Acquisitions Anonymous - #1 for business buying, selling and operating - A Profitable Rafting Tour Company - Acquisitions Anonymous Episode 114

Starting point is 00:00:00 Hey, Michael here. Welcome to Acquisitions Anonymous. We have a very summer themed episode for you today. We went through and analyzed an exciting business located outside of Whistler, Canada, near Vancouver. That is a whitewater rafting business with a lot of unique things to dig into from COVID impact to how the broker is presenting stuff. So really enjoyed this one. I hope you enjoyed as much as we do. Here is the episode, but first, a quick word from our sponsor. Hey, Michael here. Today's sponsor is Guardian Due Diligence, and that is run by our friend Elliot, who was on our episode number 88. And what Guardian Due Diligence does is provide the diligence solution for first-time buyers and self-funded searchers, so people that are buying businesses. And they believe that diligence is critical. We believe the same thing as you're digging into a business. And he thinks that you should be able to acquire a business with comfort, that the numbers are solid and the seller is not fooling you. And your lenders and equity partners, they want to know the same thing too.

Starting point is 00:00:58 So that's where a Guardian comes in. You can get good financial diligence and providing you comfort that you're not buying a bad business and risking your entire net worth on a personal guarantee. So Guardian's quality of earnings reports will give you that confidence and belief in what you're doing and peace of mind. So, you know, they offer free reviews of LOIs and company valuations and you can find out more from Elliott at offer from Elliott.com. And mention that Elliott's been on podcast number 88 and that you're

Starting point is 00:01:26 heard him there and tell him we sent you. And you can reach him at E. Holland at Guardian Due Diligence.com. And again, also at offer from Elliott.com. So I can get in touch with him. Now back to the episode. Awesome. All right. We are back for another episode of Acquisitions Anonymous. And it is summertime. So we have a summer themed deal read by our resident outdoorsman Mills. Go ahead, buddy. Wait, it's the beard, right? You go outside? We're on roofs all the I just gave, that was a layup. I just gave you that one. You baited me into it.

Starting point is 00:02:01 Mills, you're reading this one, right? All right, we have an exceptionally profitable rafting to our company, not just profitable, but exceptionally profitable. $2 million asking price. Total revenue is $1,57,000. SDE seller discretionary earnings of $524,000. EBITDA of $459,000. They save the value of their asking.

Starting point is 00:02:26 sets is $217,000. Since 2015, they have been expanding their services, hiring more guides, creating a stronger business model, and have become the number one rated rafting experience in the region. Over the years, they've built a solid reputation with both customers and suppliers. They have a significant presence in Vancouver, Squamish, Whistler, tourism communities, and as of 2021, they are the Travelers Choice Award winner. The business has great relationships with suppliers utilizing its strong cash flow and profitability to ensure vendors are paid on time. It'd be interesting to talk about what their vendors are, who they use, what are you using vendors for in this case? Along with their focus on employee recruitment and retention,

Starting point is 00:03:09 it makes the company a preferred choice for seasonal tourism employees to work. Number one, rafting adventure company in BC and more possibilities to expand await. They've been around since 2015, 36 full-time employees. They lease their facilities. They have 3,200 Instagram followers, 4,500 Facebook followers, 80 YouTube subscribers. I almost think I would leave that out if it was only. That's just me. Newsletter recipients 13,000 with a 43% open rate.

Starting point is 00:03:40 That actually seems pretty good. I would think I'd sign up for their email while I'm on the, you know, about to travel there and go. And then I would unsubscribe later. So good for them. They've rarely invested in print, radio billboards, and other more traditional advertising. They're focusing on digital. They have referral sources set up with TripAdvisor, Whistler.com, some hotel, concierges, activity booking desks, and word mouth referrals.

Starting point is 00:04:07 They operate from a physical base short drive from Vancouver and Whistler. It's a four-acre lease site, and it's ideally situated equal distances from the launch points of the two main rivers that they operate on. Plenty of parking, office space, guest greeting area, the whole nine yards, everything you'd need. They have a five-year lease that began in January of 2022. That's very interesting at a rate of $6,300 a month. So it expires in 2026. And we actually have some good financials on this.

