Acquisitions Anonymous - #1 for business buying, selling and operating - Beverage canning plant in Washington (It was odd!) - Acquisitions Anonymous 261

Episode Date: January 9, 2024

In this episode of Acquisitions Anonymous, the hosts discuss the potential purchase of a Pacific Northwest beverage manufacturing facility for sale in Washington. They analyze the business's financials and lease situation, concluding that the business may be struggling due to factors like the rise of mobile canning services and changes in the microbrewery industry. They also delve into the challenges of negotiating lease terms in commercial real estate deals and how SBA loan requirements can impact those negotiations. The hosts consider potential strategies for a buyer, including partnering with the current owner or buying specific equipment. Overall, they explore the complexities of acquiring and reviving a struggling business.Check out the listing here: https://www.bizbuysell.com/Business-Opportunity/pacific-northwest-beverage-manufacturing-facility-for-sale/1996396/Thanks to our sponsors!Acquisition Lab and their team have been longtime supporters of the pod.Created by Walker Diebel author of Buy Then Build: How to Outsmart the Startup Game, is an accelerator with a highly vetted cohort-based educational and support community for people serious about buying a business.Acquisition Lab exists to help people buy a business and navigate all the complexities of the process, as well as provide a trusted framework, tools, and resources to support you from search to close.If you are serious about buying a business, check out acquisitionlab.com or email the Lab's director Chelsea Wood, [e-mail].---- Check out Girdley's new course, How to find a great business to buy. It's chock-full of insights and is perfect for listeners of AA who are looking to start their own search!Subscribe 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 to Acquisitions Anonymous Internet Number One podcast about small businesses buying, selling, investing, and pooping on. And today, myself, your host, Michael Gridley, and my co-hosts, of which there were all of us, got together and talked about a very unique business located in the Pacific Northwest that does canning for beverages. So like bottling and all that kind of stuff. So it was a really interesting way we went and looked about it. And I think what was super cool is you can see us go through the journey of trying to figure out the story behind the business, come up with some preliminary hypotheses and then try to figure out ways to make the deal work. So really had a good time. And I think you will enjoy this as much as we did.

Here is the episode. This episode of Acquisitions Anonymous is sponsored by Acquisition Lab. Acquisition Lab and their team. They've been longtime supporters of the pod and they provide a really great service for people who are looking to acquire a business. So it's created by Walker Dival, who's become a friend. the author of Buy Then Build, How to Outsmart the Startup Game. So Acquisition Lab is an accelerator with a highly vetted, cohort-based, educational, and support community for people who are serious about buying a business.

So a lot of our listeners like you, you turn in every week to our deal reviews, you want to get in on buying a business. You're on this podcast because you're trying to learn how to buy a business. But if you're not quite sure where to start, Acquisition Lab is a great place to start. So they exist to help people buy a business and to navigate all those complexities. of the process, everything you hear us talking about on the show. They provide a proven framework, tools

and resources that support you all the way from search to close. They do it. There's a whole bunch of education material and support. So if you're serious about buying a business, check out AcquisitionLab.com or you can actually email the program director Chelsea Wood directly. Her email is Chelsea at buy then build.com.

All right, guys. I've thought about the way we need to grow this podcast is going more broad. And I think what we need to do is every other episode, we just make it about Taylor Swift. Oh, I'm into it. I mean, you guys are hardcore Swifties, right? Not hardcore. Like, I would listen to it on the radio.

I wouldn't turn it off, but I wouldn't also buy the concert tickets. So I'd say I'm like middle of the road. Okay, Mills, I want to test your level of swiftiness. What is your favorite Taylor Swift album? She and I were born in the same year. You're testing the bounds of my knowledge with this, but 1989, and I'm pretty sure that's an album name. So I'm going to go with that. My wife and daughter did go to one of the concerts. My daughter's about to be 10. So, you know, she's the target audience for sure.

