Acquisitions Anonymous - #1 for business buying, selling and operating - A Crawlspace Repair Franchise for Sale / A Small Watch Broker Business - Acquisitions Anonymous e11

Episode Date: December 7, 2020

This week, we discuss two businesses for sale:- A Crawlspace Repair Franchise for Sale- A Small Watch Broker BusinessThanks for listening!-----* 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 December 2020. We survived a year of COVID, and it's time for another episode. I'm here with my co-hosts, Bill and Mills. And this is the podcast where we talk about a couple of businesses that are for sale, small businesses, and we analyze them. Sometimes we like them, but mostly we poop on them. And then, so today we have two deals to talk about. Mills, I think you're up first. You got one around crawl spaces. Tell us about it. Yeah, so full disclosure, I know these guys. They're here from my hometown in South Carolina. And yeah, so I'm going to try not to let my bias come through. But Cross Space Medic is a franchisor. So we talked about franchises, I think a couple episodes ago with Orange Theory. So Cross Space Medic is in the business of selling franchise units. But the real core of their work is doing wood rot, removing. vapor barriers, sump pumps, french strains, basically anything and everything in a crawl space. And the majority of their work comes as a result of kind of water-related issues or humidity issues. It usually comes up as a result of a repair addendum.

So if you're selling your house, you know, the buyer gets an inspection. And I would say more frequently than not, you know, there's some issues, some wood rot or you're, you know, you had something in your bathroom that was leaking and part of the floor needs to be torn out, which leads to an average ticket of about $3,500. I think what helps that probably is that if you're selling your house, a lot of times these things have to be done if the buyer is going to, or if you as the buyer are going to use a mortgage. Hey, Mills, maybe I'm just an idiot in terms of construction and stuff, but what is special about

this kind of problem case versus, say, just general construction and stuff like that. Like, what makes crawl spaces and these types of problems unique? Well, so I guess in particular, if it's coinciding with the sale of a piece of real estate, if you want to get a FHA loan, you have to have a clean CL100 letter, which just is basically saying there's no termite damage in the house, no active termite damage, and there's no active wood rot. So, you know, things like the gutters might be falling off or, you know, the house needs to be repainted or like, you know what, we have some shingles that are loose.

That kind of stuff, while it's important, it's still like fairly discretionary. When you get into the crawl space, you start to get into what I would say is a little bit trickier or higher technical area because of kind of engineering and foundation issues. And so you can't just go in and say, hey, we're just going to cut out these floor joists and put back in some new ones if you don't really know what you're doing. It'd be similar to like, hey, we're going to take a wall out of our house and hang, you know, a header and open up, you know, two rooms and make them one bigger one. Yeah. It's a little bit more technical than just, you know, hey, can I get somebody to put,

you know, ship lap in my den or something like that? That makes sense. Okay, cool. So there's a very, there's a very narrow kind of problem space here that requires specialization, kind of like a foundation, the equivalent of foundation repair as a subset of contracting. So totally makes sense. Yeah, exactly. So to get involved with the franchise, the initial upfront requirements they state are somewhere between $100,000 and $220,000. And some of that I think can vary on, you know, are you buying a pickup truck or are you leasing it, you know, the different tools. It's very kind of CapEx Light, though. You're basically talking about guys going down into a crawl space and doing carpentry. It's like wood framing. So you've got circular saws and sawsals and drills, but you don't

have to have like, you know, forklifts and big kind of fancy pieces of equipment per se. The average revenue per unit is about a million dollars top line. And they state that the average gross profit is, it's about $500,000. So about 50%. gross margins. So that just make sure I understand that they are indeed lumping the cost of delivering the services into their into their cost of goods sold. Yeah, my guess is it's probably all job costed, the labor and materials and then customer acquisition costs. But any, you know, general overhead and, you know, admin and all those kinds of things are probably not broken out into cogs.

Do we have a sense for the magnitude of that type of stuff for a typical franchisee? I think their average EBITDA margins are around 20%, maybe slightly north of 20%. So it's higher margin construction. You know, it's not a typical kind of GC or commoditized sub like interior paint or something like that. Okay. So your typical, typical guy is bringing in a million dollars at top line and taking home 200, 250 cat.

Yep, yeah, I think that's probably a safe assumption. So maybe we can rip off of this. We had some dialogue with the owner, and Michael, you had specific questions, but we can go in whatever direction on this. Yeah, well, so first of all, before we got in the air, there was a suggestion that I hate this.

