Acquisitions Anonymous - #1 for business buying, selling and operating - A chain of transmission repair shops - A FBA by Amazon maker of beard oils - Acquisitions Anonymous e9

Episode Date: November 9, 2020

This week we talk about two businesses for sale:- A chain of transmission repair shops on the East Coast of the US- A FBA by Amazon maker of beard oils 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, everybody. It is another week of Acquisitions Anonymous. We're going to go fast today because two of us have appointments in 25 minutes. So that means we'll get straight to the point. So here with my host, Bill and Mills co-hosts. So good morning, guys. And Mills, you have our first deal this week out of two. So why don't you tell us about it? Yep. Thanks, Michael. So this company is a transmission repair shop. It's a set of shops. They have three. relocations all in the southeast. It's a husband and wife who own it. They've got 12 employees. The business has been around for it looks like maybe about 15 years, started out with one shop, a few years later opened another. A few years after that, opened a third. Their 2019 revenue is about $2.24 million. And 2019 EBITDA is about $470,000. A lot of that is comprised of addbacks, mostly related to owners' comp. So they provide detailed adjustments in the SIM, but basically they're saying, look, owners are grossly overpaid, but they are including, I think it's $100,000, you know, for a replacement. So they're treating it right. Some of the adjustments,

you know, they're fairly detailed, fairly granular for adding back things like meals and entertainment, travel, health insurance, cell phone, all personal expenses related to those owners. There's not really any customer concentration. It's almost all retail focused. They do some general repair, but it's about 90% transmission related work. Two of the locations are owned by the husband and wife in a separate LLC, and one of them is leased to at least by a third party. And they've got a renewal coming up in 2020, so maybe that's already been renegotiated. they don't have an asking price. But yeah, what are you guys' thoughts?

I had a couple questions. Are they, and I didn't really see it in the materials. Are they wanting to sell the real estate too? Are they wanting to stay as landlords? Or did they put that? Yeah, they don't specify. And I haven't talked to the broker on this one. But what I've at least seen most common is, you know,

owners are happy to keep the real estate and lease it back. As long as, you know, maybe from a buyer's perspective, I would want a first rider or refuse. or an option to buy. In some cases, and I don't know if it would make sense in this case, but it could be really beneficial if a buyer was pursuing SBA financing. It could be really advantageous to also try and buy the real estate because it would provide a good bit more collateral for an underwriter to be able to put their hands on. But they do mention that they had an unsolicited offer on one of the pieces of property for about a million dollars. So it could

also substantially, you know, increase the purchase price, which could work in your favor, but also just from a cost of capital standpoint, it's probably better to lease for the time being. Yeah. And I think there's some appeal to all three locations that they have seemingly being in the same metro. So you're not dealing with, you know, one in one state and one in the next state. So that's pretty cool. Yep, yeah. And, you know, this is one of those things where to me as a buyer, if they say, hey, look, you can have this fantastic location, but in 12 months you're going to have to move. That would obviously be a big detriment

because people have been driving by these locations for years. They know where they are. They expect to see them there. If you did their transmission five years ago and they come back looking for you, I would really want the locations to be sticky. How much of this do you think, and I'm not super familiar with this type of auto repair business,

How much of it is owner dependent? I mean, are people coming back there because of who the owner is and how much they're known? Or is it much more transactional than that? You know, I think it's probably more transactional. I mean, it's not, it's not, you know, as personalized as a service as some other things. You know, like if it's a mom and pop plumber, you know, coming into your house and you always see this guy, right? And he's always the guy who comes in. and then all of a sudden there's somebody new,

that would be a little bit kind of jarring. But this is, you know, hey, look, my car's busted, my transmission's busted, and I need to get it fixed. You know, I don't, I'd be really curious, maybe a similar question is, where are referrals coming from, right? Is it just that people are Googling, what's the closest transmission repair?

Or is it that other general repair shops don't like doing transmission work and they refer it to you? then you could have one, two, three, referral sources that make up the majority of your business. So I'm honestly not sure, but it does seem like there's kind of a clear bifurcation. There's general, you know, kind of tire shops, there's general brake shops,

there's general repair shops, and there's transmission shops. And that's probably the extent of my knowledge when it comes to the nuances of auto repair. But it seems like there's not as many shops that are doing, kind of term key will handle everything for you. Yeah, that was one thing that I kind of thought about right away is how to customers find them. Is it primarily drive-by?

Is it primarily Google? So I went ahead and Googled their metro area and transmission. And they are in the top three-ish, but they're not at the top. And their website is not super well optimized. So I would definitely ask the owners, you know, how do people find you? And I would expect or I would hope to see kind of a nice blend. But what I would expect to see is that the owner has no idea. if other businesses like this are an indication.

