Acquisitions Anonymous - #1 for business buying, selling and operating - A deal that is going UP! - Acquisitions Anonymous Episode 137

Episode Date: November 1, 2022

Want to receive this listing in your inbox? Signup for our weekly newsletter:https://www.getrevue.co/profile/acquanon -----Thanks to our sponsor!CloudBookkeeping offers adaptable solutions to businesses that want to focus on growth with a “client service first” approach. They offer a full suite of accounting services, including sophisticated reporting, QuickBooks software solutions, and full-service payroll options.----- Michael Girdley (@Girdley) and Bill D’Alessandro (@BillDA) discuss a rapidly expanding home and business elevator maintenance company in South Carolina. From a demand standpoint, we will determine what makes this so intriguing and do a little background research on the state of the market. We will also find out why neither VC capital nor PE has purchased this company. Finally, after picking up some tips from Michael, he will share a fun reality show concept associated with this transaction.-----Show Notes:(00:00) - Introduction(00:58) - Our sponsor is CloudBookkeeping.com(02:27) - Deal & financials: A fast-growing home & commercial elevator Maintenance Co (03:49) - How does this company work?(07:22) - What makes this so interesting from a Demand perspective?(08:36) - What is so interesting about this Deal? What about the industry?(11:45) - What is the Otis Roll-up strategy, and why would you focus on it?(13:31) - Why hasn’t VC capital or PE bought this business already?(14:01) - What is @Girdley’s hack to learn about an industry?(15:02) - Why should you ask about the customers, and what should you look for?(19:42) - “Girdley drunk at your business” Is this a good reality show idea?(22:00) - Transdigm’s golden Roll-Up Strategy----- Additional episodes you might enjoy:#136 - Can we make bank with Cricket Wireless stores?#135 - Should we buy this warehouse software business?#133 - How to value and underwrite commercial Real Estate? With special Guest Chris PowersSubscribe 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]

Hey everyone, it's Bill Alessandro, one of your hosts here at Acquisitions Anonymous, and welcome back to another episode. This week, we have a really interesting business. It's an elevator installation and repair business. Michael and I speculate a lot about whether it's home or commercial. We also dig into the roll-up strategy of one of the large acquires in the space and talk about the roll-up strategy of building to be acquired by a large strategic, kind of figuring out what their acquisition strategy is and tailoring your mini-roll-up to ultimately be. bought by them. So I also just want to say, please hop on iTunes or wherever your podcasts are distributed. Please leave us a five-star review. If you like this episode, it really helps us out a lot. We also are sponsored this week by cloudbookkeeping.com. If you own a business, it doesn't have to be a cloud business, any type of business. And you don't like bookkeeping and who really does, hop on cloudbookkeeping.com. They've been great friends of the pod for a long time, do great accounting and

bookkeeping. They can help you out. And with that, let's get into this episode of Acquisitions Anonymous. Hey, Michael here. Want to talk to you about today's sponsor for the episode, which is cloudbookkeeping.com. So cloud bookkeeping is actually run by my neighbor, Charlie. So I've met him in person and can attest that he's a real human being and a good person. And what cloud bookkeeping does is offer a full suite of bookkeeping services all in the cloud for you around QuickBooks and other technologies that you're using as a small business owner. So if you're interested in getting the bookkeeping part of running a business off of your plate and focusing on running your business, Charlie and his team are one to call. They can put together a bunch of other stuff in terms of helping you manage and grow your business besides just bookkeeping, sophisticated reporting, definitely helping you get your

quickbooks online set up in the right way, and a number of things around payroll as well. So definitely know them and recommend them. If you want to find out more about cloud bookkeeping, you can go to their website at cloudbookkeeping.com, reach out to Charlie. I know many of you have and see if he can help you make running your business easier and more fun by letting them help with a lot of the bookkeeping solutions.

And when you call, mention this podcast. It would help us and help Charlie know that we're supporting him as well. So thanks a bunch. and cloudbookkeeping.com as the sponsor for today's episode. Michael, this week's deal is going up. We have a pretty interesting real estate-related service and repair business, an elevator repair business this week.

Take us into it. Yeah, yeah. Well, I've been, as a business start, I've been hugely fascinated by the elevator world, and the economic dynamics of it are incredible. And the way it's shaken out in modern times is there's only like a handful of elevator brands that are actually meaningful in each country. Like if you go to Japan, right, it's, I think they're all Mitsubishi, right? And here in the U.S., there's two brands.

