Acquisitions Anonymous - #1 for business buying, selling and operating - A travel agency where you can garnish wages to collect?! | A travel agency and a landscape management business for sale - Acquisitions Anonymous e72

Episode Date: February 25, 2022

Want to receive this listing in your inbox? Signup for our weekly newsletter:https://landing-newsletter.acquanon.com/-----Michael Girdley (@Girdley), Bill D’Alessandro (@BillDA) and Mills Snell (@thegeneralmills) are joined by James and Palmer Higgins, Partners at Chenmark (Twitter: @chenholdco) to examine a travel agency/financer deal and a landscape management business.-----* 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.-----Show Notes:(0:00) Intro(3:11) Funding Chenmark(4:45) Employee Ownership Programm(7:47) Deal 1: High growth Military travel agency and sales finance company(18:08) Financial risks(20:48) Timing on the deal(32:00) Beyond8figures Podcast(33:13) Deal 2: Landscape management Business(36:10) Understanding the Business(37:01) How is the revenue composition?(39:20) Ownership situation & transition scenarios(41:55) What makes a good or a bad tuck in?(47:06) Understanding the equipment & the real estate value(53:56) Additional thoughts on the value(55:18) Starting one vs buying one: What would you be paying for?(56:45) Thinking about culture integration----Thanks to our sponsors this week!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 that include sophisticated reporting, QuickBooks software solutions, and full-service payroll options.The BEYOND8figures podcast (Beyond8Figures.com) - is a podcast where entrepreneurs and experts speak up on topics related to business and life in general. Each week our guest will have interviewees from different backgrounds to discuss what helped them get ahead while succeeding at entrepreneurship; we'll learn how these people achieved success by exploring personal journeys along the way (both professionally AND emotionally). So if that's interesting to you, make sure you check us out ;).-----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 CEOSubscribe 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]

Welcome back, everybody, to another episode of Acquisitions Anonymous. I'm Mills Snell, one of your co-host, joined by Michael Girdley and Bill the Alessandro. Hey, guys. There to be here. Hey, hey. Acquisitions Anonymous is the number one podcast for Small Business M&A. We may also be the only podcast for Small Business M&A, but we're going to keep the title as long as we can until somebody decides to compete away our competitive advantage there. We come on the podcast to be able to record conversations.

that we like having anyways, which is, hey, let's talk about companies for sale and some of them we like and most of them we don't like, but we have fun bantering about it regardless. Today we're joined by some really fun guest, Palmer and James Higgins from Chinmark. Hey, guys. Hey, how are you? Hello. We're really glad that you guys are here. I think most of our listeners know your name or know the name of Chinmark, but before we dive into the deals, will you guys give us kind of a 60-second overview of of Chinmark and maybe of particular interest is where is Chenmark today? You guys are kind of one of the, I would say like the old growth, holdcoes. Help us understand kind of, yeah, you seem like veterans, right, in this space. There's a ton of people who want hold coes, but you guys are actually doing it.

Tell us kind of where you are today at Chemmark. Sure. So James Trish and I started Chenmark about seven years ago with a desire to get into small business equity, leverage a skill set that we thought we had built in more traditional finance, but get sort of closer to the action and do something more tangible and more impactful and frankly more meaningful and purposeful. And when we did that, we had this idea that's been sort of the guiding light of Chenmark, which is to build a portfolio of small operating businesses with the expectation of owning them indefinitely. And it's very nice be to say that we're sort of old growth. Certainly doesn't feel that way. We feel like we're still in the early

innings of our mission and our journey. But certainly seven years ago, Holdco wasn't a term that people threw around. So great to see that it's sort of caught on some traction. And in terms of where we are now, we have a group of businesses throughout North America, throughout a bunch of different, across a bunch of different industries, and just continue to look to build on that trend.

What types of industries are you guys in? Can you give us some examples? Sure. We own a few landscaping companies. Those are predominantly in New England. We own a lawn care company, also in New England. We own a frozen food manufacturing company in Western Canada. We own two tourism companies, one in Maine, one in Florida.

We own an agricultural business in Tennessee. And we own a paint retail and distribution company in Western Canada as well. So a grab bag of stuff. Yeah. And so we had the enduring ventures guys on, you know, Xavier, and it was really, really interesting. He got started through raising outside capital. How did y'all get started? Is it, did you take your own money and pull it together? Did you bring an outside investors combination of those things? Yeah, so the thesis all along has been to be fairly capital efficient. So by, if you're a follow of weekly thoughts, we've written about this a few times, Chenmark is a C-Corp holding company, which is a very efficient long-term capital compounding machine. So after the first few, the capital is internally generated from the operating performance of our current companies.

But initially, we did sort of the classic, when you're starting a company, you go around to the Friends and Family Plus network and try and raise capital. So we didn't do it from traditional search fund investors, if that's what you're asking. But we did raise capital. Yeah. And how much of the just kind of rough ballpark do you guys, are you guys still controlling shareholders? How is it structured between the three of y'all? Yes. I'd say we're controlling shareholders.

Yes. Yeah, we own the vast majority of the stock. Yeah, I mean, it's one of the dangers of raising outside money sometimes to do it. Like, you've got to give up certain things like control or some upside. So it's exciting to hear that you didn't have to do some of that stuff. So pretty neat. Yeah. Although now it's great.