I actually kind of love this one. Good. I'm glad I'm not the only one. I like this. It's very stable from the financials they've provided it. It's just like flatter than flat. Their mix isn't really changing. There's really no BS adjustments in it.

It seems to me like they've already made the jump from one location to three locations, which I think can be a very hard jump to make for a business. I also happen to know that in, not in this specific industry, but like oil change for a while was really hot for people to come in and buy chains like this and take them from three to 10. And then there were a bunch of private equity roll-ups that were rolling them up regionally. And a bunch of people made a lot of money in oil change that way. And I imagine there's probably some similar dynamics here in transmission. So I think for the right operator, if you could take this in, you probably, you probably

probably have the seed of something here that could go from three locations to seven to ten locations and create some real equity value. Yeah. Because it seems like, I mean, I think your biggest risk here is that it is run by the owner and his wife, but assume you can replace them and that, you know, as kind of you guys said earlier, there's not a ton of owner concentration, I think this is a cool opportunity. Yeah. Yeah. You know, one of the other documents that we shared with this is the fact that the broker in this case gives an LOI, they call it an LOI required clauses letter or, you know, I've heard other investment makers call it, you know, an LOI guidance letter. Have you guys come

across that? I feel like it's something we haven't really touched on, but I think they're helpful in one regard, but also you don't always have to play by the rules. It's kind of my impression. But did you guys see that? Have you run across it in the past? It's not something we've covered. I don't see it a lot. On one hand, I kind of liked it because it conveys, it conveys, is that the broker is running an organized process. On the other hand, I opened it with trepidation going, oh, God, what are they going to ask for? Yeah. Like, I've seen sellers insist on a stock sale or all kinds of things that they're just not going to get. But actually, upon opening this, it all seems relatively reasonable, although they even negotiated against themselves, in some cases,

you know, offering an escrow. There were just a few that I thought, oh, these were very reasonable. So, yeah, I actually like saying it. I don't see a lot. So just, skinny on this because we're the only ones who have it in front of us is that, you know, an LOI is made up of, you know, a dozen at least clauses. Overall valuation, the purchase price, cash it close, financing, all these different terms, right? Escrow, employment agreements, how's the real estate going to be treated? And the broker in this case is just saying, look, here's the things you absolutely have to address. You can't just tell us, oh, great, you know, we'll pay the asking price or we'll, you know, we're off.

this price, they want to know, how are you funding it, right? How much cash do you have available? Where's your financing coming from? If it's a, let's just say it's a $2 million purchase price, are you going to require a million dollars to be held in escrow for 18 months? Like, they want to get as level of a playing field across different offers as possible. It's interesting because in my experience, I don't always love abiding by LOI process letters because what they're trying to do is, you know, force you into the mold. And if you're trying to really create a relationship with the seller, if you're trying to understand more about them as a person and what they're trying to optimize for, this is almost

a little bit more sterile, right? It's definitely to the broker's benefit on behalf of their client, but sometimes they're asking you things that there's no way you could know it at this point, right? In essence, you haven't ever had a conversation with the seller. How could you specify some of the things that they're asking that are very material, right? How is the real estate going to be treated? What is their employment agreement going to look like, et cetera? So they're helpful, I think, in a certain regard, but they're also, they don't have to be followed to the letter, is I guess my encouragement. Yeah, I think a lot of the listeners would be interested. So, okay, so we found a deal that we like at this point. Like, Mills, what would be the next step you would

take here to kind of go see if this is something that makes sense? What would be your next steps in exploring this and finding out what you need to know? Yeah, so typically if it passes that first filter, I'm wanting to get on the phone with the broker and just understand more in the context. Hey, I've read the SIM. I've studied up on it. I have some specific questions, but give me the behind the scenes. What are the sellers like? In here, it says that they want to focus on other interests. I really want to understand more, okay? Does that mean they want to start a break? business, wise brakes better than transmission, you know, or whatever it may be. Maybe that they want to start flipping houses or something or just retire. But I'd want to talk to the broker and

then I'd want to fairly quickly either get on the phone or get face-to-face with the sellers in some kind of comfortable, non-threatening environment. Because first 10 minutes of that is going to tell me more than the sim in this case. Yeah. What price would get you excited about this deal? You know, I would in this deal, I would probably be more focused on the terms and the structure around the deal. I don't know anything about the comps, right, of a business like this. But, you know, if I got in there and started to understand there's a lot of employee risk, you know, there's 12 employees, but two of these guys really call all the shots, then I'd really want to find some way to insulate around that, some structure. something held back, right? Either an earn out or some short duration seller's note to make sure that this husband and wife aren't leaving because they know that their best guys are about to retire

or their best guys are going to follow them, right? Any of those kind of things. But I would be more fixated on the structure of this one than the price because I think, you know, I think you can probably meet their expectations of price. This isn't, you know, this isn't a recurring revenue business. It's not a software business. I think their expectations are probably in the three to five times range, even though I know this broker gives people off the expectations. I think probably in the three to five times range. And if they tell me, look, on 400, let's just call it $400,000 in EBIT, I'm expecting five times. I think there's probably a way you could structure it where you could pay $2 million for this. It's just not going to be $2 million cash in close.

