Acquisitions Anonymous - #1 for business buying, selling and operating - A Gov't contractor that does *everything* / Orange Theory Franchises - Acquisitions Anonymous e7

Episode Date: October 26, 2020

This week, we talk about two businesses for sale:-A Gov't contractor that does *everything*-Orange Theory Franchises-----* 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's time for another episode of Acquisitions Anonymous. Very excited. Friday morning, we're full of energy. This is a podcast where me, Bill, and Mills get together and talk about some deals that are on the market that are small to medium businesses for sale, somewhere in the less than $20 million EV stuff. And basically what we do is we just look at the deals. We talk about how to think about them. And then we move on to the next thing. with our first deal today is Mills. Go ahead, Mills. Yeah, this was actually a user-submitted deal. So we have a teaser from an online listings website, user sent. And I don't even know the context behind this. Maybe they're looking at it. Maybe they just thought this would be an entertaining one. But this is a government contractor that does kind of myriad of different things.

They're base kind of in the greater D.C. area, 725,000. of EBITDA and about $2.2 and a quarter million in revenue. The way that the company's described is that they're a multi-dimensional contractor. They provide scientific and professional services to the U.S. government. They focus on things like IT, software, application development, telecom, cyber information. Solar panels. Don't forget the solar panels. Yeah. Yeah. Risk management. I mean, it's one of those things. We're in reading the teaser, every kind of paragraph is this wild twist and turn.

It's really interesting all the things that this company does. So maybe let me just highlight a few. So you're saying it's basically an Agatha Christie novel is what we're looking at in this list? Yeah. Okay, got it. Just buckle your seatbelt and get ready. So under the kind of pipeline and opportunity section of this teaser, it's advertised. that the company has $40.6 million of contracts in the works, which I do want to circle back to

that in a minute because that could mean a lot of different things. Those could be signed contracts. Those could be contracts that they're bidding on and you would really want to know the difference specifically with a government contractor because if you don't have kind of a degree, so to speak, in understanding government contracts, it can be really tricky. But then they also highlight possible geographic expansion to Africa and the Caribbean in renewable energy and telecom, I'm not really sure what all that entails. They mention, I think this is an opportunity, but they want to establish a technical team of 500 interns

to support a specific software company. They also, I don't know what they mean by this, but they say that the company has 80 colleges and universities providing access to professors and graduate students. I think they're alluding to the fact that they have a network of those folks. they don't actually have 80 universities, but I'm not really sure what they're suggesting they could do with that. They also have created a 501c3 that helps provide IT and cybersecurity knowledge that they share with the U.S. federal government and business community. Next paragraph,

they believe that they can start a solar manufacturing operation in a blue-collar city that needs manufacturing jobs to come back. That's in the United States. They have kind of a description about that and how they think they could do it, but still seems a little bit lofty. Next paragraph, they mentioned the ability to partner with a company based on the West Coast to help roll out electric vehicle charging stations. They want to partner with this manufacturer, merge their manufacturing capabilities with this company's technical expertise, and create a, quote, neural network of EV charging stations from Maine to Florida. I can't believe you're only halfway through this, Mills.

I know, I know. There's just a few more that I do want to highlight. On behalf of myself and the other people with computer science degrees listening to a neural network of EB charging stations, those are not. That doesn't work. That's not a thing. There is no thing. Those are two different things, but not a thing. A few other is that they have, they've stood up a biomedical division to support the U.S. federal government. They're working on developments in wound technology for U.S. soldiers. And then the last one that I'll highlight is just that the company's telecommunications department is working with a local government somewhere on the East Coast to assist them in developing

rural broadband, broadband telecommunication network, I guess, or utility that could turn into a hundred-year operations and maintenance agreement for the company. So a lot of things here to cover, and if you feel whiplash, so do I. But maybe you guys go ahead and respond after all that. I can see from the look on Bill's face that he is ready to explode with all sorts of insights. This is a business that has $2 million in sales. You read this SIM and you think this is like a multi-billion dollar, you know, aerospace defense conglomerate.

But in fact, this is probably like a guy in his garage. 16 employees. I should have said that. So 16 employees. 16 employees in a garage. Yeah. It's been around since 2004. And I mean, I got to say, like, talking to this guy would probably just be incredibly interesting because I get the sense this is like one of those Brent B. Shore used to call it like a hustler with help.