We're in a position to sort of share going forward. So we've sort of built an employee stock purchase program that allows folks to participate in sort of the larger compounding story of Chenmark. So it feels good to be able to kind of curate the shareholder base and to kind of build a firm where the only way to really the only way to participate in the equity girl stories to come work for us. That's awesome. So before we even, would you guys mind if I press them a little bit further on the employee ownership program? Because I'm really interested in the design of these for long-term whole coast. because kind of traditional employee equity

all comes through the lens of fast-growing tech stocks where people expect an exit and they're not expecting cash flow and they're not expecting to work there necessarily for a long time. But I think you guys are probably on the very opposite of all of those coins

at Chenmark. So I'm curious how you design an incentive system that is equity-like or equity-based for people you want to stick around for a long time where the returns come from cash flows and there is no plan for exit. Yeah. So without sort of getting into

too much of the nitty-gritty, essentially what we've created is a mechanism where we make kind of an internal market in the company's stock once a year. And to the extent folks have received kind of incentive compensation tied to their individual performance, they have an ability to use a portion or all of that to acquire stock at the set price. Those who are current owners also have an ability sort of during a subscription window to sign up on the sell side. So there's a mechanism to both buy in and to get liquidity on an annual basis. So, you know, certainly not a public share, but, but our goal was to create a mechanism that was both simple and very transparent and would allow people to kind of make an affirmative

purchase decision if they wanted to, they bought into the compounding story and also created a sort of a mirrored ability to gain liquidity. if they needed for, you know, life events or whatever, you know, whatever things may happen to come about. So not a full-blown ESOP, but kind of a hybrid between what Bill's talking about and an ESOP, which has more rigidity? Yeah, definitely not an ESOP from like an IRS tax code perspective. I think two important things to add on. One is there's only one share of stock, so it's not dual class. The shares that everyone owns are all the same, including ourselves, which we big believers in. And two, your comment about sort of the,

a high growth story of startups. Certainly any one of our operating companies isn't a high growth operating company. But if our companies are performing well and we're doing our job well, bringing in new companies into the fold, when we actually zoom out and look at Chenmark Holdings, I think it's a more interesting growth story than you might otherwise assume. Because you're able to compound capital so quickly and buy new businesses and it looks quite nice. just because our structure allows us to have another lever of reinvestment opportunity. So, you know, even if our operating companies don't have huge reinvestment opportunities, some have more than others, some have very few, some have a ton.

But, you know, you always have this escape valve of being able to pool additional capital for the purposes of buying other companies, which adds another leg of growth into the Chenmark holding story. And so it's just the model allows you to scale in multiple different ways. Hey, guys, Michael here. I want to talk to you about one of our. sponsors in our never-ending quest to make acquisitions anonymous break even. And that sponsor is cloudbookkeeping.com.

It's actually run by my neighbor, Charlie, who's a great guy, and he has been our longest tenured sponsor, and we're super grateful for him to just support the podcast. So what cloud bookkeeping does, it is a set of cloud bookkeepers that if you're a small business person, help you get out of the business of doing your books and let you focus on the business of taking care of your customers. So they do all the complexities, bookkeeping, payroll, and they come across in our very client service first. That's their phrase, but I know that's true because I've spent time with Charlie and dug into their

business. So full suite of accounting services, sophisticated reporting quickbook software solutions, and full service payroll options. So definitely talk to Charlie if you want to get out of doing bookkeeping and outsource that to a trusted third party, and you can find them at cloudbookkeeping.com. So thanks again for sponsoring today, cloudbookkeeping.com. Awesome. All right.

Let's talk about two deals. Michael, you have the first deal, which is the military one. Yeah. So this one comes to us from generational group, who I think has to be like of the lower middle market small business brokers, like has to be like the ones who produce the best kind of looking Sims on the regular. So I appreciate that. So generational group produce it.

in its title is high growth military travel agency and sales finance company. So the business by numbers did, well, in 2019, did $6.7 million in revenue and $2.1 million in in EBIDA. In 2020, they did $2.2 million in revenue and $1.1 million in EBITA. And in 2021, they projected to do $1.8 million in revenue and $532,000 in EBDA. and then they are projecting to snap back in 2022 to do $7 million and $1.8 million in EBIDA. And then they have a footnote here, COVID. That was the footnote, basically. So revenue went 6.7, down to 2.2, down to 1.8, and then project it to go back to $7 million.

I think if you just multiply these numbers by 100, you would get every cruise ship's balance sheet as well. And how this worked during COVID. So definite falling knife that they project is going to just come right back again. So what does this business do? They're a unique online sales finance company that leverages the sale of travel packages specifically to U.S. military members. So they enable customers to purchase and finance their travel expenses. So basically what GEICO is for auto insurance, they do this for U.S. military folks

that are trying to finance their travel expenses. So they do sales financing through a retail installment sales agreement with monthly installment payments being received directly from deductions off of people's monthly paychecks. Wow. Okay. And they are licensed state-by-state nationwide. So this is a lender that specifically does consumer lending to U.S. military people to finance their travel packages. So they support operations by having a robust proprietary account management system that allows for automation in origination, underwriting, and servicing. So it sounds like there's some software that they've built,

and they have an extensive review of retail installment sales agreements by attorneys to make sure each state is in compliance with applicable rules and regulations. So they've developed a system to verify a borrower's active duty status, how much he, she gets paid, and for how long the individual will remain in active duty. With applicant authorization, the company obtains military pay stubs and is built relationships that allow it to utilize the payroll allotment process offered to military members. So I guess the idea here is you know that the military rarely separates with people involuntarily, and you can loan them money and feel pretty confident you're going to get paid back going forward.