Love it. All right. Well, let's move, Bill, unless you have anything on this. one, let's move on to your deal. No, let's move on on the other one. That's a good one. Something that we would actually bid on or pursue it. So this will be a positive episode today because the one that I brought is also one that I like. I will kind of give you the quick overview. So this is a hybrid Amazon FBA business, but that also does their own manufacturing as well as contract manufacturing for some other brands. So they make a bunch of beauty oils, they make, you know, serums for your face, they make rose oil, they make beard oil, they make vitamin E, they make all kinds of, imagine like, you know, one ounce kind of glass

jars with droppers in it. So all kinds of things like that, beauty products on Amazon, they are doing about 9 million in sales, about 3 million in EBITDA, and they're asking almost 15 million bucks. It's about a 4.5x multiple. So, strong, price, but it's a decently sized business and it's been growing pretty strongly from $5 million to a little under $8 million to $9 million at the time, TTM at the time of the SIM. And kind of, as you look through the SIM, they've got, you know, a ton of pictures of customers using their products, kind of Instagram style. They've got really good reviews on Amazon. Their cost of, or their margins are phenomenal. Their cost of goods is literally a dollar or two

on something they sell for 15 or 20 bucks. And they've got a bunch of customers. They've got 35,000 people who've bought from them. They've got a repeat order rate of 20 to 30%. They do about 95% of their revenue on Amazon. And they have their own Shopify store, although it doesn't do much. And then they've got about 20 contract manufacturing customers, although it doesn't state what amount of revenue comes from FBA

and what amount comes from the contract manufacturing. And they can, by the way, on the manufacturing side, they can do all kinds of, they say oils, lotions, you know, shampoos, topicles, kind of anything you want. But it is domestic, I should mention. So their facility is in the United States and they own it. It does not indicate that they're selling real estate with a deal or anything. But it seems as though there are definitely some assets,

some people coming into a building every day and mixing this stuff up, which increases your operational complexity, but also is giving them a cost advantage because they're not giving margin away to a contract manufacturer. Anyway, very interesting business. What do you guys think? Yeah, it's interesting, Bill, because if you come from the CPG space, and I don't, but if I'm approaching it from that as the stable base or the majority of their revenue, owning their contract manufacturing is a huge leg up. But if I approach it more from a contract manufacturing perspective, contract manufacturing is not

known for its margins, right? You're probably squeezed, right? And you're being shopped around and it's more commoditized because you all basically use the same raw ingredients per se and you can, you know, it has nothing to do with your brand, right? Somebody else is putting their sticker on it. And so I almost think that, you know, in this case, the whole is, you know, worth more than the sum of its parts because I think the contract manufacturing in this case is only valuable because is it's associated with at least one sticky customer. They have 20, but this one sticky customer is particularly helpful in making the other more valuable, if that makes sense.

Yeah, so that's interesting because what I'll tell you is we ended up passing on this deal because of the Amazon concentration, which is a little bit outside of our mandate, but I sent it to a friend who owns a beauty contract manufacturer, who was very interested in it because they could take out, they could absorb the contract manufacturing. take out all of that cost. And a lot of contract manufacturers, for exactly the reasons you mentioned, Mills, are really hungry to get out of commodity contract manufacturing and get into branded products. So a contract manufacturer saw this as a very interesting acquisition because there were a lot of cost synergies,

and they could buy their way into kind of vertically up the chain into a brand. Interesting. Yeah. So this is 98% Amazon. fitting on to how the math goes. So they said 95% Amazon US, 3 to 5% Amazon Canada, and then some other stuff. So it's 98% Amazon at the best case?

Yes, this is an Amazon brand. So how you feel about this will depend a lot on how you feel about 100% Amazon brands. I'm sure, Jeff, will take care of us over there. I mean, when is he ever screwed over a supplier, right? I mean, Bill, I'm interested because, you know, to me, I just can't figure out where's the value in this, right? And we talked about this before. But as a guy who doesn't really, I'm not a CPG person, to me, I look at this and I go, okay, I can't quite figure out where the value is.