I actually think it's pretty cool. So I want to be forced to. And the proof is I've sent this to a friend of mine. I'm like, hey, this would be a good franchise for you. So just as the person who seems to hate every deal, I want to tell you, I don't hate this one. But I think they're with all of these small contractor things, right, what I see is the value proposition for me as a franchisee is, like, help me solve the biggest problem with being a franchisee, which is how do I get a consistent stream of business? And that's why I was asking Evan and the guys that are promoting this and running it, you know, how are you going to help me? do that and he he didn't really give me i felt like a great answer so that was that was the one thing i'm

kind of like well like you mean you want me to do the digital marketing like i'm supposed to be a crawl space expert like why am i why am i doing that you guys should be doing it centrally so and that's maybe just me misunderstanding the value prop and the deck i know is just a draft so yeah so as are as are maybe i'll dub myself our resident digital marketing guy i actually did not think uh the description of how they did the digital marketing was that bad. I actually thought it made a lot of sense. So for the listeners, the way that, so Michael basically said, he said, I think the hardest part of this business is, how do we get leads? So, hey, franchisor, tell me how you help me get leads. And the way they do it is the franchisor will run kind of broad in-market ads, you know, to raise awareness of the,

of the franchisor, crawl space medic generally. But if you're a franchisee, you are responsible for doing what amounts to kind of your local Google direct response. So getting your business listed on Google local, they'll give you, they'll kind of help you set up a website, doing some local Google advertising. So when people search crawl space medic Charleston or crawl space medic Charlotte or wherever, they are going to come up towards the top. And then after you do a job, the franchisee is responsible for soliciting reviews to kind to build up their star ratings, adding pictures of the jobs they've done specifically,

etc., which is absolutely the way that local service digital marketing like this is done. It's all very Google-centric. And one thing that I actually did like about their answer is they didn't send us this packet, but from speaking or from reading their description, they send the franchisees, it sounds like a pretty prescriptive playbook of here's exactly how you get listed on Google Local, Here's exactly how you do the ads. After you have a job, here's exactly how you follow up and get the star rating and reviews, et cetera. So it seemed to me like there was work on the franchisees part.

It didn't seem like there was a ton of a ton of cost. I mean, some Google advertising. But this is the type of thing where if you believe that there is a market for this service, you kind of also have to believe that there is Google search query volume. and I didn't have time to check Google search query volume before this podcast. But if there was a search query volume and you just kind of have to run the local playbook to show up for it, I think that could work. I want to talk to existing franchisees to see if it actually did work. Yeah.

But I thought they gave more support than some franchisors would give on the local stuff because they gave the playbook. It appears exactly how to do it. Right. Well, yeah, I think where I got maybe tripped up is, you know, are you expecting me to do ads? placement, are you expecting me to do, you know, some of that stuff that you're saying is centralized. And then I think them having the centralized call center to qualify leads and then turn those over. And then the local people do their part, right? Like networking with the real estate agents, like the title companies, like, you know, following up, getting reviews. That all is just,

that totally makes sense. Okay. And so that's more consistent what I've seen from other franchisors. And I think the way you're right on. That sounds much better than the, way the deck made it look. And I guess that's kind of also a byproduct of where their deck is at this point. It's kind of rough. Like there's some stuff in here that needs to be well-designed. It's just a little light on details. It's beautiful. The content needs to work. Though I do appreciate that seemingly on every slide, they've managed to put a picture of their team in there. Like every single house, like, guys, I've seen you guys in front of your house. I've seen you guys in front of other people's house. I've seen you guys in front of a desk. I've seen you guys

talking to a customer. I've seen you in black and white in color. It's pretty adorable. So they do have a good designer. It's a pretty beautiful, good photography. It's, uh, in terms of the detail and making sure people understand this, it's right on. So one thing I'll also say about this business, one thing I like about this business is that I think it perfectly illustrates the value of franchising because this business is not a hard business. Many people, listening to this podcast, I would think our audience, could start this business and would not necessarily need to franchise it. Right. I mean, like just from kind of hearing about what it is, going to their website, you go, okay, I get this. I can do local Google marketing for crawl space.

I can hire a couple tradesmen, buy some saws, you know, we can do it. And, you know, lots of handymen do this also. But what I like about this business as a franchise is that there are a whole bunch of people who are not necessarily entrepreneurs. as far as taking things from zero to one from total scratch. But they're enough of a, you know, they're a smart person and they're capable business owner, but probably not a capable entrepreneur. And that's a very different skill set. So, and there's many more capable business owners in the world than capable entrepreneurs in the world.