Can you name them off the top of your head, Bill? Do you know what we sealed? There's Otis and then there's someone else. Yeah, the one that starts with S. It's Schindler. Schindler. Jenner. Yeah, yeah.

So there's like two brands. And it's super interesting. It's like, wait, like we have 42 different manufacturers of cars, right? Delivering cars, but really only two brands of elevators that matter in the United States. Like that's like a super weird natural monopoly. So it's always fascinating me. And I did end up reading a business school case study, even though I didn't go to business school about it.

And it's just fascinating how the dynamics ended up. So hopefully I can do a decent job of bringing some of that. that is we talk about this business. And it is from the broker Trans World Business Advisors, and it's named East Coast Home Elevator Install and Service Business for Sale. And it is described as the following. This business is poised for a new group or person to take us to the next level. Spreading up and down the East Coast would be very easy based on its current location in staffing. Owner has a bunch of ideas, yada, yada, yada. 2020 is showing a 38% sales increase, which projects close to $10 million in 2022 sales.

So I'll go back down here to the bottom and just go through the numbers here so we can see them first before we read the rest of the description. The business is listed for $7.5 million. They list a down payment of $5 million, which is very interesting. And they claim that the business is generating $1.78 million in discretionary earnings. Total sales of $6.8 million and located in your neighborhood bill in North Carolina. So we figured out it said Myrtle Beach. I thought Myrtle Beach was in South Carolina. That would be South Carolina.

Yeah, they're very interesting. They might, a lot of companies around here do work in both states. Yeah. Well, because up here in the URL, they say locations, Myrtle Beach. So it is what it is. Coming from Texas, like if it gets out of the state here, it's really far away. And I forget how the East goes is. Well, and South Carolina together are like East Texas.

Oh, that makes a lot of sense, actually. it's weird over there so yeah yeah oh my dad you know my dad did a lot of business in south carolina uh down by savannah area to savannah georgia and he just talks about how weird everything was just totally fascinating type area we think you're down in texas well don't worry yeah okay you're probably right okay so uh this business has 28 employees no inventory no furniture fixtures and equipment. It was established in 2016. The owner is retiring. And so basically, so what these guys do, and I'll kind of jump around here in the listing, because this is not really well organized by the broker Darlene here, who seems really nice. No hat and not touching her

face. So good for Darlene in terms of her profile photo. So they service all different brands of elevators in addition to manufacturing, milling, and assembling their own hardware parts with new cutting out technology in their precision machine shop. It is also, including the purchase price and has cut the cost of goods over half over the past year, in addition to beginning to have its own standalone contracts for metal jobs. So the owner has consistently reinvested profits to purchase more state-of-the-art production equipment as they prepare to scale up operations. This one if-a-kind business is a fast-growing home and commercial elevator company doing

complete installations for existing or new construction homes. Yada, yada, yada, they have a bunch of stuff, and the owner is looking for the right company and offer to leave his legacy with. He is also available to stay on as an advisor or research and development consultant as needed. I want to see the business grow, but also needs to spend more time with family. So semi-retirement is the next step,

and he can stay on part-time or as needed. What else is on here that I missed? I think that's it. This is a commercial and residential home. Oh, this is just home. This is very confusing. So they say home, but then here they say they do home and commercial elevator.

So I guess they do both. Is that you're reading here? Yeah, I think they do both. I mean, you'd have to. There's not a ton of home elevators out there. You know, what's interesting, the thing you did miss that I think is really worth calling out is they put, they service all different rounds of elevators in addition to manufacturing, milling, and assembling their own hardware parts with cutting edge technology in their cutting edge precision machine shop, which is included in the purchase price. And here we go, has cut cost of goods in half over the past year. is in beginning also to have its own standalone contracts for metal jobs. So this is really interesting. So these guys are repairing elevators and they need metal parts to do it. Some of those metal parts might be custom.

You know, we're not available if an elevator, you know, brand or model is discontinued. So in the past, it seems like they're going out to other CNC machine shops and commissioning these parts to be made or milled. But they've decided to vertically integrate and they've got either bought or spun up their own precision machine. chiening in-house, which cuts their cost to get in half, makes sense. They don't have to outsource that part of the business. And then also they are now spinning up as kind of a parallel business here and kind of that classic turn your cost centers into revenue centers, you know, kind of strategy here. So I thought that was pretty cool and pretty sophisticated for a small business that it says here is doing, you know, less than $10 million of sales.

