Acquisitions Anonymous - #1 for business buying, selling and operating - A Family Entertainment Center Chain in the South / A tiny hardwood flooring contractor - Acquisitions Anonymous e14

Starting point is 00:00:01 All right, everybody, happy new year. Welcome to Acquisitions Anonymous, the podcast where me, Michael Gridley, Millsnell, and Bill get together each week or so and talk about small businesses that are out for sale. So small business, M&A, usually small stuff, less than 20 million EV in terms of enterprise value. So I was told by listeners, we need to stop using so many acronyms because a lot of beginners listen to this. So you will hear me using fewer acronyms are explaining the ones that we have. So cool. Well, it turns out today I have both of the deals. So do you guys want to, Mills, do you want to do the big one first or the little one first? Do the big one first. Okay. These are both listeners submitted this week also. So thanks to our listeners for sending stuff. So this first one is a deal that is

Starting point is 00:00:57 basically the eye of the storm for COVID-affected businesses. So it is a, Southern U.S., so suburban kind of based indoor play and party center, looking to be acquired. Over the past few years, they've done 17, 18, 19. They've done $2 million in top line, $2 million in top line in 2018, and then $1.9 million in top line revenue in 2019. And then EBIDA, so earnings before interest, taxes, depreciation, amortization, has been a little bit under half a million each of those years, the first two years. and then 2019, they dip down to $290,000.

Starting point is 00:01:38 So a little bit, I guess what the math is, 15% EBITDA in 2019. So revenue's been decreasing a little bit, 2-2, and then 1.9, and then profits have been going down a little bit. So they're in, technically, an industry that's called Family Entertainment Centers. I did not know that.

Starting point is 00:01:54 That was a sick code. So I just, by the way, a sick code is what the IRS and the government uses to classify types of businesses. So FECs are what these called, Family Entertainment Centers, multiple locations in this southerly state where they are. They're all kind of in one city. They claim to have updated facilities and attractions. And so these are just those, I guess, indoor places where there's just like kitty rides and bouncy castles and like little games that they play.

Starting point is 00:02:21 Like a giant Chuckie cheese, right? It's like overgrown Chuckie Cheese, but without pizza. Yeah. In some ways. Yeah, no animatronic mouse. Yeah. Right. Yeah. Yeah.

Starting point is 00:02:31 Perfect. Right on. Good one, Bill. They claim to have 3.3 million invested in the amusements and the leasehold improvements. So it sounds like they don't own all or any of their real estate maybe. And of course they have big plants, but they want to sell. So that's where we are. So let's see. So two locations located in the same area. One has been around and stabilized since 2015. The other one since 2016. They are 12,500 square foot and 15,000 square feet each. And they are both leased premises. They target kids. what they call from 10 to crawl. I didn't know this was a technical term either. That means zero to 10. And it's designed to foster creativity through active play in a safe age-appropriate environment. By the way, if I ever met a business that describes itself that way, you could come over and kick my butt, Mills.

Starting point is 00:03:19 They claim to have a robust marketing database of satisfied families. They have different attractions inside, multi-level play structures, obstacle courses, wacky slides, ballpits, balance houses, mechanical carousels, fun motion toys, edutainment, merry-go-rounds, climbing walls, and towers. They'll do all kinds of events for stuff, including annual events like the Halloween bash and Santa visits. So 3.3 million has been invested. So if you kind of do the math there, in 2019, they generated about 300 grand in EBITA on 3.3 million invested. So should have put their money in Tesla. So they see their EBITA margins adjusted, 15 to 24 percent. I guess that's the first two years.

Starting point is 00:04:01 And they had plans to expand until COVID came, and then things apparently went to terrible. They are currently seeking both going concern and liquidating offers from potential acquires of the company and its assets, and they have hired an investment bank to represent the company. And that's what we know from the teaser. So what do you guys think about the indoor family entertainment center market in a southerly state? Before I even comment on the market, I would just like to say it always, like all the red flags for me go up when the teaser leads with the sunk cost fallacy. We've invested $3.3 million as if to anchor that like this is clearly worth at least that amount of money and we need to get