I get the sense like this guy is trying to hustle his way in absolutely everything. And the company's hair is probably on fire in eight different directions. And I would be flabbergasted if this sim was not reduced. Like if you took this guy out of it and you took all the puffery out of it, I would be surprised that this sim was not reduced to like two. sentences at the very end where it says the company is an authorized reseller of many leading manufacturers in the industry including carhart software these solar panels Microsoft and Titan LED. I would just love to see where the revenue actually comes from. Like I get a sense like this guy is like trying to wheel and deal. He's bidding on all kinds of things. And I mean,

just the sheer hubris in this sim, like I would have like I'm running screaming from dealing with this, but I would almost take a call of him just to kind of chuckle along. it's definitely an opportunity to meet a personality that's going to be nuts. I think this, if you're looking for a hot take on this for me, which I'm going to give it to you, even if you're not looking for it, this is going to be one of those things that turns out to be an unintentional fraud. And I don't mean in a negative way,

like not criminal fraud, but the guy who's running this, and only men run businesses that look like this, by the way, this is not a woman running this business, is going to be, in his mind, such an amazing juggernaut. But when you open up the curtain and look at it, you'll understand that basically none of this is real and maybe a couple of deals to resell

somebody else's product are there and everything else is just pie in the sky, total, total fabrication. I bet there is zero there there when you dig into this one. So I wouldn't even call these people. I would say on this one, it's one of those interesting occurrences where, I don't know if you guys have seen this, but typically business owners select intermediaries who are very like them. personality-wise or kind of just their kind of disposition. And so kind of all personal characterizations aside, I would just think, okay, the guy who has all these ideas about gross, I mean, he's got vision, right? He's found a million different ways to create a revenue

stream. And what I would say is that he's selected for an intermediary who's willing to entertain it, right? And say, yeah, look, let's put all that stuff down. And let's put it in the deck. And it would just be a very diff, if there was anything there, which I think is a big F. And I kind of agree with you, Michael. The bigger issue is that you've got an intermediary who's willing to entertain this client on zero kind of focus, right? And that's just going to make for a really, really cumbersome process. Right. I do, I do consistent with that idea. And I hadn't really thought of it. But now that I look at the headshot of the intermediary, like he's, you can't see it over the podcast, but he's reclined in a chair. His tie is like,

done and he's got like this kind of ruffled cocky thing going on. It's on the second page of the sim. And I imagine that is a representation of how the whole business is run. I think that it's all sums up in that one photo there. Having worked with good intermediaries, you know, and sold businesses through, and I'm not knocking intermediaries. In fact, when you find a good intermediary, they have a ton of value to your deal. And having worked with some good intermediaries, they would have never, if I had tried to put this in a sim, they would have never let me do it. They would have said that, you know, this discred to you, you know, this is going to make savvy buyers run screaming. Like, we need to focus this. But either, as you said, Michael, this intermediary is sort of unethical enough to let this guy make all

his promises, or, and this is just as likely don't attribute to malice, what could be attributed to kind of ignorance and laziness, he could have just let the guy write his own sim. Like, this guy could be, you know, just turning and burning as many listens as he can, and maybe it closes and he takes a fee. either way, that's not really an intermediary that you want to play ball with. Just think about it. Think about it. If they just said, look, we're a reseller and we do some consulting for LED light retrofits, and we've got $2.2 million in revenue and $700,000 in EBIT.

You would go, oh, okay, that's kind of interesting. Like, I want to know more about how you have 30% margins. But instead, you know, you are kind of chasing this wild story. And all of a sudden you go, I don't care about LED retrofits. or whatever consulting you're doing, this is just too kind of potentially toxic, right? It's just too frenzied for me to really give any effort to. Before we get off this one, there's a paragraph that stuck out to me,

and I want to read it, and I want to get y'all's take on it. At the very last thing, it says, modest ongoing capital investment requirements. The need for capital expenditures is minimal moving forward for the company. Capital expenditures are projected at $2,000 per annum with a 3% growth rate, to reach the pro forma sales figures. Based on what you know about the government and how the government pays