Starting point is 00:04:35 They are pursuing for other interests before we get into the financials, so we'd want to know more about that. revenue took a major hit in 2020. They basically have been steady from, we have 2017, if you're on YouTube, you can see this, 2017, 2018, 2019, they're around 1.3 to 1.4 million top line. 2020 decreased by, you know, more than half. They went down to $600,000 in revenue. But they've bounced back quite strong after, you know,

Starting point is 00:05:07 after COVID lockdowns and they're up to 1.1.4. 5 million top line. They, you know, have decent gross profit. Very, very strong. Like maybe 70-ish percent or more. Net income is really has fluctuated a lot. If you look at their net income, like in 2019, pre-pandemic, now their net income is almost 50%.

Starting point is 00:05:35 So I would have a lot of questions about that. maybe it's like PPP or something like that that they got in 2021 that makes it a one-time one-time bump. This is actually kind of nice. So this broker has put together the SDE, they don't list the normalizations or I think what they're calling normalizations, which would be adjustments. They are doing a weighted average SDE of 524,000, weighted average EBITDAV-4-59, and the multiples there are 1.3 times multiple in revenue, 3.8 times multiple on SDE, and a 4.35 times multiple on EBITDA.

Starting point is 00:06:16 What do you guys think about this exceptionally profitable? I'm going to hold my comments about their EBITDA calculation until later. Let's talk about the business first. Maybe we should start with this EBITA calculation because this 2020% thing makes me so mad. I don't know why it's got me so mad, but it's basically saying there's basically what they're saying is there's a 0% chance. that this business will experience a full shutdown pandemic type something in the future. And we all know that's just intellectually dishonest. So maybe that's what's got me so mad about this listing, which it's otherwise such a beautiful

Starting point is 00:06:49 listing so well put together. But like they got to put, they have to put in like, you know, now that we've gone through it once, like there will be another COVID-19. It may be five years from now, maybe 15 years for now, but it will happen again. There's a chance that they have a 50% drawdown. It can't be 0%. Yeah. It can't be 0%.

Starting point is 00:07:07 or there's forest fires. I mean, anything. It's just totally just, it's intellectually dishon. So the sneakiness here that you almost got to say, I got to hand it to you here. So what's happened here if we just look at this business, right? It was stable around, you know, an SDE in the low 300,000s, roughly. It was stable around there. COVID hit.

Starting point is 00:07:30 They had an awful year in 2020. And then in 2023, they did almost 700,000 of SDE. So this business has a COVID rebound, right? Right? People, you know, COVID is, I won't say COVID is over, but like people have decided they're going to do vacations again, right? And so there's a huge bump up on outdoor vacations like this in British Columbia. So they're selling on like off their best year ever, which any buyer would go, okay, like this is an abnormally high recent year to pay a multiple on. But the broker, in a genius way, to redirect you instead goes, yeah, yeah, yeah, we're going to sell on a weighted EBIT. We're going to, only ascribe 50% of the value to the big bump year in our weighted average, and then 25, 15, and 10% to the old year. So that gets you to a weighted average SD of $524,000. But the problem is, besides 2021, this business has never done $524,000 of SDE. It does $336,36, $361,000, right, in a normal year. So I almost love how they just like right in your face have slight of handed you and said,

Starting point is 00:08:38 yeah, yeah, yeah, yeah, yeah. We're not going to, you know, we're going to wait at even. We don't want full credit. Right. But we want a huge amount of credit. Which I think this, that's what makes it difficult. I would say this business is probably totally untransactable at this moment in time. Because you're, the seller is going to want some sort of multiple that gives them credit for the almost $700,000 SDE year that they had recently.

Starting point is 00:09:03 and a buyer is going to want to give no credit at all. So, I mean, I've just seen this so many times that you're just never going to cross that chasm. So what you really, what this business needs is to put up full year 2022 financials so it can be valued on those. And until then, I think it's going to be very hard to get a deal done. Well, and it's exacerbated by even worse. If you look what was happening, revenue was going up 2017, 2018, 2019, not by much, but it was going up a little bit, a few percent.

Starting point is 00:09:33 which is fine. But then their problem was their expenses were exploding. In 2019, they spent 900,000 expenses on $1.4 million in revenue. But in 2018, they spent $700,000. So nearly $200,000 less despite barely growing the business year over year. So their STE has been going down year over year, right? 2017 was $443,000, 2018, $361,3,319. And then this huge bump again, you know, post-COVID.

Starting point is 00:10:06 But you've got a business that not only is dealing with this COVID bump, but there's something going on underneath this business to cause it to be less profitable year after year, despite growing. So something else is going on in the context year. Maybe they don't have pricing power. Maybe there's too much competition. Or these deal sites, right?