Starting point is 00:04:40 our money out. So like anytime I see one of these that leads up front, not with like the potential of business, but how much the seller has sunk into it, I go, oh God, you know, to start moving the other way. Yeah. Well, it's it's super interesting. I know some people that are in this business and they specifically are in portions of it around some of the trampoline park and stuff like that. And it's been a really tough year for them. COVID just obliterated any opportunity to go in there. And at least what I've heard on the industry,

Starting point is 00:05:12 the landlords are not cutting them a break. I mean, maybe things have changed in the past couple months, but those leases were personally guaranteed and these big corporate reeds are like, hey, congratulations. You know that PG? Pay up, sucker. And at the same time, one of the three, challenges, I think, that I want to point out with these type of businesses where you are,

Starting point is 00:05:30 you know, a mom and pop that comes in and the landlord has all the good spots and they have all the, you know, they have all the leverage over you is, I think a lot of these type businesses you look up and all you're doing after a few years or at least renewal is making the landlord rich. So, you know, Trent Griffin on Twitter talks about the wholesale transfer pricing problem, right? This idea that you have to see what the underlying, who has the pricing power on the underlying inputs to a business. And this is one of those ones that it does not surprise me at all, that they're only operating at 15 to 24 percent even margins, because I'm sure the landlords are doing just fine on leasing them spots. The other issue with these is, you know, thinking about the real

Starting point is 00:06:09 estate, you know, we have a couple of these here in South Carolina, more of the trampoline parks. But, you know, they're taking abandoned grocery stores, you know, or abandoned, you know, 20 to 30,000 square foot buildings. And having to come. in and re-skinned those and put, you know, like this is, $3.3 million, it's pretty capital-intensive to come into an empty shell and have to, you know, to build out a trampoline park, right? Or to build out a big play area or, you know, a ball pit. Like, those things don't seem that expensive on the surface. But if you're going to put, you know, 20 pinball machines, right, or video games, like those

Starting point is 00:06:48 things add up. Ours did something similar. So the teaser says that these guys closed from March. to September, then they reopen on October 1st, and they basically realize that traffic isn't, there's not enough traffic to keep the lights on. It's not sufficient. I kind of like the fact that they are at least owning this and saying, hey, look, we'll sell it as a going concern or we'll take liquidating offers. So that tells you something, I think, about their expectations. But the one we have here, it's close to my house, it's actually a godsend for our family. I mean, if it's a rainy day

Starting point is 00:07:22 and it's cold outside, my wife will go, you know, take the kids. And it's, it's pretty valuable, right? To us as a family for them to go get some energy out. I've gotten close to calling, I know the landlord, the guy who owns the building. I've gotten close to calling them and saying, hey, you know, this business shut down, right? They went out of business. But I know the trampolines are still in there. Could we work out a deal? And I think you're right. That's probably what's happening across the country. Yeah. So the other thing that I saw in this one that gave me a little bit of pause, COVID aside, I mean, obviously, you kind of got to have brass balls to go into this thing right now in the middle of COVID with it shut down and no foot traffic and no end in sight. But even before that, their EBITDA went from 480,000 in 2017 to 440,000 in 2018 to 290,000 in 2019 on essentially the same $2 million of revenue.

Starting point is 00:08:15 So even pre-COVID, this was a flat business with deteriorating EBITDA margins. And so COVID aside, and then they got whacked, right? But all this was pre-COVIDs during a great economy. And I would really want to understand why your EBITDA margins eroding like that and why is your revenue not growing? Because it strikes me, you know, this is a local business. There probably is a revenue ceiling here just based on the number of people that live nearby, etc., which is fine. Lots of local concepts have that dynamic. But if $2 million is your revenue ceiling, how much you've got to be working on squeezing out EBITDA, not seeing EBITDA, not seeing EBITDA. decline from 480 to 290 over two years. So I would have a lot of questions about that. All right. Before we leave this one, let me give you the bull case that you could go in as an investor on this thing, right? So I think there's three things that are interesting. One, I think it'd be interesting to go in and come in as a, you know, this is a distress business at this point. Like, COVID has made it that way. Like you come in and you just say, okay, we're going to, we're going to be relatively well capitalized. We're going to make a bet on the ability for us to go in

Starting point is 00:09:20 and buy this thing on the cheap, right? If you could buy it for, you know, two times, you know, EBDA pre-pandemic, like, there's something there, right? And you could potentially go back to the landlord and negotiate some things as part of that deal to make it work. So that's, I think, is pretty interesting. Number two, it would not surprise me if just some of the basics around running a business like this, they're overstaffed, you know, over everything.