So this takes a business that is relatively simple and kind of gives you in a box, here's the branding, here's how you do the local market. here's how you position it. Here's what you call it. Here's the total playbook. And none of it's rocket science, but there's a lot of people out there for whom this is valuable. They've pre-identified the market.

They've pre-identified that there's demand here, which is hard sometimes, right, when you're starting a new business. And they're saying, here's demand, here's exactly the playbook to go do it. If this excites you, if you want to be a crawl space guy, here's how to make $200,000 a year.

And I think that's valuable. for a lot of people. It's great. Well, as a contrarian who doesn't, has problems with authority and a claustrophobic, this is precisely the wrong business for me, but I totally take what you're saying. Yeah, those people that go into caves, what's wrong with you? Like, I'm so claustrophobic. I have no idea why they would do that.

But I think what this is, I think you're right on. Like, this is cool because you start to see these small, Contractors either fall into good buckets. They're great contractors and terrible salespeople, or they're great salespeople and terrible operators. And this is a way for that person who's a mediocre salesperson, but friendly and poor at entrepreneurship, but graded operations, just come in and kill it. And I think Evans' email said that and encapsulated that really well. Like, this is for the person who can make the trains run on time. And I like it. Super cool. What would you guys say if you were thinking about kind of risks, right? If you're thinking about doing

this? What are the kind of high risk categories that you would try and mitigate? Seems to me like a lot of the risk is on the very front end. Like is there demand for this in my area? And it seems like they've done, Evan described in his emails to us, they've done a lot of data science. It sounds like niching down their various markets based on are there crawl spaces in this market, you know, weather, demographics of the customer, you know, can they pay for this service, etc. And it sounds like they've done a lot of the work in kind of identifying where the demand should be in different geographic areas, which again, I think is the value of this franchise system, right? Somebody, you know, if you just started this business on your own in a city and you're like,

oh, surely there's demand for this, but, you know, for unforeseen reasons, like maybe there's not a lot of crawl spaces in your area, you know, or whatever it might be. That's where your business could fail is you just can't find the demand, even if you could service it fantastically. So I think one of the big risks on this, which they've done a good job of mitigating, is doing the hard data work up front to say, is there probably demand in this market? And it sounds like hopefully they have the discipline to not sell franchises to people who are going to fail in the markets where there's probably not demand for this. So I think one of the biggest risks would be, are there people looking for this service and can you prove that to me before I open this franchise? it sounds like they've, I would ask a lot of questions. And I also talked to a lot of existing franchisees about where their leads come from,

whether they're organic or not. Yeah. I think the hassle with this is always going to be the typical hassles that you run in these small services businesses, paying the ass customers and pain in the ass employees. You're going to be challenged to find people that want to crawl around with a respirator on in 100 degree weather in Texas, you know, looking for wood rot. like that's going to create a lot of kind of you know you're going to have to do a lot of hugging and loving and caressing to get people that are going to want to do that job and you're going to stick around for it. Yeah. I think I think really that means just going into something like this with your mindset that, you know, there's going to be some, you've got to get your hands dirty literally in terms of, you know, understanding how it works and getting in there and doing crawl space work yourself and be an expert in it.

But then also managing people who are going to be pretty challenging on both sides, both the customers and the employees. please. Yeah, because this is around real estate transactions, right? So you're typically working on a time frame. They need your service right now. They're trying to sell their house. It's got to get fixed. So you're probably going to have high emotions from the customer side. Well, they talk about your customer base and it's like, oh, like real estate agents, title companies, people buying houses, people selling houses, pest control companies, like, except for the pest control companies, those are all drama-centric, drama-centric people. So, They are, although I will say oftentimes when you're selling your service that is very modestly

priced as a percentage of a transaction that is occurring, it can be very easy to maintain a high price and good margins, which might be part of what's going on here. Because if a house is transacting for $300, $500, $500, $1 million or more, and they got to spend $4,000 on the crawl space to actually be able to do that transaction, you know, depending on who's paying for it, you know, they might not like it, but they'll kind of hand-wave it. And they're not going to negotiate for, you know, instead of $4,000, $3,500 or, you know, they just want it done now. Right.

I think that would help you. Whenever you're selling ancillary services around large transactions, it can be easy to make too much money. You just gave the entire business case for investment banking. Yep. And deal lawyers. Congratulations. What I will say is, you know, the thing I like about this is, you know, the thing I like about this

I come from kind of the traditional M&A background that really looks lovingly at home services and HVAC and plumbing and like some of these really kind of stable, durable blue collar type demands. And what I've seen, right, is that it's really hard to make HVAC work in a residential model in particular because it's all about customer acquisition cost. and you also have a very, very kind of hot competitive market with all the same issues, right? You've got to find people who are willing to be in 100 degree heat and a crawl space. Now, it doesn't have kind of the exact same service and maintenance and recurring revenue components as HVAC, but it's, I think, much less competitive in terms of the other folks who can provide this service.