Yeah. Well, and also kind of out of, it's incongruous with what's what they say the story is here, right? Which is, like, when was the last time you saw somebody who's in the last two or three years and getting ready for retirement building out a new machine shop? Right? It's just kind of, it's like, wait, why? People, people who are getting ready to retire in the next two to three years, they rarely take on new major initiatives because they're mentally already retired, right? They're just, they're just headed that way. So it's interesting, I would dig into this and understand, like, why did they do that? Like, is there some kid involved in the business that maybe there was a breakup recently and the kid left. But somebody had to go in there

and have the initiative to build out that machine shop because that's not a trivial activity, right? That's like a whole other business to be in. And it doesn't make sense to me that somebody who's like ready to retire, like did that. Does it, do you see what I'm saying? Yeah. Well, that's what makes me wonder, like maybe he's got a sick family member or something because he says he needs more time with family. So semi-retirement is the next step. This kind of reads to me like somebody had a life event. Yeah. You know, that's dropped the transaction.

The other thing that comes... It was started in 2016. It was started in 2016, so it's only, you know, five or six years old. You know, something happened here. He's growing really well. You know, he just invested a bunch of money. It's profitable. And he's retiring.

I think this has got to be life event driven, which, by the way, is a great reason to sell and buy a business. Those are my favorite scenarios as a buyer because that's a plausible reason that, like, there's not something that seller is trying to hide from you, right? Like, oh, they're selling at the top or there's new regulation coming or, you know, like, I mean, as sad as it is, like, my wife is six and I want to spend more time with that. That is a very transparent ethical reason sell business. Yeah. And I think also makes you feel good when you're involved in a situation like that. I mean, you know, for me, like I've done transactions

where we've enabled somebody to go live their best life. And like, that's super fun. Like, like, for a year or afterwards, you're getting pictures of them like out fishing or, you know, we did one in Europe where like the guy moved to like the south of of Spain and was just like living living his best life at like 72 and just like so stoked and so thankful because it turns into a win win like that's I think that's one of the nice things about this like in buying businesses you can actually really help people as well you know despite it being kind of a naturally adversarial process at the beginning yeah so you mentioned michael at the beginning episode that there is a kind of natural duopoly here with schindler and odis it's important to know

Also, if you're going to be coming into an industry like this, what's going on in the industry? So I was doing some Googling, and I'm semi-familiar with this because my wife used to work at a company called United Technologies, which is a big industrial conglomerate that owned Otis for about 45 years. And they actually just spun it back out as an independent company in 2020. But what's interesting is if you look up Otis's kind of press releases, they're now publicly traded Otis worldwide OTIS on the New York Stocky Exchange. So they put out press releases and you read their 10Ks and cues, et cetera. One thing that their management is very transparent about pursuing is they have a strategy to roll up elevator servicing companies. So Otis makes the elevators, right? And then they go, geez, we want some more service revenue.

You know, all these independent repair shops are backing me up all of the aftermarket work. So they actually have recently announced several acquisitions. So for example, one I found very easily. And in 2020, Otis has acquired Bay State Elevator, which includes its service portfolio and operations in Massachusetts, Connecticut, Vermont, and upstate New York. And the quote from the president of Otis Americas says it demonstrates our commitment to strategically accelerate our service portfolio growth. So depending on kind of the, I imagine there's a very specific template for what Otis. And I imagine Schindler's probably doing the same thing, right? Because birds of the fed are flocked together.

So I bet the thing here for large elevator manufacturers is to roll up their service providers. So there could be a very interesting M&A strategy here to look around the country, right, because they're going to want scale. The one I just read was in like four or five states. So there could be an M&A strategy where you go around and you do the mini roll up, right? You get North Carolina, South Carolina, Georgia, and Virginia. You do a couple years of integration and then you flip it to Otis for what I would imagine it is huge multiple expansion.

But what you'd have to do is you have to buy them right. You'd have to make sure that the ones you bought, not only were good businesses on their own, but we're focused on Otis Elevator, right? We're mostly commercial, because I imagine that's what Otis cares about. You know, you'd have to kind of figure out the profile. But there's a whole kind of strategy of figure out which large corporates are doing roll-ups

and then do many roll-ups and sell them. Yeah, I love that. But yeah, that was, and that's, was my big question as we started talking about this was this is like primetime private equity, some bigger buyer who has cheaper capital than you. To me it was like, well, wait, why haven't they bought this yet? And I think it ties back to kind of one of the things we see often, which is you and I dig into these things.