Starting point is 00:09:45 You know, a lot of these mom and pop things have an opportunity for somebody that's relatively sophisticated to come in and just do some basic things in a way that's much smarter. For example, deploy some software stuff to reduce the amount of people you have there. Like my friend's trampoline park, they'll have like 15 people working per hour. Like, it's nuts. How can you reduce that second biggest cost of yours, which is the labor? And then I think number three, which is really interesting, they mentioned the mailing list, but it would surprise me if this group has any sort of real digital strategy whatsoever. I think that's a huge opportunity to unlock. in terms of if I was going to go approach this business.

Starting point is 00:10:20 So anyway, that's my bull case that I think there might be something interesting here, but that's a lot of risk to assume and you've got to get it at the right price. But, you know, the pandemic's going to end sooner or later. Like so many things, the bull case is the price you pay for it. You make your money when you buy. Cool. Any closing thoughts on our indoor listener-supported Family Entertainment Center? Closing thought for me is, if you want to do this,

Starting point is 00:10:48 come to Columbia, South Carolina, and do it with the one that shut down so that my kids have a place to go. Or if you want to do this, why don't you just send me 500 grand and I'll put it all in Tesla calls and Bitcoin, and I guarantee I'll get you a better return at this point. All right, that was great. Cool. And seriously, nobody sent me money. By the way, did you guys see my tweet where I was like, put a joke in there about launching an online course and somebody actually sent me money? No. Yeah, I made a joke about it. On spec, like here's a lot. Like, here's a Here's some cash, make a course. Yeah, it was awesome.

Starting point is 00:11:21 I was like, okay, guys, I'm launching a course, how to be your authentic self on the internet. And I, like, C-C'd all of the non-accounts on Twitter. And I was like, send me $500. And somebody sent me $500. I feel like you're obligated to have a call with them at this point. Now they asked for it back. I was like, oh, crap, now you're going to figure out how to Venmo this money back.

Starting point is 00:11:42 It was Braden Lethridge, that guy out of Indiana. It was awesome. That's funny. All right. let's go to deal number two. This is a teeny tiny one, but also listener supported. I had wanted to get the listener who submitted this on the podcast, but we just couldn't coordinate it. So I think that would be a fun thing for us to do in the future when somebody has a deal they're looking at. Like, come on in and let's talk about it. So super fun. So again, we'll keep this one anonymous, but it is

Starting point is 00:12:07 a relatively limited amount of information and this person's looking at the deal. But here's what, here's what we know about it. It is a hardwood flooring installation and repair company. So basically, hardwood flooring contractor is what they say. They are asking 265 grand for the business. Revenue-wise, it has been 2017. They did about 600 grand and they made about 100. 2018, they did 800 grand in revenue and did about 200 in profit. 2019, they dropped back down to about 600 grand and did 100 grand in profit. And then through December 1st of this year, they had done $520,000. 28 grand of revenue with about 88 in profits.

Starting point is 00:12:53 So looks like they were going to be their third year, kind of second year in a row of declines from a good year in 2018. So again, a hardware flooring contractor. They've been in business for 25 years, known locally for high quality. And like many sales, the owner is retiring. He has done little to no marketing. He mentioned some of the customers, are she, if it's a she running the business. They are exclusive and repeat clients with some high-profile engagements and some work as subcontractor work from general contractors.