Starting point is 00:10:23 These deal sites, if you see these daily deal sites, group on and stuff like that. Those are the beginning of a death spiral for restaurants and a lot of, you know, small consumer services stuff. So those have me worried that they've been having to do huge discounts in the face of a ton of competition, you know, just to keep revenue kind of flat. And, you know, so you exacerbate this COVID thing. Go ahead. They could also be investing for growth and it just doesn't pan out. They're trying to hire new guides. You know, they're trying to invest new equipment thinking that that's going to give them some pricing power. and then it doesn't pan out.

Starting point is 00:10:56 And that's why you look at it and go, man, if I was going to take a, you know, substantial cut in profitability, you know, you got to figure out what was the increase in expenses here? You know, $200,000 increase in expenses year every year and revenue only went up $100,000. Yeah, that sales and marketing line is the first one I'd look at in expenses, right? Because they're not going to, they're in that bucket. Maybe. you know, maybe they're throwing a bunch of money at Groupon. Maybe they'll throw a bunch of money at digital ads. Maybe some of these local sites like Whistler.com and stuff,

Starting point is 00:11:31 they're having to pay big time, big time payments to them, digital marketing spend. It looks like here they're spending $62,000, $66,000 just in June. They're generating $62,000 for June from $4,800 and Google AdWords spend to try to get people that are searching for this stuff on Google. So I bet there's some value. capture happening with their, you know, with the folks that are potentially new customers. Because this is not a repeat. It's also worth noting. This is not a repeat customer business, right? You maybe have somebody that's lifetime value of two or three times, but by and large, you're having to go hunt and kill figuratively new customers, right, in order to keep your

Starting point is 00:12:15 business growing. So you're always going to be kind of subservient to the marketing gods in terms of what it's costing you to get the customers. Yeah, I mean, it's a it's a destination kind of tourist thing, right? Like, I don't think the locals go whitewater rafting with this company. So on one hand, you know, you're leveraged to, we talked about the Pagosa Springs ski rental shop on a prior episode. So very similar to that, you're kind of leveraged to the tourism volume to your particular local market, which might be very stable or it might be fluctuate dramatically based on how much snow the local area gets each year, right? So there's definitely a leverage there. But the thing that's a little tougher about this one, as Michael kind of intonates here, is that the ski shop, you go to Pagosa Springs. It's right there in your face. The whitewater rafting thing, you're going to British Columbia. You're going to type British Columbia whitewater rafting into Google. Right. And there's this discovery component that has a middleman and you pay a toll. And whether that middleman is Groupon or Google or whatever. And that's why you see this business has clearly spent a ton of effort.

Starting point is 00:13:22 on digital marketing, which you got to hand it to them. You know, they're citing their social media followers. They're running a seems like a relatively sophisticated Google AdWords campaign because they cite number of clicks and a specific conversion rate and a specific cost per customer acquisition. So you, I mean, that tells you right there that this is a customer acquisition business. It's not a foot traffic business, which makes it a little bit tougher, I think. The other thing, too, is this is, I'm sure, seasonal as heck.

Starting point is 00:13:50 right like you don't go whitewater rafting in January in British Columbia I don't think um so it's we're sitting here July 22 like I have a feeling they only provided 2021 financials but I have a feeling 22 financials are almost fully baked at this point right or will be in another 30 days um so it may be that you know they were trying to sell this uh when the most recent was the COVID bump year but if I'm the buyer here I am in no rush to complete this transaction I want to see wait another 30 to 60 days and see how 2022 busy season shook out. That brings up a really good point, which is buying, Michael, you could speak this better than I can, but buying a seasonal business, depending on where it falls in the

Starting point is 00:14:32 seasonality. Like if you buy a fireworks business on, you know, January 5th, you know, what does that do and all the different aspects that go along with it, inventory, working capital, all those things. Yeah, it definitely affects your networking capital computation, right? And also what you're going to be spending, you know, in terms of just keep the lights on between now and the time when the revenue starts coming in again. You know, I have talked to people that run these kind of businesses because I've gone on, I've gone on these type of whitewater rafting things. And so, like, I'll just, well, you know, I mean, like, I'll just start interrogating the operator about how it works and stuff like that.