And it sounds like the military provides some... You can take it directly out of their check. Yeah, there's some wage garnishment thing here that the military is allowing that private employers do not. Yeah, that's amazing. I don't even think you can do that in the real world. Anyway, management has cited that this process can be adapted by an acquirer for a variety of other financing needs outside of travel, but it looks like they're currently just financing travel. So in terms of market segments, it's mostly domestic leisure, 38%. Then they do corporate unmanaged. I don't

understand what that is. And then leisure international, so those are 24% and 19% and then 16% is corporate managed. Does anybody know what that means, managed versus unmanaged? Nope, nope. That doesn't make sense to me at all. Okay, well, anyway, so that would be a good first question asked the broker when you find out what tech this company does. Products and services, 20% airline travel, 25% tourism packages, 8.6% accommodations, 22% cruises, 1% car rental, and 21% other. They were very profitable pre-COVID and did 27%, 30%ish of sales as profitability in EBIT terms. People love travel. They say there's high demand. diverse revenue streams, industry expertise, and a unique niche.

I think that's, to me, the thing that's kind of most exciting here. They've done this all with this level of active borrowers with 4,700 active accounts. And given how big the military is, it's kind of surprising that they do this well with that little. Their team is three corporate, seven in sales and marketing, four back office and tech, and six in customer service. So we have this business that loans to the military personnel, the ability to finance their travel. It did terrible in COVID, and it seems to be projected to recover. What do we think? So you're looking at stuff that I can't quite see from here, but on the revenue breakdown,

does it say when you're talking about managed, can you run through that one more time of like where the revenue breakdown, like different types of revenue? 38% is leisure domestic. so they're going on a cruise or whatever and sold to an individual. Then they have corporate unmanaged and corporate managed. So that's what we're kind of confused about. Those are 24% and 16% where we don't understand how there are corporate buyers of leisure, of travel in this situation. But I guess it could be if you have a small business and you're a military person

and you're using this to do corporate travel, I guess. But yeah, 38% leisure domestic, 19% leisure international, and then about 40% is this corporate bucket of unmanaged and managed. So are they basically an originator or are they actually the one making the loan? I believe that both spelled out. I think that's really important because they would have to have a massive capital base to finance all this off their own balance sheet. If they're going to be the actual, if they're going to be the creditor, they're going to have huge balance sheet associated with that. It does say under their revenue mix in 2022, 86% of it is going to come from goods and services, and 13.6% of their revenue is interest income, which makes me think, like, maybe, right?

I mean, unless they're just assessing an interest charge and then passing that through, like, they act as the originator, right? You sign up and they say, great, you know, here's $100 and we're going to take $25 out of your paycheck. for five months. So we're going to get 25% functional interest, but then they turn around and sell that loan to a third party, or they just hold it is what we're contemplating. I would assume they'd have to have someone to sell it or using someone else's balance sheet. Yeah, I think they're using they have to be using someone else's balance sheet. So why do I care? I mean, I think if I'm, if I'm an owner of this business versus using somebody else's balance sheet versus having to do all

the loans myself, like, why does that matter? Well, one is available at capital. is going to be one. So in order to scale it up, you're going to have, it's like working capital for a more normal business. But in this case, it's like working capital on steroids because I'd assume loan balances. I mean, what do you think the average ticket price is of a travel package? A couple thousand dollars at least. So that might be not as big as I would have thought. A couple thousand dollars times five thousand customers. So that's not a ton. But then that means your velocity, your turnover has got to be super high to reach $7 million. revenue. If you're only, if you're only clipping off $2,000 travel packages at a time. Yeah,

maybe it's more. Origenation, origination fee on that can't be that high. So, you know, to back into $7 million, you've got to be turning over just a boatload of loans. Which they're not, because they say they've got 4,700, right, people here. So I don't know. I wonder if this is more, you know, they save goods and services are 86% of revenue. That to me would be kind of travel agent fees, right, for putting this all together. And then interest income is 13%. So what's interesting to me is they spend a ton of time talking about their financing activity in the description of the business when they really should just be talking about this is a travel agency business that also occasionally does this financing thing. It seems like. Yeah. I think they finance everything,

right? Like nobody is booking through them and not financing, whether it's third party or not. To me, though, Michael, your question, the risk is, right, is if they are just an originator and they rely on a third-party financing provider, that may be the only person in the world who will finance something like this. And what if that person decides we don't like the exposure, we don't want to do it anymore? And all of a sudden, you can't sell travel packages anymore because you can't finance them. That would be the risk in my mind of third-party. Well, yeah, it depends on who owns the risk, right? So if they sell it off, then they don't care. Basically, who's holding the bag if there's bad right if there's

even if they're selling it off and that person wants to stop buying it now you can't originate any more debt for sure right although it's strange if they're offloading it it seems like they've developed a lot of sort of internal underwriting processes so you know it

sort of who owns the underwriting decision versus who owns the credit is sort of made something that would be worth digging into yeah because it's almost like a perfect scenario from an underwriting standpoint because they can what this says is they can look at the individual's pay stubs. They can see how much of their paycheck is allotted to other people and for how long. So it's like we get to be first in line. We take the money right out of your paycheck. We can see who else is in line with us and how long your income is going to be encumbered. That's a great scenario because you're not in essence kind of waiting, right, and worried about collection. I almost wonder if this business has zero problem with bad debt. Because of that.

Right. I mean, super, that part of it is unique. And I've definitely never seen anything like that, never didn't even know that that's something that could be, that could be a thing or legal at all. I thought only the government could garnish wages. I didn't know private business could for sure. So it wouldn't surprise me, though,

that if they're pardoned up with a financing entity, that the finance entity is the one that's giving them, hit these metrics based on your, clients, which are all military, as long as they're at this debt to income ratio and you're here in the stack of other, other encumbrances, then like they don't care. Like you can basically pre-qualify and, you know, we'll underwrite it. We'll take the underwriting risk as long as they meet these criteria and you vet that criteria for us.