We're like, I don't know anything about this industry. Well, let's start thinking about it. And to me, the actual most fun thing in terms of like looking at businesses to buy is learning about the industry through that process, right? So I'm sure you've gone through this, too, Bill, but the best way to hear about that industry is to talk to an expert, and the person that will definitely tell you the truth or some variation of the truth is somebody trying to sell their business, and we'll give you a lot of context on it. It's fine and dandy to go to GLG or one of these expert networks, but man, the person who's been in there in the trenches running one of these little

businesses, you'll learn so much, right? Like, I've learned so much about little tiny software businesses by talking with hundreds of owners to understand where their challenges are and stuff like that. And that's the same thing here. But to tie all that back, it's like, well, wait, like private equity, if you look at the macro here, private equities had a bazillion amounts of money, has been doing roll-ups for decades, has seen that this type of services, especially when you're dealing with a life or death product like elevators, can be hugely valuable. You can extract a lot of a lot of value out of it. And they haven't bought this yet, right? Like that makes me wonder that there's something going on here that we just don't understand. Yep, which there might be.

I mean, this could be, it could be not that it's a bad business, but it could be, as we suggested, maybe just mostly home, maybe like 70% of their portfolios, home elevators. And that's not attractive to Otis corporate, which means it's not attractive to roll up to private equity, which means those buyers are passing on it. It doesn't mean it's bad, but you'd want to understand that dynamic before you bought this business. Yeah. So I actually, my house has an elevator in it. I don't know if I ever told you this.

No. All right. So are you a customer? You would be if they were in Texas. Maybe. Well, okay, so here's the deal. We bought the house from a very nice couple who retired and moved out to a lake somewhere, right? And they're good people, but their daughter had a physical disability or set of physical

disabilities that required them to install an elevator in the house. So we have an elevator. we use it maybe two times a month because we're just like, you know, we're trying to have the family move more. So we're just like, no, walk your butt up the stairs. And sometimes we use it to move luggage and laundry and stuff like that, but by and large, we never, we never do it. You know, I think the interesting thing here about what's going on in this market is, you know, as you start to look at baby boomers who are getting to an age where moving up and downstairs are a problem, there are a lot of two and three-story homes, especially here in Texas and built around the country in the suburbs that they're not going to move out of, but they're going to have to figure out how to get upstairs.

So I've seen a lot of that where, you know, at least here, the new installs and the service, like this appears to be a growing market. And I like that aspect of it. But I bet you're exactly right, Bill. I bet when you dig into this business, it's 90% home. And then there's some commercial stuff here and there that they do. But by and large, that commercial stuff is going towards the Otis partner. Because it's interesting, I would have expected them, like, say, Otis and Schindler to be, if they were a commercial heavy service fighter, to list that they're a partner with those folks, right? Because just like the aftermarket, like aerospace parts, right, where people will pay $50 for a 45 cent nut or a bolt to fix their plane because you don't want the plane falling out of the sky because you save 30 cents on a bolt. The same thing goes on with Schindler and, and, and, and, and, and Otis, right, where you pay up for the parts.

But these guys are not doing that. They're not reselling those parts or they're not getting them from the manufacturer to service those things, which has me to bring this all the way back to the circle of life here, which means like I think they're maybe doing very little commercial stuff. I bet you're going to see this is mostly home and that's why this business is still on the market. Yep, I would think so too. That means it's a bad business just means it might not be roll-upable.

Yeah. Well, I mean, so the dynamics are totally different. in home. And you can see it in the case of who makes the brands of those home elevators, right? The ones that we have at my house, I don't know who made that. And I don't care. So what if it breaks? Like, we're not going to use it anyway. But if your elevator breaks in a 30-story building, like you've got some real problems, right? And it's a total different dynamic where you don't have the things happening in commercial happening in home. My parents have a house with an elevator and it, totally different, you know, totally different manufacturer.

