just go start one from scratch. Like, go hire a couple of bookkeepers, go, go start one of these mullet versions of this. Yeah. You know, unless there's something incredibly sticky about these customers, you know, he's already figured out how to go sell himself into more, get more deals, right? You have all these CPAs

want to give you bookkeeping services. Why the hell not? Yep, totally agree with that. Make a website, go out, get some clients, and then hire people on Upwork. Totally. Totally.

Well, any other thoughts? So Hayden, you're in on this one? You're out on this one? He's already committed to bleach your sales in Pittsburgh. Oh, yeah. He's tied up. You can't have it. I was committed before the show started.

All right. Well, Hayden, how can people stay in touch with you, follow what you're working on? You're on Twitter, right? Yeah, Michael tags me sometimes in tweets at Hayden, Jay Cohen. I should probably start getting more active on there. But feel free to reach out. That's awesome. That's awesome.

All right. Well, cool. Well, we wish the best to Mills's stuff going on. And if you're religious or even non-religious, have him in your thoughts. and we're hoping things turn around for them a bit. And we'll catch up with everybody next week. Hayden, thanks for being here, man. You were great.

And I really appreciate and Bill. You're awesome as always. Thanks, guys. It was fun as usual. See later. Bye, guys.