and the type of capital-intensive projects this guy's doing, what does that paragraph tell to you when you read this listing? He's not doing any government projects. Yeah. Well, I mean, I don't know that it's that egregious, right? If he's doing IT consulting, outsourced IT consulting for the federal government, that doesn't have to be that capital intensive, right? Now, $2,000 a year in CAPEX is,

we basically bought a new computer. And if you've got 16 employees, I think your CAPEX estimates are going to be a good bit higher. But if all he's doing, which to be fair, we don't really know from the teaser, but if all he's doing is outsourced IT consulting for the federal government, then that could be very,

very capital efficient, but not $2,000 a year capital efficient. Yeah, just very interesting. It doesn't necessarily pass the smell test for sure. Very cool. Well, I'd say let's move on to deal number two. If you guys are cool with that,

Any more stuff on this one? No, let's move on. I think this one is much more established, credible, and highbrow, I guess. Yeah, so this is one that I'm bringing today. And I spent a good couple of hours last weekend because I'm a business nerd going through and looking at some of the different franchises that are out there. So the one I looked at is one of the more popular ones. And it is called Orange Theory Fitness.

So it is now a franchisor or franchisee model. So buying the business, quote unquote, here would be buying yourself one of the franchise locations that are located around the U.S. and now globally. So what Orange Theory's are, they're boutique gyms. So think about the microgim model. So like a CrossFit or an F24 or a Bikram Yoga Studio, those are all these kind of boutique microjims designed to be in strip center. a thousand to 1,500 to 2,500 square feet.

They run classes that are group classes, and you pay a subscription fee as a consumer to attend those. The gimmick that Orange Theory does is the orange theory is that you get the best workouts by managing your heart rate. So if you go into one, they have these TV screens around, and then everybody wears these fancy heart rate monitors. And that patent protected gimmick is they run you through a combination of strength, calisthenics and basically like running, rowing, biking type aerobic exercise. So that's the model.

I'll just pause there in case I didn't do a good job of explaining what business Orange Theory is in. Yeah, I should also mention this business is growing very quickly. Orange Theory has exploded. They have kind of taken the country by storm. There is probably one in your town. And if there is not, there will be one soon. It is private equity backed, or at least has been for the last couple years. and they've been really leaning into growth. And I have heard, actually, that they continue to perform even through the pandemic. I heard they had kind of a step back, of course,

in spring and early summer, but that it has rebounded and as popular as ever. Yeah. Well, these, you know, the microjim concepts have a lot of, a lot of upside to them, right? If you think about running a business like that, so consumers pay you subscriptions to come in, then you sell them, obviously the classes.

I think Orange Theory has gotten so popular, that they will charge people if you don't show up to the class, you have to pay for it. So you lose money around that kind of stuff if you're a consumer. And then they sell you crap. And I mean that the nicest way possible. So T-shirts and water bottles

and then the gear, right, if you want to have your own custom heart rate monitor that you're going to wear and stuff like that, you can get your own and people buy them. And funny anecdote for you guys, the Orange Theory franchise that opened up near me, the word on the street, is that it was the fastest and quickest growing opening in history of the chain here in San Antonio.

So given our reputation is a pretty chubby city, I think maybe we're working on it. So that's pretty cool. Also, by the way, I have been to Orange Theory a couple times. Oh, yeah? My brother was a member for a couple months, have been as his guest. And it is an experience. I mean, it is like they turn down the lights, like there's strobe, they pump the music. There's like a Peloton-esque really fit, hype.

instructor running around. Everybody's wearing a heart monitor. You have to wear heart monitor to do it. Because the idea is that you're in the orange zone, which is like the fitness zone of heart rate. And, you know, like, they get you for 30 minutes or whatever. But you have to buy the heart monitor in order to do it. Right. Because they put your heart rate on the screen with everybody else. So it's a whole thing. Yeah. And people are into it, I guess. Yeah. A lot of my buddies do it. I'm more of a crossfitter personally. You know, it gets my male energy going, my masculine energy. but I've gone to Orange Theory a couple times. It felt like too much running to me.

I was like, oh, this sucks. We're running too much. I was like, ah. So I think that translates into the type of client you seem to get, right? You get upscale, socioeconomic folks who can afford to pay $150, $200 a month or more for a subscription to be a member and do the classes. And a lot of those are, I would say, the aerobic-focused ladies, right? the classes I've gone to, and I don't know if it was different for you, Bill, but the classes I went to was like 80% ladies over 30.