I would assume that they're just, they're like a mortgage originator. So it would make sense. James and Palmer, how do you guys think about the timing on this business? They want to transact now, right, where they've just had their worst revenue in Ibadah year ever, and they're projecting it to rebound voraciously from $1.8 million to $7 million. And there's not an asking price in this listing. But, I mean, do you guys think this is even transactable at this point in time? And if so, how would it have to be structured?

I mean, if they're willing to transact around 2021 numbers, then, yeah. Yeah, but my guess is they want to transact around 2022 expected numbers, in which case, That's going to be super tough. Yeah. I mean, just take kind of more, as a more general comment, I think what we've just finished talking about sort of is part one, and what we're getting into is part two of some, like, basic things that we try to cover for any business that we look at,

irrespective of industry. And so, and so like the first piece is, let's take it down to the individual transaction level and make sure we really understand who the players are, how the funds are flowing, and how all the different sort of interested parties interact. with one another. And so I think if we could get an understanding of that, you know, that would really clear up this origination, sort of who's balance sheet, whose credit risk, that whole issue.

The second thing that we try to understand is, like, rationale for selling and why now. And so if this business seems like, from a profile perspective, seems to be kind of automatic from a sort of earnings generation perspective, it just happened to run into a COVID sort of buzzsaw. But if it's going to rebound the way they say it's going to rebound, then like, why on earth are you selling this business at the current moment in time? time. So, you know, we would want to understand, we would want to make, we'd want to sort of dig into the rationale there and say, look, like, why don't you just wait a year, prove out the rebound and you're going to get a much better price and probably structure for your business? Yeah, so if you

just take $7 million bucks in revenue, you divide it by their 4,700 customers. So that assumes that they deal with every single customer that they have every single year, which is probably not accurate. They're booking $1,500 of revenue per customer every single year, which just seems like, very high unless they're unless they were booking the value of the trip as their revenue but then their cogs would be stupid high

and they wouldn't have 30% EBITDA margins. So I'm struggling to understand the unit economics of just like one customer walk me through the dollars of revenue your cogs, your profit. And the thing about that,

the Palmer is those are active accounts. So I'm wondering if like active accounts is people who have booked trips, right? And depending on how long the repayment schedule is, they may have, quote, active accounts that revenue actually was generated, like the sale was booked in the previous year, but they're still repaying. And so it's still active, right, from a collection standpoint. So you're saying like, so their revenue is essentially loans receivable? I don't know, but I just think that that whole active accounts, may be skewing the average order value.

I see. Yeah. And it does look like based on how this team is constructed, they have seven in sales and marketing, those sound like people selling people cruises. And then six people doing customer service, those sound like people who are helping people when their cruise ship gets stuck. Hopefully you get home or make sure your loans getting paid off and stuff like that. Like, I think this is a travel agency that, back to Bill's point, like, unfortunately,

this broker took what is a travel agency and tried to spin it as, as a consumer debt financing company. And when you look at it, this is mostly just a travel agency that focuses on the military. The goods services, I think of the dead giveaway here. 86% of it is them selling people cruises

and tours to Italy, which I think that's the lens to look at this thing as. I like it a lot better if it's like a unique financing business. Well, I think the broker gets that too. But as we're bringing into this, we're just like,

oh, well, this is just a travel agency that focuses on the military. Like, fine. you know, but they're going to want to, you know, I assume those trade at a much lower multiple than consumer financing, or the consumer financing businesses. Well, certainly the proprietary account management system and capitalize there, so it makes it sound really fancy.

Certainly if that's true, and there's some moats around other people's ability to get access to the same type of underwriting information and then step in line to essentially garnish wages for this cohort of of customers, then that is interesting. And it doesn't matter if they're not the lender. They're the customer facing entity. And so they have a defensible position. And they can always find,

they can always get credit or extend credit. But if they're the source of the customer, and that's a defensible position, that's an interesting place to be. Yeah. Well, I think I totally did what you're saying. And this is where they have this last paragraph that the broker put in, those unique niche market where they have very little competition,

that's the paragraph I'm going to sprint to, like, when I start to talk to this company, because my suspicion is this is BS. And the reality is they are just one of like 500 other travel agencies focused on the military that are just in a red ocean of trying to sign up people to buy their services and travel and cruise and packages to Las Vegas and stuff like that. So, you know, I'm very curious how much of an actual remote there is when you dig into this business versus what the broker claims here in the teaser. Other than that, I think it's a great deal. I would tend to agree with you not only because, but like, but because what happened to them with COVID, if their niche was travel and they say, hey, great growth opportunities to do something similar but not in travel, you know, couldn't they have cycled in? into like more consumer goods or whatever furniture, you know, TVs, like home-related stuff.

So when everyone's home and they want to spend money on their home, why can't they pivot into that? You know, easier said than done, sure. But to your point, it could be because someone's already doing it in that niche and their niche is really just travel. Yeah. Well, the other thing, just contextually, like, there's been a lot of, a lot of people that have gotten like payday lenders especially.

have been like, if you go outside of like Fort Hood, which is one of the largest U.S. military base, I think it's the largest army base we have in the country. It's up in, it's up between Dallas and Austin off I-35. And like, if you go outside the base, there's just like rows and rows of payday lenders and by now pay here or car places, just totally targeting the military.