Very good. Heather, what's your favorite album? I think the midnight one where she kind of sounds weird and kind of went in a different direction. I like that one. Oh, okay. Yeah. Yeah. I'm a 1989 fan also. I think that's really good. All right. So I brought us a deal because I'm the one host that did my homework. Okay. Where's the truth? Actually, I delegated my homework to someone else. And she did it. But it turned out really good. So I brought us a deal that she found. So you guys want to hear about it? Yeah. All right. Let me pull it up here. So it is a Pacific Northwest beverage manufacturing facility for sale in Washington. And I believe this would be Washington State. But we'll figure that out a minute. They are asking $6.9 million for it. It has no cash flow, $3 million in revenue, pays $16,000 a month

in rent, and it was established in 1996. The description is that it's a business, or it's a high-speed beverage canning facility, nationally recognized company, turnkey, poise for growth, SQF, an organic, organic certified facility in an opportunity investment zone, central to the West Coast distribution, experienced and trained staff and management, great value sale, more information, won't be provided upon request. The real estate is leased. It has a 32,000 square foot building. The lease expires.

That's a dramatic pause. 315, 2024. In four months, it expires from now. 30 employees, facilities for more info, please email and we'll send deck. Growth and expansion, send more email for more info, financing up to 45% or shareholder rollover into purchase, three to six month,

management support with consultants available. Reason for selling. Please email for more information. Oh boy. Business listed by business listed by Adam Diskin. Adam Diskin. Yeah.

Well, while we talk about this one, I think I think I can Google who Adam Diskin is and we can figure it out. So what does this business do? What do we think? I'm looking here at the pictures. It looks like they put beverages into cans. Is that it? That's what they do.

Yeah, they're probably like a contract food processor, right? Well, a lot of these small breweries, I was just talking to a brewery owner the other day, and they don't have their own canning lines or bottling lines. They just have the vats and they brew, and then it's expensive to invest in all that equipment. So these guys come and they're all mobile. This one may or may not be mobile because they're in a lease space, but the ones that are mobile, they'll like come to your brewery, pull out their line or run it through like their trailers, and bottle your beer, can your beer,

and then you slap your label on it and you just didn't have the machine. When I was living in Colorado, like probably about 10 years ago, those mobile canning things absolutely exploded. With all the microbreweries, you know, like that had not been invented. There were a couple guys,

a couple different companies, that made gazillions of dollars. They actually franchised it out. So, like, you could start a mobile canning operation in your city and they, like, told you, what equipment to buy and how to build the truck, you know, and how to run your business. And they took a 10% royalty on everything you did. And it just proliferated everywhere. So these mobile canning things are very prevalent. And I would be interested and curious to

understand how a non-Mobile one competes. Yeah. And they're trying, why are they selling it for more than two times revenue, gross revenue? So I'm imagining that is the cost to set up this kind of facility. I was going to say, you know why, Heather, because that's how much they invested to build a facility. Yeah, yeah. And it's not making money, apparently. And so they want to sell it probably at their cost.

And that's probably not a great idea. To your point, because you are competing against the mobile units. And the whole microbrewery industry seems to have kind of peaked and then kind of is on the downward side now. you know, most of those, those brands didn't become profitable. They didn't find their market. And so, you know, these businesses set up to service them, I've got to also be on a downward trend, I would imagine.

That's my guess. I think there's some information missing here. Obviously, they're alluding to some of it being missing. But, like, the business has some amount of cash flow, even if it's negative, right? There is something happening here that, you know, we're not getting the whole story. And this is one of those things that has a lot of red flags and you probably don't want to spend that much time on it, you know, because you get into it and you just pull on that thread. And it's like, wow, it only is getting worse. The more info I find out.

But it would be worth, it would be worth knowing. Do they actually make money and they just don't, they're worried about somebody finding out so they don't want to put that they have three million in revenue and a million in, you know, free cash flow? I doubt it. Yeah, you also see the ramping back up after COVID and supply chain issues getting better, which is never a good sign. Like, I would be willing to bet this company got whacked during COVID and has just barely been hanging on ever since then and is finally capitulating. And the guy's trying to get his capax back out of the facility.

