Acquisitions Anonymous - #1 for business buying, selling and operating - Asian Specialty Food Distributor going from $3.9M to $6.8M - Acquisitions Anonymous 308

Episode Date: June 21, 2024

In this episode of Acquisitions Anonymous, we get our hands on an Asian specialty food importer and distributor in the US. Over the past three years, their revenue has jumped from $3.9 million to $6.8 million, with $2M EBITDA, which is pretty impressive. Tune in for a great episodeThanks to this week's sponsor:CloudBookkeeping offers adaptable solutions to businesses that want to focus on growth with a “client service first” approach. They offer a full suite of accounting services, including sophisticated reporting, QuickBooks software solutions, and full-service payroll options.Learn how to buy a business.If you are interested in buying a business but unsure how to start, you should check Michael's Buy a Business CourseSubscribe 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]

Well, I mean, this is interesting. Just out of curiosity, like, I want to know more. I'm dying to know, like, what's the actual kind of linchpin of this business and how viable and how sustainable is it, especially since, since 2021, what's been going on. Yeah. I'm sure there's an interesting story here. And it probably did get sold because the story was, you know, probably something that was sustainable. Or someone came along that was a kind of a competitor or in the space somehow already. And this was a good out of. Welcome to another episode of Acquisitions Anonymous. I'm Heather Anderson, and today Mills and I looked at a really interesting business that is a distributor and importer of Asian specialty foods, specializing in the Japanese and Korean market. It was really interesting business. There's a lot going on in the numbers.

We were sort of guessing at what might have happened with the supply chain and how this business might have taken advantage of it. Also, we got into a pretty deep dive discussion about working capital when you're looking at a business like a distributor that has to invest a lot in inventory and carrying goods like that. So it's a really good discussion. I hope you can join it. Hey, Michael here. Want to talk to you about today's sponsor for the episode, which is cloudbookkeeping.com. So cloud bookkeeping is actually run by my neighbor, Charlie.

So I've met him in person and can attest that he's a real human being and a good person. And what cloud bookkeeping does is offer a full suite of bookkeeping services, all in the cloud for you around QuickBooks and other technologies that you're using as a small business owner. So if you're interested in getting the bookkeeping part of running a business off of your plate and focusing on running your business, Charlie and his team are one to call. They can put together a bunch of other stuff in terms of helping you manage and grow your business besides just bookkeeping, sophisticated reporting, definitely helping you get your QuickBooks online set up in the right way and a number of things around payroll as well.

So definitely know them and recommend them. If you want to find out more about Cloud Bookkeeping, you can go to their website at cloudbookkeeping.com. Reach out to Charlie. I know many of you have and see if he can help you, make running your business easier and more fun by letting them help with a lot of the bookkeeping solutions. And when you call, mention this podcast. it would help us and help Charlie know that we're supporting him as well. So thanks a bunch and cloudbookkeeping.com as the sponsor for today's episode.

Happy Monday, Bill, or a Bill. I called you Bill. Sorry, Mills. Wow. It rhymes with Bill. Is that good? Heather, if Bill is the worst thing I get called today, it's a great day. Okay.

Okay, good. Now, we do miss Bill and Michael. It's just you and me holding down the fort today and Faithwell Gustavo in the background. that our viewers and our listeners can't see. But do you have a good weekend? I did. It was a great weekend. Although I'm still waiting for the California sun.

It's still, you know, I'm wearing a sweater. It's cold. But it was a great weekend. We got you covered in South Carolina. It's brutally hot and just getting hotter. Yeah, that's where it is everywhere, it seems like, except here. Yeah. But we have good, good weather for roofing.

But yeah, we got a fun, fun deal to talk about today. This one is kind of unique. I have not seen something like this in a while. So I'm going to share my screen. This is an axial deal. Axial.com. We've been talking about their deals from time to time when we come across good ones. And can you see it on the screen?

Yeah, this one looks really interesting. All right. So I'll read it. Yeah, we can banter from there. So this is a premier Asian specialty food importer, processor and distributor. The company is a leading importer, processor, and distributor. of Asian specialty foods with a strong focus on Korean and Japanese goods. Its products are widely available across North America in restaurants, grocery stores, and

specialty markets. Key aspects, they say product sourcing, they excel in sourcing high demand and unique products with exceptional lead times, ensuring a competitive edge in the market. Private labeling, they boast an extensive private labeling portfolio catering to a diverse range of customer needs and preferences. Customer retention, they enjoy a high customer. return rate of 96% demonstrating strong customer loyalty and satisfaction. They have supply chain stability. They say that they maintain a stable supply chain through a wide network of long-term