And it wouldn't surprise me if this business also has future potential danger to it, as future military lending acts to protect soldiers get past that make some of this stuff impossible. Because beyond that, they're just a travel agency, you know? The thing that's tough for me on this one is there's so much on the come, right? They're trying to sell it at the bottom of the COVID number. So you've got to believe that it's going to rebound in 2020. They're also trying to sell it on the come of they've got this proprietary financing system that you can spin to going into other areas.

But they haven't done that yet. So really what they're saying is you, the buyer, are going to create all of the value, both by gambling on the code rebound and by taking this thing and taking it to any other industries. And they're not willing to do any of that. But you can bet, better believe that they're going to want to be paid for it. Tough to pay for your own performance. It's not generally something I like doing.

Yeah. Yeah. So, I mean, is there is, what do we think? Is there a scenario in which you make this deal work? One thing that comes to mind is, okay, well, if you think we're going to go back to $7 million, like put your money where your mouth is seller, like, and there's a performance earn out where you're,

we pay cash that the worst side for us is it looks just like it did in 2020, but the upside is the thing takes off and the owner gets there. Is there some sort of model that works or roll over equity? Any things that come to mind as a way to make a deal like this, interesting? Do you want to cover earn out? No, you should be before. We have never been successful with an earn out, and I've stopped trying.

You spend all, you spend all, you spend all your time haggling over the structure of the earnout and you lose sight of the deal. And I understand it's a thing in profit equity. Let me ask a question about that really quick, Palmer. When you say you've never been successful with an earnout, does that mean you've never structured the deal with an earnout and paid it out or you've never gotten a seller to accept an earn out as a part of the structure and gotten to close? The latter.

The exception being for tuck in acquisitions in some of a regard. green industry companies, we have been with sort of earn out like or contingent type payments when there's a lot of opacity in the deal and there's a desire to get a deal done on a tighter timeline. And so like that's where you have to lean into some sort of some sort of contingent type payments. But for a platform acquisition, I would just never had it be, I've very rarely proposed one. And the few times where I have, it's never gotten past the, the LOI stage. And just like I said, I think you spend so much time talking about the structure of the earn out itself. The seller wants it as close to the revenue line as possible. The seller or the buyer

wants it as close to the bottom line as possible and everything in between. It's just, it's really tough. It's really tough. So are you doing typically including seller notes for at least a portion of it? Like are you asking or having at least some holdback in case things don't end up the way they promised? Yeah, always do either a seller note or escrow. Generally, we don't do both. I know some people do. Our preferred is just a seller note with offset rights. So you're not just double-dipping on the escrow side of it. Yeah, and for us, that works. It's cleaner, it's simpler than an earn-out for sure. But they're not really synonymous with each other. Earned out is really to bridge valuation gaps when you have big differences and expectations of the future, whereas a seller

note is more a deal structuring tool and a tool to make sure that the seller is sort of as committed as possible to handing over a business in good standing above and beyond just what's in the legal docs. Hey, Michael here. I want to talk to you about one of our sponsors for the podcast today. It's the Beyond Eight Figures podcast. That is actually a podcast done by a friend of the pod named A.J. Lawrence. And you can find the podcast at the Beyond Eight Figures, 8 being the number.com website.

And so AJ actually wins the award for our sponsor who's given us the most entertaining scripts to read. If you don't know AJ, he is a successful repeat entrepreneur and he has just basically made it his podcast mission to go through and document the entrepreneurial journey. And so he puts and does those kind of stories with folks. And he's actually done a bunch of episodes of it. I've listened to a few of them in terms of different folks that he's at on, especially folks that are outside of kind of the typical Twitter. Twitter bubble where a lot of us are. So definitely if you're interested in getting into more around, you know, entrepreneurial growth, the stories of what other people have learned,

definitely check out the Beyond Eight Figures podcast and see what AJ is doing with him and his folks. So thanks again for him sponsoring today. And now on to the episode. Let's shift to our second deal because I think we, this is something that's very much in you guys sweet spot. and I really want to make sure we can hear your thoughts on it. That one's fun and interesting, but man,

a lot of questions left unanswered from the teaser. All right, Bill, you got this one, right? All right, yeah, I'll take us to this one. So this one is a landscape management business located in Southwest Michigan. In 2021, they did $1.5 million in sales and $55,000 of SDE, so nice, strong, 33% SDE margins.

They say they own a little internet, $900,000 of equipment and $850,000 of real estate. There is no asking price that I can see unless you guys have one in a different easier. So they service commercial customers typically operate on one to three-year contracts, which is nice. They offer various services, including landscape management, fertilization, and turf management, and snow removal services, which I imagine need a lot of in Southwest Michigan. The company provides these services to 600-plus customers in both the residential and commercial. commercial markets. On the residential side, the company services individual homeowners, apartment condo complexes, and more. And on the commercial side, it services retailers, school systems,

municipalities, and more. They've got a 13,000 foot building, as I mentioned. They value it at about $850,000. They're open to selling it separately or doing a lease back to you, the new owner, and they're willing to provide transition services. They do, let's see, they've been around since 1992. They have 12 employees plus seasonal employees. The owner is looking to, one owner is looking to retire and the remaining two are seeking to pursue different new ventures. So this is a dissolving partnership, it looks like. And they say they got a strong company culture. They got extensive equipment base. They operate its business with their lawn maintenance, snowmobile, and other equipment. All is maintaining good condition and undergoes routine maintenance and repairs.

If that's true, that's great. They also say that you could grow this business by restarting their landscape construction division, which generated up to a million dollars of revenue a year, but they made a strategic decision to remove its focus from, the company's focus from these jobs. I imagine there was a reason they did that, probably because it's a huge pain in the butt and low margin, but you could always do it. If you wanted to do it as a buyer, they say you can implement a sales team and execute an aggressive marketing strategy because they do very little. You could do SEO and Google ads, wizardry.