And so, you know, it does seem much more appropriate for that demographic than, say, a very manly CrossFit experience, but also not as, you know, soft and chakra-centered as your typical yoga studio. So pretty fun. I actually did Orange Theory for a little while, probably six or eight months or something like that. And I had some friends who actually became franchisee,

franchisees and they bought franchise rights for a handful of units and started opening up stores. And then they ended up getting acquired. Like Bill mentioned, there's a lot of kind of capital that's been poured into. Look, it's a recurring revenue model. If you can manage the churn, it's, you know, not incredibly capex intensive to open. Michael, I know you dug more into this FD and you can talk a little bit about that. But, you know, these guys did well. And they had somebody who came along and was trying to consolidate the franchise, you know, to be a bigger franchisee with more units.

And they were in it for not that long and ended up getting acquired at a really, really nice valuation. But yeah, I think you've hit on all the things. To me, the biggest issue, right, is I don't like feeling like I'm being taken, you know, from a financial sense. And so the way it worked here was, I think it's maybe. 80 dollars a month to go four times it's like a hundred and you know maybe a little over a hundred dollars to go maybe six or eight times and then it's like a hundred and sixty dollars to go an unlimited amount and you guys have highlighted you got to buy the heart rate monitor which is maybe another hundred bucks for a one-time thing what i think is so smart right from from arm's theory's

standpoint about their business model is that there is accountability and it's all scheduled right so they know, look, 5 a.m. class, the 6.30 a.m. class, they're usually 60 minutes. It's going to be full, and we can pack them full of people, and we don't necessarily have to pay a trainer to stand around. And we also get to provide the trainer with a pretty, you know, pretty nice revenue model, because they're not just waiting around at a mega gym all day, hoping that they can pick up personal training clients. So it's smart from their standpoint. They do also charge you because you have to book an appointment. if it gets really popular, the time that you want to go is popular. And so, yeah, you have to pay, I can't remember what it was.

It's like maybe $8 or $10 or $15 if you don't show up, which a lot of people, and I think you're right, in a higher kind of socioeconomic level, people want that kind of accountability and they're willing to go, yeah, look, punish me basically if I don't show up. But they have definitely grown pretty exponentially. I worry about, and I was a victim of this, just churn in the sense that I was going, look, you know, I don't know that I'm really getting all the value out of this. $160 a month is a lot for this thing that I, you know, kind of just, it just lost its appeal, right?

The shine kind of came off the penny. You're right. You're running on a treadmill. You're using a rowing machine and you're basically using free weights. And so to me, that felt like a lot to spend on something that is not necessarily that hard to recreate. Yeah. Yeah. Well, you know, I spent, you know, based on all this, there's attractiveness to this and I'd heard on the herd on, you know, from different folks that these things run at 40% EBITA margins, you know, 40% cash on cash returns, like really very good, really very good metrics. And, you know, the popularity of the one here, you know, I ran off and I found the franchise disclosure document, which in some states, they are publicly registered. And basically what these are, if you are a potential

franchisee, you call the franchisor and say, hey, I'm interested in becoming a franchisee of of whatever franchise chain, whether it's Sonic or Orange Theory or F-45 or whatever it might be. And they give you this document, which is all their legal disclosures. And it's basically designed to protect you, the franchisee, from getting ripped off. And I went through and, you know, it was just like every paragraph of this 300-page document was another way that they chisel you, the franchisee, out of stuff, right? Like, okay, you got to pay a royalty off the top of 8%. Then there's a brand fund that they have.

That's another 2 to 3% that you have to pay weekly. you have to renew your franchise every few years, up to 50% of the latest price. If you want to transfer your franchises someplace else, you've got to pay a new fee. For them to just look at your application as a franchisee or to renew or transfer your franchise, you have to pay them a fee. There's late fees on top of that. You have to have your people trained, all this kind of stuff. And as I'm going through this, I'm like, oh, my gosh, like, it's a lot of rules.

