Acquisitions Anonymous - #1 for business buying, selling and operating - Big boy painting contractor for sale - Acquisitions Anonymous 187

Episode Date: April 25, 2023

Michael Girdley (@girdley), Mills Snell (@thegeneralmills), and Bill D’Alessandro (@BillDA) review a big painting contractor for sale. Check it out: https://www.bizbuysell.com/Business-Opportunity/painting-contractor-with-85-reccurring-clients/1974619/?d=L25ldy15b3JrL3BhaW50aW5nLWJ1c2luZXNzZXMtZm9yLXNhbGUv-----Thanks to our sponsor!Acquira - your acquisition in a box service. Acquira offers training to help you find, evaluate, and close on a small business. All in under a year.    Their team has bought over 30 businesses across  3 different portfolios. Whether you’re just beginning your business search, actively pursuing a specific deal, or looking to grow your existing company, Acquira’s training and team of experts can help. Their M&A advisors provide individualized support through the entire process. They will provide guidance toward your offer structure, drafting your LOI, in-depth due diligence, and securing funding for your deal.  They will even fly out to the business with you.  Once you acquire a business, they can help you grow it too.Acquira’s ACE Framework will help you transition that business from owner-operated to management-led, increasing profits and allowing you to step away from the daily operations and enjoy doing more of what you love.  And if “more of what you love” is buying and growing more businesses, they can help you build a portfolio of businesses, and eventually get liquidity from that portfolio by selling it to a financial buyer, or selling it to its employees.Space is limited each month, so if you’re looking to acquire a cash-flowing business this year, sign up now at acquira.com/pod-landerSubscribe 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 Mill Snell, one of your co-host. We have the band back together today. Me, Bill, and Michael are all there first time in a little while, and it's a roller coaster of emotions. At certain points, I'm super excited. Bill and Michael are totally discouraged. And we talk about a really interesting business in New York that does maintenance and painting, kind of on industrial surfaces. Think infrastructure, bridges, you know, underground pipes and different things. It's really, really cool. And it's a pretty decent size deal. It's about $22 million in revenue, $4.5 million in earnings. And we talk about some of the nuances with these types of contracting businesses. They have a massive backlog, $73 million in backlog, which is good, but it has some pros

and cons. So we get into the nitty-gritty and have a fun conversation. And I, I'm a wet blanket. I just totally discourage the guys, but I think it's a good conversation. If you've ever looked at a business like this, this is one that's slightly upmarket and has some favorable characteristics. I do it in a heartbeat.

If you're in New York and want to do this deal, I'd love to talk to you about it because I think it does have a lot of really good benefits. Big thanks to our sponsor this week. I'm not sure who it is, but Michael will lead in with that. And thanks for tuning in. Today's sponsor is Acquira,

your acquisition and a box service. Acquire exists to help you find evaluate and close on a small business, all in under a year. Their team has bought and operated over 30 businesses across three different portfolios, so they practice what they preach. With a Criterer, you could choose to go through their accelerator, set up your investment thesis, and finance creative business by yourself, or Acquirer can do it for you. Their search team scours the continental U.S. for a business matching your thesis and gets it under LOI. Their unique business model combines an accelerator and investment fund. They can take on minority interest in the business,

making them something like a search fund. Only you maintain majority control. Once you've signed an LOI, their M&A advisors provide individualized support through the entire diligence and closing process. They will provide guidance toward your offer structure, in-depth financial and operational deal diligence, and securing funding for your deal.

They will fly out to the business with you, and once you acquire a business, they can help you grow out as well. Acquire as ACE framework will help you transition that business from owner-operated to management-led, increasing profits, and allowing you to step away from the daily operations and enjoy doing more of what you love.

And if more of what you love is buying and growing more businesses, they can help you build a portfolio businesses and eventually get liquidity from that portfolio by selling it to a financial buyer or selling it to its employees. Space is limited each month, so if you're looking to acquire cash flowing business this year, sign up now at aquira.com slash pod-hyphen lander.

And again, that's aquira.com slash pod-hyphen lander. All right, Mills, can you start with a beard report? Um, somebody told me today that I needed a haircut and it wasn't for the hair on top of my head. It was for my beard. Dude. Was this somebody your wife? No, no. I have my friends.

It was a stranger. I now have my friends commenting to me about your beard. Oh, man, here we go. I just saw my sister. She was visiting from, uh, from New York. And she gave me so much, she gave me so much crap about it. So thanks, Margaret Ruth. All right.

Well, you're hosting, right, Mills? I'm sorry for, I'm sorry for taking over. No, I love it. We just always talk about hair. You are always baby-faced and bald-headed, and I just look like a homeless person. All right, so we have a fun one today. I know nothing about it other than the fact that you guys said, oh, Mills is here. We have a deal to talk about. And apparently it's a painting contractor. Well, look, I think the important thing is we did the Aphrodisiac chocolate, and we decided to do that when you weren't here. but the painting contractor we think is right up your alley. We're worried about your aphrodisiac chocolate reaction.

The sex chocolate, I don't know that I would have brought much to the conversation, but this one, I think I have something to say. Okay, so guess what, Biz Buy Sell, our favorite future advertiser, we're talking to you, Biz By Sell. So this is a painting contractor with 85% recurring clients in New York, New York, And the picture is a bridge and a big ferris wheel in the background and a building, but they have a bridge. They're asking $18.75 million for it. Cash flow is $4.5 million.