These guys don't know how to do, but assure that you do, which will grow their business and cause you to pay them more for it, I think. So what do you guys think? Palmer and James, I mean, I know you guys do a lot of this and this is kind of right up your alley.

Does this seem interesting? You know, what questions would you ask if you dug in? Yeah, so I think for us, the first thing generally we try to do is distinguish between something that we'd set up as sort of a distinct. sort of operating subsidiary as like on a pure stand-alone or something that would be sort of plugged in as more of a tuck-in and something that would be kind of absorbed into a pre-existing subsidiary of ours. Sort of in this hypothetical scenario, you know, if the geography, if, you know, we had something in place, this would this would be something that we'd probably look at fairly hard from a from a tuck-in perspective. But as a standalone platform, I think there are a number of issues. that would make it difficult.

And we can get in all of those. I think I'd start with, I'd want to understand a little bit better the sort of the revenue composition, both with respect to, you know, the number of customers, what's the concentration, what's the split between residential and commercial,

specifically. Split between landscape maintenance, construction, no. Do they have any of that? It mentions it in passing, but it doesn't really go into the detail. Which of these are good? good for you guys. If someone's evaluating a landscape management business like this,

what are the good parts of the business and what are the bad parts of the business? What's the mix that you like? I personally don't have a problem with any of those service lines per se. It depends on how they're structured. I actually think the, I see the shutting down the construction aspect as not necessarily a negative, provided that they haven't seen any material adverse effect on customer acquisition, so I'd be interested in what revenue and customers have done over a period of time before and after that change. But between landscape maintenance, lawn care, snow removal, if they're priced right, the scope of work is right, I think there's benefits to being

both in the residential or commercial. If it were residential, but they're doing sort of Mo only residential, I'd say, I guess, probably the least interesting, the least attractive type. But full service, sort of more property management on the residential side, I think can be just as attractive as commercial maintenance. Again, provided you look under the hood and the scope of work and the pricing is interesting. Interesting, meaning high average order values per customer, right? Yeah, we don't want to see as like, yeah, we don't want to see as like 80% of your customer base, you know, has like really low revenue per customer. So it's just tough to manage, especially if you're a full service, that would be more applicable for a lawn care company where your service offerings are more condensed. But if you're in the

full service landscape maintenance world and you have just a boltload of customer count at a low revenue per customer, that's just very difficult to manage when you also have a very wide breadth of services. What thoughts come to mind for you guys on this ownership situation? There's three owners, two active, one passive, the guys who are active want to do something else. Like, I just have all these alarm bells going off in my head about this.

I mean, this is something that we, again, probably to be honest with you, probably the biggest reason why this could be problematic from the platform perspective is given the scale of the company and the number of owners, it's likely that basically the entire

management, what you're looking at in the ownership group is the entire management team. And so if they're, and I think what you're seeing is artificially high, you know, SD margins, primarily due to the sort of compensation required for those folks that are going to be leaving. So you'd have to be building in pretty significant adjustments to sort of a true run rate earnings number to compensate for the replacement of what probably is most of your management staff. Again, given the scale of this business,

it's likely that a lot of the institutional knowledge is tied up in those three individuals, or the two ones that are active anyway. So pretty unlikely that you'd see sort of a robust system for understanding. We talked about unit economics in the last deal, but sort of core unit economics by customer service outside of the sort of established, kind of built up intuition of the owners who are leaving. So all those things make it, I think, would suggest that it might be pretty challenging through a transition.

On the flip side, if it was a tuck-in, that would be less concerning. is that you have your management in place. So that goes on the assumption that the 12, and I had that highlighted, the 12 people, does it go into detail on the org chart at all? Are those 12 field staff? And then the managers are, the owners are the only management? Or some of those 12, yeah, okay, so no idea.

Yeah, they don't tell us here. So when you guys think about a tuck-in in this industry, we've had a couple people on in the past that are doing roll-ups in landscape management. When you think about a tuck-in, is what things are important? Is geographic proximity important? So you can kind of cover it

with the same management team. You can move equipment back and forth. Is similarity in lines of service? Does it not matter at all? Can these things be managed remotely? You know, how should people think about maybe they own one of these and they're thinking about doing a tuck-in?

What makes a good tuck-in or a bad tuck-in? So, I mean, I think it's important to define terms. So if, like, you're requiring a business in a different geography, like that's not a tuck in. You're buying a company in the same space and you are hoping that you'll understand that you'll have some

an ability to share learnings or intelligence, but the sort of operational synergy that you would expect is just not going to be there because most of what you're, maybe there's some slight back office stuff you can scale from a very high level kind of controller, customer service, sort of financial and administrative perspective.

But in terms of the day-to-day operation, you know, that that's not a tuck-in. For us, when we're thinking about, when we're truly talking about a tuck-in, we're talking about buying a revenue stream that builds density in our current geography. So we saw what we're diligenting is really the quality of the quality and durability of the revenue stream that we're acquiring and more specifically the gross profitability of the acquired revenue. Okay. I think that's really savvy to say that just because it does the same thing, if it's a physical business and it's not in the same place, it does not make it to tuck in. Because you still need separate management.