I don't even know, I don't even know who the manufacturer is. And I don't think anybody cares. They may not even be in business anymore because it's been in there for 15 years, that sort of thing. So it's, it's important what you did note, though, about new installs in the home because, you know, as we have this big aging population, the trend is, you know, I think we've done a deal on a home health care provider before, the trend toward aging in place, right? Wanting to stay in your home longer rather than go to an elder care home. And a big thing is you've got two-story house, you're going to need an elevator. My parents are hoping to stay in their home, and they've got two-story house, and they've already figured out if we need it, this is exactly

where the elevator is going to go. Right. Like, they got a plan. So I would think there's a pretty good tailwind on home elevators, even if it's not as attractive, margin rise as commercial elevators. It's interesting. I just clicked on the broker to try to figure out where we think this is. It's definitely in Myrtle Beach, because all of her. other listings are all in Myrtle Beach, everything she has here. Ooh, check this out, Bill. A fine dining Miami-style restaurant. They're just calling for a man with your...

Like, if you had to give me a list, like, Gurdley, make a list of businesses Bill would most hate to run, and a Miami-style restaurant in Myrtle Beach, South Carolina would be in the top five. That only makes $200,000 a year and win your life. Oh, man. That would be an awesome reality show. Like, if you were running this and I would just show up in order, like, Miller Lights and get really drunk in your bar every night, I think it would be awesome.

Like over, yeah, and then my hostess has to throw you out, and then she's in my office crime because she's like, well, I'm totally damaged because of you. Yeah, that'd be great. Oh, they have that show undercover boss, but it could be the opposite of that where it's like Gurdley drunk at your business. That's the whole business, this whole show. Gurley terrorizes your business, what do you do? Gurley comes into your med spa and asks you to wax his entire body.

What do you do? Man, I think that would hurt. She has another listing here for a Burger Phi-style super trendy burger place that it's doing supposedly $90,000 a year in seller discretionary earnings on $159,000, which I just, I queued on this just because I've loved the burgerfi chain, but a few, I don't know if you, have you been to burger pie? Do they have that in? No, we have to Carolina.

So burger fly is basically, it is like a burger cafe that is walk in only in most of the places and they serve like organic high quality beef, like very high quality potatoes. So it's like a step above your, it's like what Whole Foods is to like grocery. it is that for burgers, right? And like my kids and I used to go there all the time. And it's interesting to see the one near us like closed down. Like they stopped doing well. So it's I think a testament to that kind of that franchise challenge that you have is

franchising can be amazing if you, we talked about this in previous episodes. Franchises can be amazing if you get on the right franchise. But like if you get on the wrong one, like, you know, you're going to, you're going to share in the upside. you're going to share in the downside too. I think we got to get someone on the show who likes is like making a ton of money in franchise restaurants or really even non-franchised restaurants because, God, I hate restaurants so much.

Like they give me the willies. I mean, just the, like nights and weekends, you know, low rent employees, drunk customers, thin margins. I mean, oh my God, it's just my nightmare business. But, you know, some people make a lot of money in them. We should have someone on like a good restaurant. I would love to see it. Yeah, amazing.

Back to the elevator thing. So one of the things that it's cute on me is this pattern where you can make a ton of money is if you can figure out how to align yourself as closely as possible to life or death decisions for purchasing agents, you can make a lot of money. And that's like to some extent how Otis and Schindler and all those guys have incredible aftermarket parts businesses, it's because like, hey, if you put the wrong case, on this or the wrong button or the wrong computer on this on this elevator you're going to potentially hurt people and the same thing goes also for i don't know if you've listened to it the 50x

podcast that patrick groshanasi put out recently about trans time have you have you listened at yeah i definitely recommend it they have like um they interview like the guy who like put it all together it's basically a p e roll up done as an opco and uh like what they figured out was all of these like airplane part manufacturers were way undercharging for aftermarket parts. So basically their whole model is Translime was to go in, buy these companies, run them a bit better, and then like 5x all the aftermarket parts, and everybody would just keep paying. Like it was just amazing. So I highly recommend that podcast after you, a listener, give us a five-star review for this podcast.

I love that as a roll-up strategy because I feel like a lot of people are like, oh, I'm going to do a roll-up and they like big brain it. And they're like, okay, we're going to outsource all the back office ops to India. And then, you know, we're going to strike a huge agreement with the one chicken supplier and share costs across all of our restaurants. And like, there's just a lot of execution risk there. But I love the thesis where it's like, we're just going to buy them or we're going to raise the price.

We don't have to do anything else. We'll buy them, raise the price, like integrate the operations a little bit. But if all we do is raise the price, the thesis works. Right. I just love that in simplicity. Super cool. Well, hey, I got to end at this one. I got to jump on another call.

But this is a fun one. I love me some elevators. Love it. You start with elevators and we're all over the board. That's what makes that position anonymous great. That's it for another episode. We'll see y'all next week.