Yeah, blood in the water for sure. I'm kind of keying in on also the lease term that Michael showed us. it's expiring in four months. They point out that it's in an opportunity zone, but I mean, that's physically where it's physically located. So it's maybe not going to be in an opportunity zone. And also you can't move this stuff.

This is the kind of business where it's probably more expensive than it's worth to move everything and reset up somewhere else. So I think just the lease term alone is enough of a red flag to say, why would anybody step into this situation? If you pull back the onion here, I think what you'll find is a business that's struggled since COVID, barely hanging on. The founder is probably fried. I mean, I feel for the guy for sure. And then his landlord probably hit him with a huge rent increase. And the rent increase is likely takes the last little bit out of the business and pushes it over the edge to where it doesn't work with the higher rent. And the guy is probably so burned out, he's like, I'm out. I got to sell it. The problem is, as a buyer, I mean, what are you walking into? What do you have here? Like, you're buying a business that doesn't work where the rent is going up or God help you, you got to move all this stuff. It's, I feel so bad for the guy, but like, I don't think situations like this are salvageable.

The one outlier that's kind of interesting is they've been around since 1996. I mean, that is kind of amazing, almost 20 years that they've been, no, almost 30 years, 25 years that they've been going and I wonder I wonder like what the full story is here you know if this equipment is bought and paid for then there's probably like an interesting angle but we just had there we go oh he's the head bottle washer well it's really interesting so he had his name and phone number but no listing anything beyond that on the listing so I googled Adam Diskin Seattle or Washington Canning. And a guy came up, and it turns out he's this.

And then I was like, okay, well, that's the only guy, but it's kind of weird. He does have Seattle connections through this D.H&G thing, which may be the name of this canning thing. And then it looks like he's been, he created a cider company in Nashville. And then he says he's from Santa Barbara. And the phone number on here on the listing is an 805 number. So, I don't know. It's just, there's, it's hard to understand the story here, but I think this is the guy

because he's the only Adam Diskin that I can find on the internet that's doing any sort of canning with an 805 phone number. I have one up to Gurdley on the Google sleuthing because I found more on this guy. So I found, uh, there is also an article, which is rare because Gurdley is a hell of a Googler. Um, but I found another article on this. Sherlock Gurdley. I have one, I have beached me for once. You've got to do Googling.

This is fun. Um, so there's a. a news article titled, pay a visit to Nashville's first citery. And a quote from article is, my business partner, Adam Diskin, moved to Nashville about 12 years ago from the Seattle area,

says the co-founding partner of Diskin Cider. When he arrived here, you couldn't find any craft cider. It goes on, they basically have opened a citery concept and cider brand in Nashville. I'm sure it's solid business,

but maybe it's can in the Pacific Northwest where he used to be from, but it seems like this guy doesn't even live near the business anymore. It's his legacy. It's his legacy business. And he's like, hey, look, I'm focused on cider now. And I don't want to mess with this thing. And that's why the reason for selling his call for more info, no email for more info is, hey, I live, I live, you know, all the way across the country. It seems like he's doing more commercial real estate and multifamily housing. There's his DHGLC website. Like this guy's on. other stuff, you're exactly right, Mills. And he's still got this cannery in Portland that is

probably barely breaking even, and now his lease is up. And he's got to do something with it. And canned beverage is, you know, really boomed in the last few years. So, I mean, there was that going for this business. But, you know, maybe just the fact that he's absentee is the problem here. So what do you guys do with this, though? Okay, so you've got a whole bunch of in-place cap-ax. Let's assume it's paid for. It's probably good equipment for canning and bottling. but you've got a lease problem where you might have to move it or pay up. I mean, this guy clearly doesn't want to own it anymore.

You know, what do you do? Like, what's the play here if you're the type of person who wants to own or invest in Canning in the Pacific Northwest? Are you looking for a small business to acquire? Well, this book right here is the Bible for people in your shoes.