You still need, you know, you have no customer overlap. You can't cross-sell between customers because it's a local business. It's still, it's in the same line of business, but it's a different business. Yeah. And so I think to Palmer's point, it does matter a little bit. And I mean, there's some of that that's specific to landscaping, I think, but to Palmer's point, you know, it's hard to tell from the teaser here. You know, this could profile as basically a long care company. that does some snow, in which case there's a consistency of service delivery that probably makes remote management of a new geographic area easier. But core landscaping is actually pretty complicated. There are a lot of different services that change throughout the year, particularly in the snow

belt. And so to assume kind of operational consistency from geography to geography, I think without but kind of organically building that is challenging. Is there a rule of thumb that you guys think about for tuck-ins as like, you know, more than 30 minutes away from kind of a platform or another subsidiary? Or, you know, is there, I'm just wondering what the, at a certain point, right, like an hour or two hours away, it's a totally different business. Like you said, it can't be tucked in. But if it's 15 minutes down the road, is it like, oh, we can make that work,

but we're absolutely going to consolidate offices? How do you guys think about those elements? You can still explore a company two hours away. I think that the difference is you have to look at that deal through a different lens. So either you need to have high confidence that you can supply your own management because there's just no overlap in terms of physical presence and landscaping and snow removal. There's just no substitute for physical presence. So if you do, if you've built middle management bench and you've built leadership depth,

then you can have confidence. We can go two hours and I have a person. who's ready to step into a more of a leadership role and be a branch manager at a satellite location, that could work, but you're looking at the deal a certain way. Whereas if it's within your territory, and for that, I'd say probably within an hour, 45 minutes to an hour's drive of your shop,

you don't want to probably be too much more than that. That's probably where you're saying, well, look, we're going to route it out of our own location, and therefore, you know, I have the management infrastructure. You know, I might need to staff up a little bit to handle this leg of this chunky growth, but you're looking at that very differently than you are something that's going to look like

a satellite office or a whole new brand if you're not going to usurp the brand into your own. And I guess it could have been a little bit more specific with the geography thing. I think really what we're trying to lay out is who's operational systems and processes are running the show of the acquired business. So generally, if the geography is close enough and there's management depth at the home office,

you can acquire a book of business that's, you know, an hour or two away, install kind of a homegrown manager, and the diligence is essentially mapping the acquired revenue stream onto kind of your established system for generating operating profit or gross margin. to the extent what you're that, to the extent you're not doing that and instead saying, hey, I'm going to run this company in the manner in which it's been run previously, the diligence lift becomes much higher because now I need to understand,

like how replicable is this once the three people running it are gone? And so that just becomes a much different analytical process. Aaron, you guys look at the equipment and curious why that number seems very high? Yeah, yeah. That's probably cost, right?

Don't you think that that's... My guess is that's an estimated market value straight from the seller. It could be cost. If it's cost, that would make more sense, in which case, you know, actual depreciated value or economic depreciated value is going to be, you know, if probably half that.

30% of that. Yeah, like in most likely less than half, but if you're talking purely academically you're replacing your CAP-X as equaling your depreciation, you know, it should be around 50%. That would make more sense. But if that's a true, you know,

depreciated value, then the implied return on assets is pretty rough. Yeah. But not all that. What do you think about the real estate? Yeah, massive real estate. I think all of our landscape companies would love to have 22 acres

to grow into, I think that's the difference between We probably could provide Combine all our operations on 22 acres That's the Midwest versus the Northeast for sure Before we started recording James and I were both curious what cold storage was

Because in landscaping you don't need Cold Storage So I don't know if that's actually refrigerated Or that's just a Midwest term For just warehouse space or what That's for when you go hunting You can put your deer In junior warehouse I guess

I don't know I mean, I'm curious, though, so you think about this seller, right? These sellers, three guys, they own a business that, let's say, arguably, is worth somewhere between, you know, a million and $2 million. A large part of their personal balance sheets is also tied up in this real estate. As, you know, capital efficient-minded buyers, most people look at that real estate and go, you know, sure, it may help create an asset base to lend against. but I don't want to come up with another, you know, 10 to 15 to 20 percent of a higher purchase price if I fold in the real estate. It strikes me, though, that, you know, depending on where this is and what the geography is like, this real estate may not be that valuable, right? I mean,

you could probably relocate the company into a more efficient use of space, i.e., you don't need, you know, 7,500 square feet of cold storage and 22 acres. But how have you guys seen on previous transactions, the spectrum of what sellers want to do with their real estate and maybe how that jives or doesn't jive with your desired use of capital. Yeah, good question. I'll take a step and you can jump in. But I would say the majority of sellers are interested in retaining real estate for, I mean, for some of the reasons you guys talked about. And generally speaking, that's fine with us. I would say over time, I think our sort of emphasis on just coldly capital efficient sort of analysis has sort of moderated somewhat in favor of sort of being more strategic and

being able to kind of control our own destiny to a certain extent, particularly given the fact that we intend to own our businesses more or less indefinitely. So, you know, it's, It doesn't bother us if the seller wants to retain real estate, but to the extent they want to put it on the table, that's certainly something that we'll look at. Yeah. I'd say add two things. One is, if real estate is sort of mission critical to the business, then we absolutely want it on the table.