suppliers ensuring consistent product availability. They also have high margins on their products, benefiting from the increased demand for Asian specialty foods. They list some growth opportunities, industrial sales market. There's potential to capitalize on the industrial sales market, tapping into a new customer segment and revenue stream makes me wonder, are they wholesaling or is it like maybe somehow retail? I'm not really sure what industrial would refer. Yeah, I'm confused by the word industrial with food here as well. They also talk about product expansion. They want to increase product offerings that it could attract a broader customer base and meet the growing demand for Asian specialty foods. They talk about the possibility to expand their sales team, which they could, you know, drive further growth. and more market penetration, how, you know, how hard could it be? E-commerce platform. They talk about establishing their own e-commerce platform to expand their sales and market reach.

Business intelligence, this is quite a growth opportunity. These are so generic. It's kind of cracking me up. Implementing business intelligence software presents an opportunity to gain operational efficiencies and enhance the business decision-making process. All right, quick financials. We have 2019 through 2021. We have three years worth.

In 2019, the revenue was $3.9 million, and they made about $350,000 in EBITDA. In 2020, they did $3.3 million in revenue, so they declined by about 15%. And they did $550,000 in EBITDA. And then in 2021, they jumped up to $6.8 million in revenue, over 100% growth, and $2 million in EBITDA, or $29. EVDA margins. They say they're located in the central Midwest U.S., and they are looking for a sale or change of control. They are listed in terms of industries here as grocery and related product distributors

and then parentheses wholesalers. So it's kind of hard to tell what this company really is doing, but what an interesting kind of segment they focus on. What do you think, Heather? Yeah, I'm imagining, you know, sort of an importer of. of consumer package good foods that are going to be on the shelves of either the Asian market or Asian aisle of a regular grocery store or more particularly in, you know, grocery stores that cater to Asian or to Korean or Japanese markets.

And we have where I live, we have both. We have Japanese, you know, catering kind of grocery stores and a lot of Korean as well. So I can, I've been in these kind of stores and I know there's a lot of specialty products that, you know, definitely are important. They're manufactured in those countries and they're imported, and that's what I'm imagining. It feels like it's a very supply chain-oriented business, and they're sort of highlighting that, that that's sort of their strength. And when I look at the numbers, because their numbers are really confusing, I think it, you know,

sort of tells that story because we've only got one year past COVID, 21, and that's the year that they grow. Obviously, 2020 would have been a really weird year for a business that's importing products, from Asia. So, you know, you probably can't really draw too many conclusions from 2020 itself. I'm really curious what 22 and 23 looked like. Because, you know, you also can't judge this business by 19. It was a really tiny business in 19. So something happened, you know, when the supply chain sort of blew up. And maybe it's when they kind of put it back together, they put it back together in a way that really works for this business. This is what I'm imagining anyway. Yeah, yeah, it's a Great point. Yeah. One of my favorite things to talk about with sellers, you know, in a business

scenario like this, when they're like, oh, you know, we want to be paid a multiple off of like 2021, right? Free cash flow is to, you know, okay, so let's just say it's, I don't know, somewhat conservative, three and a half to four times multiple on two million dollars. You're talking about, you know, seven or eight million dollar purchase price, but to go, wait, wait, wait, a year ago, 18 months ago, you were making half a million dollars a year, you know? Has this been a structural change? Is it normative going forward? Or is this just you wanting to top tick, you know, and be able to kind of cash out on top? And it's not necessarily something I can bank on or a new owner can bank on going forward. And I mean, nobody has a crystal ball. But I think if you probe, usually you can kind of

find some clues about, you know, maybe things that would make you think it is more, you know, substantive and it would last or things that would make you go, this was kind of a flash in the pan and it's really not going to persist. Right. Exactly. Like something big changed here. They didn't really give us many clues. And it wasn't any of these growth opportunities.

We can kind of eliminate those, right? I guess that's one clue. They didn't do any of those things. We're still trying to figure out what industrial food is. Someone will have to email me and tell me what that is. I don't understand. But, you know, they list a whole bunch of things and they didn't do any of those to grow. So I have a feeling my gut tells me it's something to do with the way the supply chain sort of came back together.

They found an opportunity to get some shelf space probably on some of these. You know, if they were the ones, they sort of said something. They gave us a hint about their lead times. So maybe that was it. You know, hey, we can get this product on your shelf faster. Remember those empty shelves that we had, you know, post-COVID. Maybe it was a little bit of that. you know, there was an opportunity there.