Starting point is 00:13:25 So GCs, general contractors. They are located in the south in a relatively small but growing city with an 80K population and a metro of about 500K. That sounds like Columbia. Am I right, Mills? We're a little bit bigger than that, but yeah. Weighted average discretionary earnings is 125 grand over the past three years. That's been pretty variable. FFE, what is that, furniture, fixture and equipment of $99,000 is included. So kind of what we just talked about with the Entertainment Center, that's at cost, probably

Starting point is 00:13:57 not what you could get in market at this point. And the owner owns the real estate, which is available for purchase, but not included in the purchase price, a standalone building. If not selling the real estate, they would consider leasing the building at a fair market rate. So what do we think about buying a niche hardware flooring contractor at basically a price of a little over two times discretionary earnings for the last three years? I wouldn't call it niche. I'll specify that, I guess. I've seen some contractors like this who really do niche down and get very specific and they grow quite substantially. I remember looking at one that they specifically did flooring, not just hardwood floors, but they specifically did flooring for hospitals. That was the only type of flooring jobs they would take on, which is a very high traffic,

Starting point is 00:14:51 high durability type product, but also from a service standpoint, you've got to, they don't shut down the hospital in order to replace the floors. So you've got to get an above average crew who's very, very keyed in on the environment they're in and, you know, the customer experience, so to. speak. So to me, I would say this is a run-of-the-mill, right, probably solo operator. Maybe he's got a helper or two. I'd be surprised if they were running more than two crews on this amount of revenue and probably very highly correlated to new construction. Sure, people redo their hardwood floors, but I would guess probably 75% of their revenue or more is based on new construction. So if you're

Starting point is 00:15:34 bullish on new construction, the problem with that is that, then you're probably going to have a lot of customer concentration, you know, from GCs. Mills, is this something that is kind of very population dependent where you know, like, per capita, there are so many dollars of hardwood floor installations generally, and maybe it moves with the construction cycle, but, you know, really just you're buying the market, or is this the type of thing where there's significant dispersion, you know, inside the market for individual operators? You know, I'm not really sure. I mean, I think it also depends on the geography, right?

Starting point is 00:16:09 Home construction methods are very different here than they are in Arizona. We have almost no houses. I would say over a $200 to $250,000 price point, we have no houses in the southeast that are built on slabs. You know, track home builders are building a lot on slabs, and they're probably not using real hardwood. They're probably using some kind of laminate, you know, or vinyl even to keep the cost down.

Starting point is 00:16:35 So I think it depends on the geography and the construction method. But this is also just low barrier to entry type work. You know, it's carpentry and finish work. Now, some of these high profile engagements, you know, if you're laying hardwood floors on a herringbone or something, it's more difficult than just, you know, laying it in normal. But I think this is probably more commoditized work across the board. So is this the type of thing? So they've got, they're in a metro with 500,000 people and a city with 80,000. Is this the type of business that could be five times bigger through excellent operation?

Starting point is 00:17:11 Or is there, you know, kind of much like the play place? Like, is there just a local, like there's only so many hardwood floors that need to be done and redone per capita? Like, is this more like a sort of annuity you do all the ones there are and the way you get big is expand geographically? Or is there a way to like actually sell more hardwood floors the same amount of people? Yeah. Yeah. I mean, I think it's probably the latter. I mean, I think that if they're doing, you know, let's call it somewhere between 500,000 and 800,000 in revenue in a market that big, I'm just guessing.

Starting point is 00:17:41 The market's probably 20 to 30 times that size, you know, but your competitors are guys like you in a pickup truck who, as long as they're making about $100,000 in discretionary earnings, they're happy, right? or you also have competition from, you know, the lumber liquidators and Lowe's and, you know, other folks who are trying to capture more of that market share. Lowe's margins aren't that high. So you see them now selling carpet installation, cabinet installation, let us come check your HVAC unit, let us put new siding or shutters up. You know, they're adding that service element. And I think that's probably going to really eat into these guys into their opportunity set.

Starting point is 00:18:25 So I think it would be hard to capture, you know, the 20 times total addressable market in this one given geographic area. You have the other side of the market, I guess, is the input side, right? How hard it is to find qualified vendors, especially and workers, especially in a small market like this. So I have a friend that owns one of these in the Midwest. It's significantly larger than this. They cover a much larger geographic area. and he says that is his number one difficulty is finding qualified tradesmen to actually do the work. He is much more supplies constrained than he is demand constrained.

Starting point is 00:19:03 And they've been growing and they just can't keep up with staffing it. So that would be good questions to ask if you were diligent in this business as well. The other thing I think is interesting about businesses like this is this dynamic where, as you said, Mills, there's a bunch of guys in pickup trucks making $100,000 of discretionary earnings. and if you're okay with that, you can buy this business and probably do that for a long time. But it's probably hard to kind of end up in this middle ground between guy in the pickup truck and lumber liquidators. You kind of have to have a big vision or you have to have like a complacent, I'm okay being the guy in the pickup truck vision. I think this is sort of a recipe.