And it also seems like it could go away, right? The threat of new insurance seems incredibly high because you're all, in essence, selling the same stuff. And the margins are high enough that somebody could come in and instead of selling it for $15, you could sell it for $12, and they could just eat into your search ranking on Amazon, right? Or they could accrue better reviews or whatever, all these threats. Yes, I mean, absolutely. So what you've just articulated Mills is kind of the line that divides people who are comfortable with CPG and people who are not. Because I can make all of those same arguments about, you know, tied detergent, you know, or Coca-Cola,

Right? I mean, Coca-Cola is just sugar water. I mean, yeah, they claim to have a proprietary formula, but at this point, you know, anybody can make cola. And you just kind of either believe in the moat of a brand or you don't. And, you know, whether that makes you comfortable or whether it doesn't, you know, that's kind of up the individual investor. My argument, and actually for the reason we passed on this one, is that I don't believe 100% Amazon brands actually have a brand moat because

if this brand were to disappear off of Amazon tomorrow, any number of their competitors would slot right into their search result on Amazon and start capturing all of their revenue. Whereas, you know, the CPG brands I really like are the ones that are, say, 50% their own dot com, 20% wholesale, 30% Amazon. If those brands disappear off Amazon tomorrow, the customers actually know the brand and are going to the website. They're going to see if they were to delete their Amazon account, they would see their website sales go up. Maybe not by the same amount, but by some.

Yeah. Interesting. So would you ever, in a case like this, basically go to the seller and say, hey, look, your business is not as valuable as you think it is, but let me help you migrate your business off of Amazon independence into an e-commerce-centric, or at least just more e-commerce related. have you ever approached somebody like that and said, hey, let me help you migrate in exchange for an option to buy or an exchange for some equity or would you ever approach it creative like that or is it just not worth the work?

It's kind of not worth the work because what you just articulated, I believe it's one of the hardest things in e-commerce is to take an Amazon. It sounds easy though. What? I said I made it sound so easy. You did make it sound very easy. Just migrate over to your own e-commerce.

Yeah. So that is actually one of the hardest things to do in e-commerce, and most brands have already tried. If you read the SIM, they do have a Shopify store, but it is so inconsequential, it's like 1 to 2% of revenue. So sellers, typically FBA sellers like this have tried, and they're just, they're not getting any traction. So that being said, there are a whole bunch of buyers in the market who don't think like me and will gladly pay Forex EBITDA for this business. This kind of Amazon FBA roll-up trend has been white-hot in kind of graduating MBA students and, you know, private equity circles for the past kind of six to 12 months. I mean, you've seen nine-figure capital raises. Companies like Thrasio, companies like Perch, companies like Elements Brands, my own.

There's a lot of capital in this space that are just rolling up FBA businesses, rolling up FBA EBITDA, essentially at 4X. and so yeah, like I could go to them and say your business isn't worth what you think it is, but actually it is. Not to me, like I wouldn't buy it, but there are enough buyers out there who like, I guarantee you this sold for North Forks.

There are so many lookalike brands to just this stuff on Amazon. I had no idea. I just Googled it and there are, you know, of this brand that they have for men's beard oil, they're number 15 or so that comes up if you type in beard oil and there must be another 200 or 300

of things that look just like them. Oh yeah. But I mean at the end of the day, they're doing $9 million in sales. They're growing 25% plus a year, $3 million of EBITDA. Yeah. Well, I think part of the interesting strategy here would be this group has created one brand and just gone with that per category that they're in, I would ask them why they don't have five, right?

And some of these actually have the hallmarks. If you look through the graphics on them, you can kind of tell when one designer does multiple designs and tries to make them look different. You know, it surprises me that this group didn't do that, right? Didn't come up with four or five different names for beard oils and then put them all on Amazon and try to get spots there. And so they just went deep in one,

which is entirely fair. fascinating. Yeah, I mean, what you just articulated, Michael, to some degree, is the fact that there are synergies, you know, having multiple brands, taking out multiple serps, you know, being in multiple categories. And if you'd like to buy equity in elements brands, the valuation is substantially higher than Forex. That's hilarious. All right. Well, cool. Hey, great one. It seems like this is when we like, but there is buyer sales company fit, so to speak, the equivalent of product market fit, but good for a different buyer, but not for anybody here. I'm sure someone bought this either a contract manufacturer or an FBI roll-up. I think Thrasio bought this one twice. That's what I thought. Probably, yes.

All right, well, guys, we are out of time today. Fantastic episode. We'll get this one up and see what the world thinks. And for our listeners, if you do have a deal that we should look at, as you can see, we are happy to talk about them anonymously. We did that last week. And if you have something we should look at

that's either private or public, send it over. we want to be talking through stuff that makes sense for everybody. And thanks everyone for listening. All right. Talk to you later. All right. Bye, guys.

That was good. Thanks.