They were able to source things faster than others and were able to grow the business nicely as a result. I like where the margins ended up in 21, but the prior periods, I'm not too excited about those margins, especially 19 where, you know, it's less than a 10% margin on what I assume are perishable, you know, I'm sure these are probably in cans and packaged, you know, food, but still it's perishable. Yeah, yeah, it doesn't last forever. And, you know, we don't.

don't have all the info, but if like, what if this business started in 2018? That's a totally different story than this is a 10 year old business and they were just subscale for a decade. You know, I think looking at their business model, if they're a distributor, right, they are probably very low overhead, relatively speaking. They have a sales staff probably and the fulfillment is all, you know, really probably outsourced. So the extra three, million dollars, you know, that they added in revenue, a little over three million dollars. It looks like they achieved some operating scale and half of that fell to the bottom line. They probably had fixed cost overhead of, you know, the owner and the infrastructure and the

office. But for a distributor, it's not like a manufacturing outfit where in order to produce twice as much, you have to have twice as much throughput or twice as many product lines or, you know, twice as many people in the field, you're operating on thin margins as a distributor. And so it makes me a little bit suspect. Like, I would expect that their margins, you know, are not, are not normal in any of these years, almost. I think they're probably in most distributors that I look at are probably low teens, you know, or high single digit, even when they get to some scale. So, part of my concern is, you know, are they exploiting a niche right now? And, you know, you know, are they exploiting a niche right now that is, you know, underutilized, under explored, and all the sudden,

their profits are going to attract a bunch of competition and eat away and erode their margins. But we don't really know how long this business has been around. We don't know, you know, what it's done since then. And honestly, we probably are looking at dated material because this business sold. That's probably why we don't have 23 and year-to-date 24 info, because it changed hands and all of a sudden nobody wanted to broadcast updated financials. Yeah, that's what I figure too. You know, the other thing I think about when I look at a distributor is working capital. You know, there's there's all this inventory management.

And, you know, I want to know, like, how well are they managing the inventory? What is the inventory? How quickly does it turn over? Are there, you know, is there waste in the inventory that, you know, it has to be thrown out because they weren't able to sell it? So I look at that. But I also then look at, you know, what is a buyer going to? to do how much working capital is going to be included in the deal, how much is that as inventory versus liquid, you know, ARs and cash. And I think it makes, you know, it raises the degree of

difficulty for someone to come along and buy this kind of business, at least as an individual buyer, as a non-strategic buyer, because they really have to think that through as a part of their offer. You know, if you think about it as an afterthought, it can, it could actually sort of structurally change the deal because you realize, oh my gosh, I need a ton of cash. And I didn't include that in my offer. Now this does not make sense. So it's something I work with first time buyers a lot, as you know. And that's one of the things we talk through is, you know, think about the kind of business that you're buying, think through what that cash conversion cycle really looks like. And when we talk about what does it look like when you close? How much working capital are you getting? And then what are

the components of that working capital? I have had people buy distributors. I have had people by distributors. businesses and find out after the fact that there was some inventory that they couldn't move, you know, that was effectively obsolete or whatever word we want to use. Yeah, super common. So that's the first, you know, flag that goes off in my head whenever I think about a distributor businesses, boy, we need to learn a whole lot about this cash conversion cycle and this inventory that you're going to get. Heather, when you're, you know, working through somebody's projections and and maybe even like

stress testing them, because I know the lender. is and you're kind of helping them proactively think about that. You know, one of the red flags to me is whenever I see somebody only doing annual projections, annual pro forma, just snapshot, you know, one point in time. Do you find, are you helping people get it into quarterly or monthly, you know, cash flow projections? I love this question. You're asking me the perfect question.

I like my clients to do a monthly working capital forecast. So it's kind of like a P&M. but it takes it down all the way to the granular level. Okay, you know, we start with our starting cash, and now what's happened to cash, receivables, inventory, and payables every month. And then you run different scenarios. If the business is seasonal, monthly is at absolute necessity? But even if it's not seasonal and you're expecting growth or you have projects

or, you know, you have to kind of think through what does the year look like? Because when you do that forecast, you can find sort of the soft spot like, oh, Here in month eight, I am really tight on cash and I will need a line of credit, you know, and I can see about how much, you know, I would need to draw on a line of credit. So now I know how much to ask for. If you don't do that, and I've certainly seen people who didn't do it, who didn't know to do it, you get the term loan close, let's say. You get close to month eight and you go, oh, hey, bank, can you please give me a line of credit now?