Starting point is 00:19:44 This is one of those business is a recipe for frustration. If you buy this as kind of a private equity guy and you know, you hope to include. the free cash flow yield on it by, you know, pulling some levers and making it a little bit bigger. Like, you've either got to want to go really big and be capitalized and ambitious for that, or you've got to make a hundred grand driving a pickup truck. I think it's tough to find a middle ground in this type of business. Yeah. The other thing I would, that jumps out to me is the, the user who submitted this, they're giving us, you know, a weighted average discretionary earnings. And I think this is probably one of those cases where I don't know the user who submitted it,

Starting point is 00:20:21 But in conversations that I have with folks who are looking at acquisitions, especially kind of earlier on in their learning curve, they really want to focus on weighted average earnings. And to me, I get the sentiment behind that. But in this case, the weighted average is probably totally irrelevant, right? Yes, the fact that their revenue fluctuates and their discretionary earnings are highly correlated with that. I just think this is one of those scenarios where you can, really work on the spreadsheet and fine-tune it, but beyond a certain point, it's not that helpful.

Starting point is 00:20:56 Yeah, I mean, this is just pure sales, drive the truck around, book jobs. I mean, in 2018, they made 200 grand. In 2019, they made 100 grand. And the only difference was 150,000 in revenue. Yeah. So, yeah, it kills me the weighted average discretionary earnings over the past three years. I just kills me. I laugh when I see that. But this is actually pretty volatile from 102 to 206 to 106 to probably about 100 again in 2020. It seems to me like this business makes 100 grand a year and had one good year in 2018. You got to wonder at some point, like, what are you really buying? I mean, I guess you're buying some staff that you won't have to go higher, but yeah, that's why I think a lot of these businesses trade a lot closer to one-time's earnings than two-time's earnings.

Starting point is 00:21:38 So I don't blame them for asking for it, but maybe a great, I mean, if you love putting in floors, buy this business, put in floors, make six figures, have a great. Right. But if you, so here's the conundrum there, right? So if you love putting in floors, what are you really buying? Like, you've probably already got a bunch of equipment. You've probably already got a network. You might have some people ready to work for you. You've already probably got a truck. So like, why pay two times earnings when like, you know, it's not that far up? Some people would rather buy than build, I think. I mean, I agree with you on buy with build. Just like, why buy this? So at this price.

Starting point is 00:22:13 The other thing, within skilled trades, right, is you have some skilled trades like this that are meticulous, right? If you, if somebody's paying you, you know, 10 to 15 to 20,000 to redo the hardwood floors on the first level of their house, they are really going to care about what it looks like, right? If you didn't load the sandpaper in your floor sander the right way and you've got, you know, marks on the floor and you've sealed over it with a clear coat, you're in trouble, You got to fix it. So certain trades are lower margin, but very, very picky, right, in product. If you're doing other things like plumbing repairs, right, or chimney sweeping, like we have

Starting point is 00:22:57 friends on Twitter who do those things, nobody's crawling up in their chimney to say, hey, you missed a spot, you know. So there's certain trades, I think, that if people are going to be picky, it needs to be high enough margin work that you can afford to hire better labor and create a virtuous cycle around the user experience. On that note, I think we did this one justice. So you guys ready to, you guys ready to shut it down for today? Yeah, let's wrap it up. Another good one. Well done, guys. Thank you to all of our listeners for submitting deals. They are much more interesting when the listeners submit them, because at least we know there's going to be two people that want to

Starting point is 00:23:33 hear about them. I also love the follow-up. I mean, we've gotten a couple of listener follow-ups from people that told us what ended up happening. So we love here on that, too. So if we're If we review your deal and you either pass or do it anyway, please let us now. It would be fun to hear. Yeah, really great. All right, good job, guys. We'll see you all next week.

Acquisitions Anonymous - #1 for business buying, selling and operating - A Family Entertainment Center Chain in the South / A tiny hardwood flooring contractor - Acquisitions Anonymous e14

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