Starting point is 00:15:12 The nice thing, which you saw in 2020, is these things, when they're off season, your costs are really low. Like the people who are your tour guides are often 1099 contractors or they're seasonal. So they get off the payroll. They might go, you know, if they're not doing whitewater rafting in the summer with you, they're down in Chile working at a ski resort or teaching ski lessons or whatever are guiding and stuff like that. So all that is a good thing with this compared to say fireworks or some other seasonal businesses where you have, you know, big expenses during the off season. This at least appears to be one that you can scale down with demand.

Starting point is 00:15:45 So it's unlikely you're going to keep hemorrhaging cash during during terrible years, like 2020 was. Except your rent. Then they just signed a five-year lease that you have to. Yeah, it's really interesting. You know, I think in the old days, you probably cared a lot about where your physical base was for this business. Like if you go to these whitewater rafting businesses, say in Colorado, where I've done a number of these kind of tours of my family, you know, you could see where people used to fight to be kind of the first visible spot because people would just drive into town and then sign up a whitewater rafting place at the first spot on the right. But here it appears because it's made a switch to digital, like their physical base is really not strategic at all, right?

Starting point is 00:16:27 They're busing to and from the launching sites, which is interesting to me that it's so expensive. I mean, $7, $6,300 for a, you know, just a field. And I don't even, maybe they, maybe they have a whole facility there and stuff like that. But it seems like a lot of money. So one thing did come to me, a startup idea based on looking at this business. I think you could make some money being a business that went to seasonal stuff like this and just said, we're going to do customer acquisition for you and you're going to pay us per lead. I'd be interesting to see if you could go to these guys and get economies to scale by marketing all kinds of different channels of being a specialist in signing people up for these types of tours and then going to folks like this and saying, hey, 50 bucks per group you pay us per lead, we'll send them to you.

Starting point is 00:17:17 I think it would be a way to insert yourself in the chain. And potentially, you got to imagine a little tour company like this that's a bunch of rafters. They don't know anything about digital marketing. these guys are pretty sophisticated, but, you know, sales process, funnels, all that kind of stuff, nurturing, you know, they're clearly not doing a lot of those things. Be interesting, it's just as a startup idea. And I know this isn't a startup idea podcast, but it came to mind. Well, you do see that, you know, the way this model presents itself sometimes is like Whistler,

Starting point is 00:17:47 whitewater rafting.com, right? And it'll be some entrepreneur who will register that domain, we'll get good at SEO, we'll start buying Google ads to their website, and then they'll reach out to all the rafting companies and go either pay us per lead or pass per month to be listed, you know, or whatever it might be. But you've got to be good at SEO and you got to be good at Google AdWords. So who do we think should do this deal?

Starting point is 00:18:10 Like Mills, if you were going to recommend what sort of entrepreneur should go after something like this? I mean, it's a, it's a hobby business. It's a lifestyle business. Probably like a somebody, somebody who really wants to live in this part of the world.

Starting point is 00:18:26 And they're, you know, They've retired from one career, but they're not really ready to fully retire. And they love, you know, they love being on the water. And they go, you know what? I've got, you know, 10 more years. And, you know, this is a good way to kind of. I mean, but I don't know, to pay two million bucks, you know, for this.

Starting point is 00:18:46 I think they're that it starts to get to a price point where that's really, really hard for, you know, for a lot of people to swallow to just kind of have a nice kind of cascade. This has got some stuff against it. from potential buyers. Obviously, it's in Whistler near Vancouver, but it's also number two, you know, it's going to be in Canada. So you're dealing with a more limited pool of financing options for a U.S. buyer or another country buyer. So maybe you're looking for a Canadian at that point. And then I think it's worth talking about a bit here. This is at a size where it's almost the Goldilocks size, right? It's not small enough for somebody that's looking for a hobby, you know, exit to go do something as a second or third career and they don't really care that much about the

Starting point is 00:19:31 money. And it's not big enough to where somebody who's a more professional style investor can be there. It's this weird 500 to 600K EBITA thing where I think it's tougher to transact a lot of deals. I would also be willing to bet $20 to you guys or any listener that if you get the financials and you push on this, there is some kind of, it wouldn't be PPP, I guess because it's Canada, but there's some kind of COVID assistance that is driving the 2021 profitability. I just, I just, you know, I see it a lot. People should, you know, you see adjusted financials and they're like, look, all this net income that we had, you know, in this case, it might be $300,000 worth of net income that's

Starting point is 00:20:12 from COVID assistance. That's one time, they're not adjusting it out. And, you know, they're just kind of going to see, see, you know, see if a buyer pushes back. 20 bucks. Well, if you get the listing for this deal and Mills is wrong, contact him for your 20 bucks. I'll have been at cash app you. U.S. dollars or Canadian Loonies? Definitely Canadian.