It's the Harvard Business Review Guide to Buying a Small Business. It's the go-to book. But here's the problem. You see this whole book and this little bit, This is the only part that talks about the hardest part of buying a business, finding the right one to buy. And the bad news is it's full of outdated advice and stuff that doesn't work anymore. I'm Michael Gurdley.

I own 12 companies, including a couple that go out and buy more companies themselves. And I have a podcast where we look at new businesses to buy each and every week. I've looked at thousands of businesses for sale, and I've bought and sold nearly 20 of them. And I'm telling you, the old ways they don't work anymore. So I made a course with the latest. the greatest, and it's called How to Find a Great Business to Buy. It's laser focused on the new way to run a business search with what works today, so you can play smarter than the sea of buyers who are out there competing against you to try to buy these businesses, and you can get the deal

that was meant for you. In the course, you'll learn three things. One, how to narrow your search with a tight thesis. We're hunting with a rifle here, not shotguns. Two, how to scale your outreach to get the most possible leads. This is a numbers game after all. And three, how to run your funnel like a pro so you can boil down thousands of leads to find your one great deal. Plus, you'll get a couple of exclusive Chili's jokes that I've never published before. So what's not to love? Go to gurdly.com slash great business to take the course today. I think part of the issue with this is that the best buyer, the best buyers, potential buyers, have already passed on it. And they're the ones who are also in the Pacific Northwest and would have need of this equipment.

We just had like a decent size brewery closed down in Columbia, announced that they're going to close down. And the headlines are, you know, cost are higher and there's more competition. And, you know, there was like some weird, you know, insurance change was serving alcohol. But in reality, they've been trying to sell the brewery, which is not super public knowledge, but they've been trying to sell the brewery for like a year and a half. And nobody wants to buy it. And so then they're like, hey, we're just going to shut the doors.

there's probably right some scenario similar to that happening here where he's gone to everybody just like this brewery went to every other brewery or every other rich dude who comes in there and is like hey i'm thinking i'm thinking about getting rid of my equipment do you have any interest in buying a bottling line and people are like we already have ours or yours is old or that's not priced correctly i could just buy a new one for the same price or whatever it may be and this if you follow it out it probably ends up where this guy's like hey we're just going to shut down. And then you buy the equipment? Yeah, it gets sold for parts. Yeah, it goes to auction. You know, instead of being sold as a one package lot, it just gets parted out, you know,

and it goes on an online auction and somebody in Nashville is like, hey, I really need one, just one of those things, not all of them. Is there some version of you go to this guy and say, look, it's not worth the $6.9 million. You're about to have to take it to auction. Maybe you recover a couple hundred grand, like, let's be realistic here. Or we could start Nuco, you know, I'll put in the 500 grand it costs to move the stuff to a new place. And I'll give you 25% of the equity because you contributed all the hardware. And I contributed $500,000 of cash. I get 75% of equity. And it's like a hope ticket. Like, and if it works, you know, maybe you get your money back, you know, and it becomes worth something. And it

doesn't work, you know, yeah, I lost 500 grand, but so did you. And then we part the stuff out and, you know, maybe my equity is senior and I get the first 500 out if we have to liquidate the thing. And at least it's better than shutting down, dude. I like it. I think the downside and the cost to recognize in all that is potentially this business is failing for good reason. And you need to understand, I think when you go do something like that, like what is going to be different for you when you start running this business? It could be as simple as like this guy is not like paying attention to the business. and that's why it sucks.

But it could be also like mobile canning has happened or there's a huge recession in, you know, in microbrews that causes this not to make sense anymore or any of those kind of things. So that's where I would dig in first, like truly understand before I got into something like that. Like what's the problem here? What's the true cause of this thing failing?