And we've done a few deals like that where the real estate is really inextricably tied to the business operation and the business value, in which case you really need to count it as one. So our frozen food manufacturing company, they got industrial freezing. that are foundationed into the ground. You're not moving those things and you're not buying new ones. So real estate really needs to be included

when you're buying that business. I'd say on the landscaping side, generally I would agree with you that you should be able to relocate a business to other types of property. And so therefore, renting it or leasing it is probably a more efficient use of capital. That assumes that you've done your,

diligence correctly and that there are alternatives for your use in your market, and that is going to be dependent on the market, right? So I'd expect, and not knowing really much about Southwest Michigan, I'd expect probably easy to come by land and fairly easy to relocate, or if you wanted to buy your own piece of land and sort of build it out yourself and sort of control your destiny that way, you can probably find the land. If you're in certain parts of the northeast, or I'd have to imagine if you're in certain sort of metro areas. And certainly I know business owners in like Toronto, for example, where, you know, good luck. Real estate is so, in such short supply that it is, it ends up being mission critical to business, not because there's anything special about that

piece of real estate, but because just real estate in general is hard to come by. Yep. Yep. That was the case with Aquasil. You know, it's not, it's not incredibly difficult for us to find, you know, a 20 to 30,000 square foot building in yard space. but because of the way that the sellers and previous owners had run their business interests, they own a bunch of residential real estate around it and a lot of the employees rent from them. And so if we ever move, it's going to make it harder for the employees to get to work. So it's like, okay, now I need to make sure I have clear options and first write a refusal on a bunch of stuff that they own, you know, so that I don't alienate my employee base kind of thing.

Yeah. So what you're saying is, you know, on the face of it, maybe doesn't see. mission critical, but is more mission critical when you dive under the hood and you learn the particulars. I'd say one other thing to keep in mind, depending on the type of buyer you are, if you're going down the SBA route, lumping in a real estate loan into a 7A loan allows you some flexibility on AM, which could be advantage. So even though your blended rate of return might drop a little bit because the implicit return on real estate's a little bit lower, you know, the whole package might be a more attractive financing package if you were to include

real estate. Yeah, yeah, great point. Michael, any other thoughts on this or Palmer and James, any other thoughts on this before we come to a close? Yeah, I'm curious where something like this you think it would trade. This feels like a tough size and a tough situation compared to some of the other ones that we've looked at and you guys have talked about. Yeah, I think the range you said of one to two million is probably, that would be my 95% confidence interval with the caveat out that I had thought it was 550-ish of EBITDA. You said SDE. And given what we just talked about with the org chart, you know, I'd just be concerned that SDE is super inflated on the two only managers' salaries added back into that. And then you're going to need to haircut that

number quite significantly for management if this wasn't a pure tuck-in. But frankly, even if it was, you're still going to have to haircut it some. So like, if I just take it on Facebook, value that it's EBDA and not SDE, I'd say, you know, one to two is probably that 95% confidence interval for me based on what I see. If it's SDE and there's a huge delta between SD and EBITDA, I'd probably have to ratchet that down quite a bit. Yeah, because you could have two guys making $150,000 each and all of a sudden, you know, replacement costs and all those things. Correct. I was going to ask about relative moat around this. So to me, like when you told me one of two million. I'm like, shucks, you know, it seems easier to go start one of these

from scratch just because there's so many of them and, you know, keep an extra three or four hundred thousand dollars in your pocket versus buying one. So what's, what is the thing that's not replaceable here by somebody that's scrappy and, you know, has that sort of capital to get something like this started? I think it is replaceable. I think what you're paying for is you're paying for a lump sum of growth as opposed to the patience of building it yourself. Certainly you can replicate it. I draw a distinction between replicating it yourself from ground zero. I think that's actually a much longer slog. So I think you're probably underestimating the time it would take you to go from hanging a shingle and getting $1.5 million in revenue.

So like the cold start is a much harder thing. I think if you're a $10 million revenue company and you have an organic revenue generation engine that you've honed over some time growing a million and a half dollars, probably that's a one-year thing, if not less than a year, in which case then you really, yeah, you definitely should be thinking about,

well, is it a better allocation of capital to feed my organic growth engine than it is to acquire customers this way, which might have different expectations, different scopes of work, who knows what, and what we haven't mentioned at all, which is sort of worth highlighting is

whenever you're combining two companies, you have to be careful of culture, which is impossible to model, but incredibly important when you actually close the deal. So like worthwhile to say that human element is very important,

but very amorphous. That's great. The only thing I'll add is I think this is where revenue quality, revenue composition comes into play. So if you're comping your own organic growth engine in whatever form that takes currently against the acquired revenue,

if it is sort of higher quality, stickier, longer ten-year and generally more dense, that's going to impact a lot your sort of willingness to pay from a multiple perspective relative to sort of, your willingness to go out and organically grow. So I think that plays a big role in kind of, you know, the actual kind of X's and O's of which is more attractive from a sort of total all in cost of customer acquisition. Yeah, yeah.

Those are great thoughts. All right, guys, as we come to a close, really, really thankful James and Palmer for you guys joining us. It's fun having this conversation with both of you. What can folks do to follow along with you guys and Chimark? I'll go ahead and vouch, maybe hopefully not steal your thunder, but really, really enjoy your your weekly email on Fridays. It's a good, like, food for thought going into the weekend. But what else can people do to follow along? Oh, yeah, sign up for that for sure.

We're, I guess, relaunching our own podcast. You want to talk about that a little bit? Yeah, if I can, if I can defend the time, big time, small business podcast will be making a return now that I have more people to help shoulder the burden of time-intensive podcast editing. So that'll be coming back. You can check that out wherever you get podcasts. And you'll probably hear about that in weekly thoughts as well. Twitter at Chen Holdko, which is really just retweeting weekly thoughts because we're not super active on Twitter.

And you want to talk about Friday? Yeah. If you ever happen to find yourself in Maine, we do a weekly team meeting for lunch on Fridays. And open invite if anyone wants to stop by and see us in person. I'm on the way. Beautiful. I'm on the way. Come in the summer.

February and Maine. Portland's better in the summer. Noted. Noted. All right, guys. Well, thanks so much. And thanks, Michael and Bill. And we'll see you next week.

All right. Take care, guys. Great job.