It's just not nearly as well covered. Yeah. Cool. All right. Hey, that's a good one, Mills. I would say let's move on to our fun one for today. If you guys are cool with that, it is a watch own, a watch brokerage, basically. So we got this teaser sent by a listener. So we have very little data, but I will tell you about it. And I think we're probably in a place to talk about it a bit without having kind of full NDA sign and all that stuff.

So it is a pre-owned luxury watch business. So last year they did. they did about 2.7 million in top line revenue. NOI net operating income was claimed to be about 500 grand. So they did 500 grand in profit on 2.7 million in revenue. And basically that ends up being three and a half times NOI times profit. So been around since 2017 and it is a pre-owned watch business. So basically there is a brokerage that they claim happens with almost no marketing. did 2.7 million in sales.

And it grew last year, 12% year over year, and profits grew by about 20%. And they trumpet how that shows that not only their sales going up, but the margins are growing up as well. The teaser here gives you some ideas about how you can grow the thing, but generally they aren't doing a ton of PPC and that type of advertising

because they claimed it gave them too much business. It came originally from a consignment sales business, and they've switched to owning their own inventory and reselling them. So they have a bunch of other ideas in here and the teaser about how to grow the business as well. There's some interesting stuff in here about how trading and used watches is a pretty specialized skill,

but they claim that you could outsource that to contract or watchmakers if you don't want to become an expert in trading luxury watches and antique watches and stuff like that. And they will give you a detailed trading video. on how you can value pre-owned watches if you're going to become a proprietor of this business. Located in Florida, they claim it can be done anywhere, and all of the inventory can fit in a single gun safe.

That was my favorite part. Making transfer our move relatively easy. So that's what we know. This is just a teaser, but a listener submitted this thinking it looked like it was pretty fun. So what do you guys think? Do you want to buy a pre-owned luxury watch brokerage with a bunch of fancy watches and a gunsafe?

I have to say, I'm just so not a watch guy. So this is not the right business for me, but it's an interesting one. So they evolved, it seems like they started on consignment. Is it consignment locally, perhaps, or consignment virtually? You know, we can't really tell from the teaser. And then they decided that instead of making marketplace margins, they would rather make retailer margins and started carrying their own watch inventory. which I thought was an interesting move because that's typically businesses try to go the other way.

Yeah. Right? You know, I mean, Amazon has built a monster business moving from that first party model where they carry inventory of that third party model, where they're just the marketplace and take a commission. So I thought it's kind of interesting that these guys chose to go the other way. What you get when you do that is you do get better margins, but you have a bunch of money tied up in watches in a gun save. Right. And I mean, I know it may be physically small, but there's probably a lot of value in that. safe, which is why it's a gun safe and not a drawer. So what you do is when you switch from that

kind of asset light model to the inventory carrying model, you have to invest a bunch of money in inventory. And so a calculation sometimes people don't do. They go, oh, my margins are up, but sometimes they don't calculate the return on all the money. They end up tying up in inventory. And sometimes the break-even can be a little bit closer than it initially seems once you account for cost of capital. Yeah. In inventory. So I thought that was kind of interesting that they went the other way with it.

Yeah, for sure. Bill, how easy is managing inventory as somebody who does this on a regular basis? Not easy. I mean, because you got to have just the right amount. You can't have too much and you can't have not enough. The thing that's a little bit different about this one, it seems, is that everything is one of one. So like for us, you know, we'll be, have purchase orders for 50,000 pieces. And if we actually have demand for 70,000 pieces, that sucks because now we just missed out on 20,000 pieces of sales.

But on the other hand, I don't have to continually be sourcing new inventory either, right? I can sell 50,000 of the same thing. Whereas for these guys, you know, it's pre-owned watches. So everything is one of one, which means they're having to continually source inventory, receive it in, kind of create a new skew, track it all. Like everything is one of one. So you just get a little bit more overhead. Now, that being said, I'm selling $20 bottles of face cream. They're probably selling $10,000 watches.