In a lot of ways, they take the money out of you. They also make you buy all your equipment and make you buy all your software through them. Some of the software they get a kickback on. So they make you buy the software and then they get a kickback on that. So as I dug into this, I was like, oh my gosh, like being a franchisee is really hard. And the other thing I realized personally looking into all this stuff is how much I don't like somebody telling me what to do. And like, I think that's where I was like, oh, thank God, I never went down the franchisee path. because these sound like terrible rules to follow.

Like, I hate following all these rules. Well, but Michael, that might just be you, right? Totally. Totally. Franchises can be awesome businesses. Mills, did you have a franchisor for it? Or is that someone else I was talking about. No, I've got some friends.

I've got two different friends. One, who's a big multi-unit franchisee owner, owns about 20 units of a service-based franchisee. And then another friend who is a franchisor or owns a service-based business here in the southeast. And it's, look, you're right. I mean, it's not for everybody. But if you want somebody to say,

hey, look, here's the rules, here's the rulebook. You guys go and just play the game, right? And here's the rails to run on. It's a great model. And, you know, if the restaurant business aside, because that's the bulk of where franchises really operate, you know, you can push out 15 to 20% EBITDA margin on some of these things. And they're basically saying,

look, here's the playbook, you go do it. Now, they're going to, like Michael mentioned, they're going to be compensated for the fact that they're kind of giving you the plan with a bow on it and you just go perform. They have to be compensated for that. But, you know, how onerous are the terms, you know, I guess it depends on your aptitude like Michael's saying. Yeah.

Well, and then so I started talking about this on Twitter and I learned something, which was the franchise disclosure document is basically the cover your ass document from the franchise or. when they actually get down to talking turkey with you in terms of what your deal is going to be with the franchisor. There's another agreement, the franchisee agreement, the franchise agreement, the FAA, that basically spells out a lot of this stuff.

And I think that was the lesson I learned from Twitter, like, oh, like have an experienced franchisee lawyer represent you in defining that FAA and negotiating with the franchisor, you know, the brand owner. because you can do a good amount to protect yourself there, but you're going to, in the end, only do so much, right? The franchisor has all the leverage in this relationship. Michael, with the minute that we have left,

will you just kind of give us the, what's the initial capital outlay or initial investment, and what do they kind of anticipate your steady state revenue and earnings to be? So they don't tell you, they can't promise you return on investment. So if you go talk to these franchisors, what they'll actually trick you into doing

to make it legal is because they can't promise you returns, but what they'll do is they'll have you speak to other franchisees, and those guys can tell you how their finances have worked. But based on what I've heard talking to people around OTF, Orange Theory, you're typically looking at a million to a million and a quarter investment. And depending on how well you run and how saturated your market is, people have been generating 200, 300, 400K a year on that free cash flow. So pretty good.

Yeah. Yeah. So even after the fees, right? But I think what we've seen is that most people are not content to do this one unit, right? They're going, look. And really, the franchisor doesn't want you to just do one unit. They're going to say, hey, look, you need to buy the rights to maybe subsequent rights, you know, to expanding into your territory or somebody else is going to do it.

And it's competitive, right? They're going to drive you. Yep, for sure. Yeah. And it's, I think it's like being a small-time landlord, you reach, you reach, you reach an inflection point where it goes from being a job for you to a business. And if I was to go into this stuff, I would think about, okay, how do I get capitalized, not just for one unit where I buy myself a job, but where I capitalize myself to create a business

where I own five, 10, 15 franchises. And I can have an office and the garbage like, who's going to get the toilet fixed can be handled by somebody else. And you can really work on running the business and building it. Yeah. I have a friend who did Jimmy John's franchises. And he started with one, and he was there at 5 a.m. Cutting Tomatoes for like a year. Yeah. And now he has, I think, 15, and he's much more of a business owner. He has general managers. And it is owning a bunch of franchises is awesome. Yeah. Because these businesses, like, there's lots of Jimmy Johns and there's lots of orange theories because they work. Like, their profit, like the business model works. So if you can follow the playbook and you can roll up a

couple of them, you can do phenomenal. Yeah, for sure, if you're an excellent operator and a mediocre creator, like, sounds pretty good. Definitely should do it. So super cool. Well, we are out of time for today. You guys did amazing. And we'll get this one up and get it out there.

And thanks for everybody that's been listening. Take care of guys. Bye. All right. You'll see you guys later.