Because I'm tight on cash. Guess what? You can't get it then. they will not give it to you. Even though that doesn't really make sense, it becomes extremely difficult to get a line of credit after you close. But if you did that exercise before, you said,

look, I can see I'm going to need it. Here's why and here's what it'll look like. You can get it. And it also determines, you know, when I know what that working capital forecast looks like, it determines which bank we would approach because some banks don't do lines of credit or they don't do larger lines of credit.

So it really like, once we know what you need, we approach only those banks that can give those types of lines of credit. Yeah. Yeah. That's such a good point. You know, it, I think it comes up a lot. And like you're saying, I think it oftentimes comes up for folks a little bit too late, you know, when they realize not just, you know, not just the typical pro forma stuff, because they may look at, you know, annual financials. And maybe they look at monthly. But, you know, like you said, it may be monthly. But, you know, like you said, it may be month eight and all the sudden you have, you know, insurance premium renewals. Those are typically very lumpy, you know, you may have one-time events. Maybe it's certain things you have to purchase

inventory-wise, you know, that happen on an annual cycle, not a monthly or a quarterly. And I've seen instances where I'm looking at a pro forma, you know, with somebody and they are projecting positive free cash flow on an annual basis. But they, they won't make it there, right? because of the intermittent negative months. And it's like, hey, on an annual basis, you maybe are good. But in months, you know, five through seven, you're hitting negative for, you know, things that are normal in the ordinary course of business, but you need to be prepared for it. And so you're right, especially with distributor because what somebody's using you for,

the reason that, you know, I don't buy materials direct is because I want somebody else to warehouse them. I want somebody else to provide them just in time to me. and they get paid for that. And so in this business, you know, it takes a long time to get something over, you know, the ocean from Asia to the United States. And every grocery store can't stock up on a six-month supply, you know, or whoever they're in customers, every restaurant can't stock up on a six-month supply of that really

unique specialty thing that they don't need a lot of, but they need it consistently. And so I think it's kind of, okay, who's taking the balance sheet risk? And if this company is taking the balance sheet risk to hold the inventory, then you definitely need to be prepared for it. And then even more to your point, how much of the inventory, we don't have any balance sheet info, how much of that inventory is really actually valued at cost 30, 60 days post close? It's usually a lot less than people think. And they usually discount it, but it's usually still less than that. Exactly. And the other thing that I find really interesting when I think about the working capital problem for any deal is that.

that during COVID, we had so many government subsidies for small businesses, right? EIDL loans and you name it. There's all kinds of cash flowing in for good reasons. But a lot of businesses, if you look at the balance sheets post-21, they have more cash, excess cash than they ever used to carry because of all that. So on average, everybody ended up with more cash. So you've got these owners who are able to self-finance a lot of these types of operations because they have built up cash over the years, number one, and plus, they got extra cash in the last few years. So you as a buyer coming in, they're going to take that excess cash off. What does that deal? What does they deal implications for you when you start over with kind of a minimal amount of cash? You know,

oftentimes it means you need a line of credit as well. So yeah, they're very, very interesting. And always really, really interesting with distributors. You know, this niche is kind of intriguing to me. because it's obviously not, you know, a small total addressable market, a small tam. But depending on who they're selling to, like, this may not be big enough for people to really chase you and go after you and try and compete, you know, much of this away. It's not like you're saying, hey, I want to create the next, you know, Yeti cooler or the next, like, hot thing. These types of providers, depending on what they're doing, when I read industrial, it made me think,

I went on a site visit once in Texas, was visiting a client of mine and reached out to a couple different business owners just kind of prospecting and just out of curiosity and ended up going and meeting this guy, sitting down with him. He ended up really fascinating business. They made dry food seasoning that went on like Doritos and Fritos. And it was this like very proprietary blend. They didn't make the chips. They didn't package the chips. They didn't do even wet food seasoning.

It was just, and they were in like a hundred thousand square foot building in Texas, just making the powder that goes on chips for flavoring. And you realize, like, that's industrial food. Okay. That's industrial wholesale because they're not selling anything to anybody other than like Frito Lay or whoever. But you know what? They probably have one customer or maybe two or three at the most.