So it's probably worth it for that kind of transaction value. But it's interesting. I know, Michael, you had some comments around kind of this type of business model in some ancillary in the sneaker industry specifically that I thought were pretty interesting. Oh, yeah. That would be important to know about. Yeah, I think there's this whole category. Thank you very much for at least big.

you can feel like what I said before was at least somewhat intelligent. But I think there's this whole category of businesses like these, this watch dealing, baseball cards, collectibles, tickets, like event tickets. Like they have this whole thing where the people that seem to do really well in those are the people that want to nerd out and really understand those things deeply and play the market. They love talking about it. They love dealing with it. I have a friend that owns a chain of collectibles like base card shops.

And he's like, yeah, the Dirknewitzky 2020, whatever is like doing this. And in the same way you hear ticket brokers talk about their ticket inventory, like they just nerd out on it. And for me, if I was to buy this business or look into it, I would be definitely scared if I don't love watches. Like am I going to be at a competitive disadvantage top to bottom on this business just to start with? I'm also interested if typically this business attracts

somebody who just loves watches and wants to nerd out about them, why are they selling? They seem to be doing pretty darn well. This doesn't necessarily indicate that there's a long in the tooth cellar or somebody that would be, you know, 75 and should be thinking about,

you know, retiring and cashing out. I'm curious, why are they getting out of the business at this point? Yeah, I would wonder too, like, you know, so it's fun to watchers in a gun safe. like is this a business or is this a hustle? Like is this like a guy like a jeweler who's flipping watches, you know, or is this like, is there sustainable demand here? Is there sustainable

inventory sourcing? Like, where do all the watches come from? Or like if you were just a watch geek, could you set up, you know, buildswatchgeek.com and start hustle flipping watches? I guess there's not enough of the teaser to really know, like, is this a business or is this this guy's hobby that he's put a price on? Right. Well, I'd be willing. to bet there's zero employees other than the owner. Yeah. You wouldn't need them, right? You just go over to the gun safe. You take the thing out. You take some pictures. You post it. You text the guy and say, hey, how does 15 grand sound? Yeah. And I think going back to the sneaker analogy, you're seeing kind of a structural change in the sneaker stuff going on where there's these verticalized, very narrow niche online kind of exchanges where people are building that kind of, you know, basically an eBay for high-end sneakers around some, you know, there's two or three of them that have gotten pretty popular. I would be willing to bet the same thing's going to start happening watches if it hasn't already. And you have to think about, well, how is that kind of,

is it going to create a more efficient market where potentially some of this margin would go away, especially if this is the type of guy who's calling his rich friend and being like, hey, I got a 1968 rolly whatever, right? Do you want to buy it? A lot of that can really start to trim into margins. I have one other thought on this one. The asking price is about $1.75 million, which they're saying, look, this is just over a three and a half times multiple, but it's plus inventory, right? So So if any instance I've ever heard of someone acquiring a business and also having to acquire inventory, whether it's included in the purchase price or in addition to the purchase price, is that no inventory audit is ever too good.

You can never audit the inventory enough. And I've just heard horror stories and I'm sure you guys may have some of, you know, I bought what I thought was, let's just say, $400,000 worth of inventory. but it was stale or slow moving or it wasn't marked correctly. And all of a sudden, I paid $400,000, but it was actually worth, you know, I was only able to get $180 out of it or something like that. Oh, that is a great point in this business, Mills, because the thing that makes that especially scary in this business is the seller

knows way more about watches than you do, a buyer, right? So he can more accurately value his inventory than you, which means that, who knows, maybe he accidentally overpaid for a watch and he hasn't been able to move it or his cost basis is too high. Well, he's going to sell it to you at cost, not at fair market value. That's something I see sellers try to pull all the time. They unload, they go, oh, well, it's fair. I just sell you the inventory at cost. And I go, well, what if the cost is too high? What if you made a mistake? You know, what if you have too much? What if you can't sell it? Like, you get to, I'm going to bail you out of all of your inventory mistakes all at once, you know, and make them all my inventory

mistakes. And at least in in typical businesses, you can see, oh, this, this isn't moving, you know, you have too much of this based on historical averages, but all the inventory in this business is one of one. And I bet some of these watches he does sit on for six months for a year, right? Because it's probably a, you know, a specialized buyer you got to find. But so you'd have no way of knowing if he'd had a watch an inventory for six months and he thought, you know, that was kind of a mistake and he might not ever be able to sell it. He's going to sell it. He's going to sell to you at cost and now it's your problem. And that would really scare me because I don't know anything about watches.

Yeah, yeah, exactly. Cool. Well, I think in terms of a discussion to amount of information provided ratio, that was our best one ever. So well, well done guys. All right. Well, we'll stop there for this episode and be back for the next one.