Starting point is 00:20:34 Definitely Canadian. Yeah. In closing, do you guys want to talk about my background a little bit? Do you like my Eat, Pray, Love, decor for those of you on the video today? Yeah, I'm in an Airbnb in New Hampshire, and the decor in our Airbnb is decidedly Eat Pray Love. That little bottle And that's why you chose That bottle behind you

Starting point is 00:20:53 Is that a The short stubby one? Is it a wine decanter Or is it an olive oil container? That one. I don't know. I think it's a wine decanter But for some reason it's full of marbles.

Starting point is 00:21:06 Couldn't tell if it was marbles or coffee beans. I don't know. I don't know. It's just this is where in this There's just like a picture here And there's some books over there. One of it was titled The Long Walk to Freedom. I think this is the most ePray love place we've ever been in.

Starting point is 00:21:21 Anyway, I think what all of our listeners should appreciate is that, for one, if you watch us on YouTube, you will note that Michael is in a different Airbnb every time we record. What you will also note is that somehow Michael schleps his entire podcasting boom arm and nice microphone for the benefit of our listeners. So I picture Michael driving around in a huge van with like a giant podcasting hard case in the back and getting an extra bedroom in the Airbnb and spending six hours setting everything up perfectly with his camera and boom arm just for our listeners. So yeah, that's happened.

Starting point is 00:21:58 Meanwhile, Bill's at the beach. Meanwhile, Bill's at the beach. He's like, guys. Unshowered, like on the laptop. Well, actually the real hero of this podcasting, you know, I have the biggest suitcase of any of the family on this trip, including my son who went to camp for two weeks. But I also brought a 63 center. meter road bicycle. So the hero of this is actually my 13 year old who's been wrestling with

Starting point is 00:22:22 a road bicycle like needling him the whole way back from Canada. So he's a hero. You're welcome. Cool. All right. Things we do for the podcast. All right. Well, that'll wrap up our whitewater rafting thing. It sounds like we didn't like it that much, but we love the, we love the presentation. Good job by DealBuilder.com. Really good stuff. I do think we should do a site visit on this one. Um, yes. Let's work. Have you been on one of these rafting tours with your family and stuff? They're super fun.

Starting point is 00:22:53 Highly recommend it. Yes. I volunteered in college and worked a summer at a white, whitewater rafting place and spoke in Washington. It's awesome. Super fun. Best bachelor party I ever went on was a three day whitewater rafting trip, uh, in Colorado where you, you, we had two rafts.

Starting point is 00:23:09 The guides did everything, including cook the dinners, pitch the tents, packed it all up, all we had to do was just raft and then drink beer around the fire, go to sleep in the tents they set up, and then wake up in the morning, get back on the raft. It was amazing. So my buddies talked about one time they did like a seven-day rafting trip down the, through the Grand Canyon. And they talked about they couldn't camp in the first spot they were planning on because they got there and Jeff Bezos and all of his friends were there. And so they had to go to the next spot. They had to go to the next spot. They had to go. They had to go. go to the next spot and they parked there and they but they took up the whole camping area and then 15 minutes later a group rolls up and it's Harrison Ford and all his friends and so then they let Harrison Ford hang out with them and he like drank all their liquor that was the story. I don't know if any of this is true but it was an amazing story to drink the share over beers so it could be could be true or not I was not invited to this I don't get invited to I don't We're going to put into fun things with Harrison Ford of Jeff Bezos.

Starting point is 00:24:16 All right. Very cool. One more thing about this rafting deal, I think worth noting, like if you buy a deal like this, you have to be ready to deal with crazy freaking employees. Because the people that sign up to do rafting guide like this as a profession, this is not your CPA group, right? These are people who want to live in a tent, like live a life of adventure. And the most fun thing to them is hanging out with a bunch of families, taking them down

Starting point is 00:24:41 white rider rafting for six months, and then they go run like a snowblower for the rest of the year. So you're dealing with some screwballs, and you should be prepared for that if you buy a business like this. Which some people don't bother them. More power to you. More power to you. On that note, we will wrap it up. Thanks, everybody.

Starting point is 00:24:57 Catch you next time.

Acquisitions Anonymous - #1 for business buying, selling and operating - A Profitable Rafting Tour Company - Acquisitions Anonymous Episode 114

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