Major customer concentration. This was a huge business. And I think if, you know, it's easy for anybody to say, hey, here's the easy ways to grow this business. You know, here's our growth opportunities. One of the issues, I think, with automotive, with anything aerospace related, with, you know, doing it, especially if it's wholesale, there's very few customers in the pool, especially like food like this, probably more so than automotive, you know, which there's just a few major manufacturers and, and, uh, airspace. space with a few major manufacturers, but you almost have to go in knowing, I'm going to have some customer concentration, you know, there may be, let's just say that as a distributor, they're selling to, you know, some niche kind of Asian grocery chains. They don't have thousands of customers,

especially because it doesn't seem like they have enough overhead to have that big of a sales staff. They don't have that big of a sales staff. So they probably don't have tons of different accounts. So I think that you know, you got to go in knowing that you could really run into some customer concentration here, which maybe 2021, they landed a huge account. And that's why, you know, or maybe they landed two huge accounts. And so they could have, you know, 20% customer concentration across, you know, five different clients. Who knows? Yeah. Good point. Anytime it's a very nichey market, then we, the pool of customers is smaller and the possibility for customer concentration is greater. And you reminded me of a story now. I guess I do know what industrial

food is now if I think about it. I went to a deal site visit a long time ago at the port of Los Angeles where they were importing these giant, I don't know, vats or containers of frozen fruit juice concentrate that was going into a soda. They were selling it to, I think, Hanson soda at the time. And they walked me back in this huge freezer at the port to show me, you know, what that looked like. And you're right. Yeah, industrial food is massive scale. And I don't. think you can go from like bottled sauces and, you know, things like that to industrial, you know, I don't think that that translates very easily. I have a friend who they had a massive, they still have a massive $100 million plus ingredient distributor, not food ingredients,

but a basic kind of ingredient distributor. And they were like, how hard could it be? We're used to, you know, moving 300 gallon drums and 55 gallon drums of this stuff. Let's just package it in smaller formats, you know, smaller container, smaller packaging size for like more Etsy, you know, makers and things like that. And they put, you know, a bunch of money for them, a bunch of money into growing out this, you know, this kind of in customer segment. And it totally fell flat. And they're like, we're used to moving, you know, 55 gallon drums. It doesn't make sense for us to move two ounce containers, you know. It's just not the way our business is built, you know. And so completely different businesses. Yeah, I agree. Yeah. Yeah.

I'm even thinking of more examples. I learned about hot sauce. And the peppers that come over for hot sauce that are imported, they come in these plastic things that can fit inside a shipping container. So imagine an entire shipping container full of like, I guess they're fermented. They don't have to be refrigerated. They can be shelf stable. I mean, I can't just imagine an entire shipping container full of peppers for hot sauce.

That's industrial. Okay, now I know. Now I remember. It's the things that like when, you know, they're on your plate, you know, at home or when they're on your plate at a restaurant, you're like, oh, this is nice. But then when you see them in that large of a format, it's kind of gross and it, you know, creeps you out a little bit. Like it's disturbing. Like, you know, our food supply chain is kind of an anomaly sometimes. Yeah, when you think about it in this way.

Yeah. Well, I mean, this is interesting. I just out of curiosity, like I want to know more. you know, but I'm dying to know, like, what's the actual kind of linchpin of this, you know, this business and how viable and how sustainable is it, you know, especially since, you know, since 2021, what's been going on. Right. Sometimes, like you did it the other day, we talked about a deal and we're like, let's go,

you know, let's go sign an NDA and get the SIM. And then, you know, it was a little bit dated. and the broker, they always kind of love to tell you, right? When it's like, hey, it's sold, you dummy, you took too long. Yeah, too slow. Too slow. It doesn't always work out that way. Yeah.

I'm sure there's an interesting story here. And it probably did get sold because the story was probably something that was sustainable. Or someone came along that was kind of a competitor or, you know, in the space somehow already. And this was a good ad on. Yeah. Yeah. especially if most distributors represent certain product lines. So if you're representing, you know, Asian, Korean, Japanese product lines for, I don't know,

some kind of package good. And all of a sudden you go, hey, we're really used to distributing, you know, chips. And now we can distribute, you know, sauces or something like that. You already have the customers on both ends. It's just a matter of diversifying your lines. But most distributors get used to, you know, kind of representation of products and vendors. So it would make sense for that type of buyer for sure. Yeah.

Yeah. I would say for me, thumbs up on this one in terms of wanting to know more. But there's like 99 scenarios where I could imagine getting the SIM and it's a very quick pass. You know, there's some scary things that you can unveil and go, kudos to you for running this business, but there's no way that it would be sold. Yeah. Yeah.

I'm thumbs up to the same same story. I'd want to see more hear that story. And, you know, I think it's a good business. Yeah. well thanks for everybody for sticking with us and listening to the episode if you know anything about the space would love to hear from you and enlighten us tell us what we got right tell us what we got wrong if you enjoyed the episode please leave us a review or share this episode with a friend and we'll see you back next week