I think there's always that issue too where you don't really know what's there. I mean, let's say you don't have a ton of bottling experience or, you know, bottling manufacturing and assembly line experience, you could walk in, you go to a site visit with somebody like this, and they're like, these machines are great, and, you know, they've been well maintained, and, you know, the value of these things is, you know, a million and a half dollars or whatever, and you have no real clue, you know, I mean, you could do some research, but at the end of the day, this guy knows more about bottling equipment than you do, and you can talk to a bunch of people

and research a bunch of stuff, but he still has, he still has the leg up on you. And the problem with that is that there's so many situations where, you know, you go in, you buy a business and you try and work out some deal on the inventory. Some of it's old, some of it's obsolete, and you, you know, you negotiate and say, hey, I want to buy some of this older obsolete inventory, maybe on consignment or on a discount or something like that. And I've yet to talk to a person who's done a scenario like that, who is like, I discounted it enough. You know, there's all these scenarios where people are like, well, you know, I bought some old inventory for 50%, you know, of cost.

And anybody I've talked to like that is like, I totally overpaid for it. I just had to throw it away. And Bill, I know you have some instances like that. Yeah. Inventory is not worth what you think it is usually. Never. Not only that, but when I see small businesses with a lot of inventory, I automatically assume that their accounting is probably not very good on the inventory, and we're going to have some EBITDA adjustments to deal with once a Q of E is done.

I did want to comment on the lease term, just like in general. I think there's a really interesting dynamic going on around commercial real estate. There's a lot of changes going on in commercial real estate. And I think knowing what sort of rent you're going to have to pay versus what the seller has been having to pay. pay can really be a big, can really move the needle in a lot of small deals. And like this is a good example where we assume the reason the lease term is so short is because the rent is probably going up, or at least the landlord's trying to do that. I see that in all kinds of different scenarios. And depending on the type of real estate, you know, I think there's, we're going into a situation

where there's kind of an abundance of other properties people could move businesses to. So we come across that question, well, should they negotiate for a longer term? term lease, or should they plan to move in two years or three years? And what would that look like and cost? The SBA has a rule. And it says that the SBA loan has to be the same term, the lease has to be the same term as the SBA loan, 10 years usually. And this is a problem for a lot of businesses. Like I just worked through one yesterday with the client. The lease term has four years left. They are almost out of room. He knows he's going to grow the business more than 20% in four years. And if he's forced by the SBA rules to go renegotiate and get options to renew that lease,

it's going to have to pay for it. It's going to cost him in EBITDA. And there will be no real business benefit in his eyes. There's plenty of other properties like that. He could go lease or less. That would be more suitable. So it's one of those situations where the rules really don't always make sense. And the lenders have to use good judgment to kind of waive that rule sometimes.

So I actually ran right into this when we sold a business and we had to go. get options from our landlord to full, we need 10 years. And most commercial real estate leases are not 10 years. I mean, you can get 10 years, but a lot of people like a five-year lease in commercial real estate. And frankly, a lot of businesses like a five-year lease too, because stuff changes. So to lock up for a 10-year SBA loan, it just, it's not the same product, a lease in an SBA loan. So to have to try to synchronize the timing is really tough. Yeah. It doesn't really make sense for anything other than a location dependent business. That's where the rule, I think, really originated many, many years ago for a restaurant or a retail

business. And then it got applied across the board. And then the SBAs let lenders waive it, but then they start criticizing them for waiving it. So now you're in a situation where the lenders feel like they shouldn't waive it. And yeah, they're forcing people to, you know, negotiate options for renewal that they don't need and don't want. And it costs them, you know, kind of puts the the leverage in the landlords court, which isn't really serving anybody well. So I have a new thesis about this deal. I think that if you look at this guy, Adam, I went through their website that you found, Bill, the DHG LLC one. These guys are real estate private equity guys. So they've been raising money. And then guess what category they're in?

Multifamily. So not good. But then the fact that on this, the actual deal here itself, it talks about it, being in an opportunity zone. My suspicion is Adam and his partner raised money to buy this business and have gotten in way over their head. That's what it smells like. And especially given this business was founded when Adam was still in college,

it's got to be what has this whole time. So you think it may have been around since 1996, but maybe these guys have not owned it since 1996. Adam appears to be in his late 30s or like 40s. That's what it looks like to me. So I don't think this is the first time. That's a great point. and they went looking for an opportunity zone investment,

which can be awesome from a tax perspective, but you got to actually operate the business. You have to make money to get tax credit. So many people did these Opportunity Zone deals and built things that didn't pencil, you know, build hotels in the middle of nowhere, you know, and it's just raw, raw, raw, but then there's not actually demand to support it.

There might be something here. I think it's just one of those like, know who your seller is kind of situations before you start to get into it. Yeah. And these are the types of deals, by the way, that occasionally people make really good money doing, right? Sort of special situation.

If you can figure out how to align the incentives, you know, and unlock the value that's there, I've seen people make tons of money doing these things. But you have to underwrite it as a turnaround. Yes. You know? And it's amazing.

Like, people who do turnarounds, like, it's a lot of work. and it requires a very specific skill set, but you talk to people and you're like, that just sounds way too good to be true, you know? Like it was a bankrupt security camera company or like, you know, just these random things.

You're like, but you had what kind of exit and you had what basis? It just doesn't make sense. Yeah, when your cost basis is like $50 in a bag of Doritos, like you can really like have huge ROI. Yeah. Yep.

You know, an interesting point about a lot of those is structuring it so the seller doesn't feel like he got screwed. So like giving him 10% equity in the new thing can go a long way toward getting distressed deals done because he doesn't feel like he's just got to walk away with a total loss with his hat in his hand. The one other nice thing about distress deals is if you have, sometimes you have to bring cash to the table, but I've had instances and Heather, you may be able to comment on this where I know folks who they just have a balance sheet that is substantial in some other way, maybe not cash, maybe not, you know, liquid.

But they have some kind of operating assets. I had a friend who bought a business from a guy actually in jail. And all he did was assume their payables and a very small amount of term debt. And he took over the business. But it was a million dollars worth of payables. And the guy who's in prison is like, it doesn't really matter what my receivables are or what revenues there or what cash flow. I just literally have no other option. It wasn't. a bad business. It was actually something that this guy knew a little bit about. And he was like, sure, I could fund those payables just out of my cash flow. But you've got to have the heft to do it, you know? Assuming debt is really tough. You know, a lot of people look into it and it usually

falls apart on the part where the seller learns that they're not going to be released from liability on the existing loans. That their name is still on it. They're still on the hook. And once they realize that it's usually over. Once in a while, you know, maybe they're in jail. They would agree to that. But, you know, usually it's a tough sell. We were actually able to do a deal like this back in 2017. We found a skincare brand.

And the founder had just got over their skis. They owed their suppliers a bunch of money. They had one loan, bank loan on the business. And what we were able to do is use our line of credit to pay off the bank loan. so functionally assume the debt, right? In fact, I'm not even sure we paid it off in full. I think we paid off some fraction of her bank loan, and she ate the rest,

and we also assumed their trade debt as well because they owed their suppliers a bunch of money. So I think we were in for, it was not a lot of money, it was like $300,000. And this business, we got this business to, so we were in $300,000, and then I paid another $300,000 to the guy who found the deal for me, actually.

So the finder's fee was as big as our capital in. So we were in for 600 grand, and within a year, this business was thrown off $700,000 a contribution margin because we were all to take a ton of cost out. Unfortunately, we had to let a lot of people go. We had to break their lease. It was a turnaround. You know, this business was in trouble. But it worked out really well for us because we kind of had the balance sheet to your point mills where we could clean up the capital structure, keep their vendors happy, and cut cost out and get the thing turned around. really worked out. I like this one for somebody else.

Gurley's favorite, favorite phrase. Love it just not for me. Too hard for me. Great deal. Seems like a lot of work. You guys let me know how that goes for. All right. Well, thanks for doing this one, guys. This is a good one. And everybody, we'll catch you next week.