Gross revenue is $22 million. And they have $2.8 million in inventory. So, $18 million asking price, $4.5 million in cash flows. This is a big boy. This New York-based industrial painting company receives approximately 40 projects a year in municipal infrastructure, boasting an experienced team of over 90 employees, including three project managers, eight four men, more than 75 painters, and six administrative employees, 15 years of quality work has resulted in strong relationships with general contractors

and a competitive bidding process that brings in 500K to a million dollars per project. Included in the purchase is a current backlog of $73 million and $2.8 million assets, which include safety equipment, rigging, and supplies, plus $680K and trucks and trailers. The company's services include industrial painting and site preparations for jobs such as bridge tunnels and transit stations. They also offer lead abatement and shield integration services, which keep workflow high during the winter months. The service area is 90% in the state of New York

and 10% in Pennsylvania, New Jersey, Delaware, and Ohio. Operations are managed from the Ohio office and stored in a New York area warehouse. There are also additional field offices for each project where locations-based staff report daily. So I'll pause there. I'm confused by these last two sentences, but it sounds like these guys basically do

painting for, mostly for painting and industrial for public transit? Is that what I'm seeing? Yeah, or infrastructure. I would say infrastructure is what it sounds like. Oh, because there's bridges tunnels, transit stations. Okay. And then what do they mean by this? Operations are managed from the Ohio offices and supplies are stored at a New York area

warehouse. So like the headquarters is in Ohio? I think, yeah, like the owners are in Ohio. their AR AP payroll, all the back offices in Ohio. And then that's too far to move materials. So like they put their paint, their scaffolding, you know, if they're spraying, like all their different equipment stays at least somewhat in close proximity to the jobs, which are mostly in New York, not in Ohio. And then the additional field offices, they probably just have like job site trailers, you know, where they have a project manager or a superintendent. And then these are, I mean, these are big painting jobs.

You got to think half a million dollars worth of painting, these things don't, they don't start and finish in like, you know, 30 days. So they would, you know, rent a portable job site trailer and put somebody there and then have the crew. Seems like most of it is captive labor. Probably labor, but I don't know if we, I don't know if they tell us that. I did find, oh, and here I'll share it. If you click on this link, they actually have, they actually talk about which

brokerage they're from. And Mills, it's your second favorite brokerage. Let me see. I can pull it up. I want to pull it up just so I could get you to react to it. It's from the firm. Of course. So, okay, let's cut to the Chase Mills. If you had to rank it in terms of like you give it a level of like, let's give it beard stars, like one to five beard stars. Like one to five beard starts, where would you rank these guys compared to generational equity? They're both the bottom of the barrel. They both have no facial hair. No bearded.

Babyface, both of them. Well, and I mean, so I think what the firm does that is interesting is they're based out of somewhere in the Midwest, and they, to their credit, they get listings all over the country, and I'm pretty sure they get them sight unseen. They never go on site in person and meet with the owners. They were selling a business in rural South Carolina that did like nine different things, but one of them was change out traffic lights. I don't know how they find these listings, but props to them.

I think where I would offer some constructive feedback is anytime I've talked to a seller from them or generational equity, they have not done a good job managing seller expectations around purchase, price, terms, what the actual process of selling the business entails? You know, we've done 190 episodes. There's part of me that thinks maybe we already did this one, like 100 episodes ago. No, I think it was different. I think it was different or, you know what? I think it was different or they've refreshed the listing.

Oh, it's possible to sell. Yeah, yeah. A lot of times these things will sit for a really long time and then they kind of have to spiff it back up, but it looks like, I mean, it looks like a lot of this is older data, right? 2021, because they're showing 2019, 2020, and 2020 and 2021. Okay, guys, people are going to stop listening. I actually don't think we've done this before. I don't remember it.

I don't remember it. And I am damn sure our listeners don't remember it, all right? Oh, sorry, sorry. Early specialty is like, welcome to Acquisitions Anonymous. This data is terrible. Nothing is good about it. You should stop listening right now. Also, we've also probably done it.

There's no point in listening at all. Goodbye. You got to definitely leave this in now. Gertley gets yelled at by Bill for ruining the episode. Everyone's already tuned out. This episode is over. I'm looking. No, so we did, I'm looking back, episode seven, we did a government contractor that does star everything.

That was, that was the firm. and I think that might be the one that you're thinking about. Got it. Okay. Well, I did just look, this actually came from a listener, Dan Kohanna, who sent it in, and he sent it in in February. So we know it's been on the market since then. All right.

That's the minimum. All right. So now that it's just us on the podcast and all the listeners have tuned out, what do you what do you guys really think about this one? And by the way, the firm has put some very cool photos. of the things you paint in this listing. You got to hand it to them. If you're watching on YouTube,

there is a, just from top to bottom, there's like what looks like a infrastructure or plumbing room where like all the pipes are painted a bright red. There is a giant suspension bridge, which it looks like they've painted. There is a guy hanging from underneath a suspension bridge, like painting the underneath steel parts of the suspension bridge.

So, you know, when we say like a painting contractor, like we're not painting walls here. Like these are guys. in hard hats and scaffolds, like applying weatherproofing, sealing paint to big infrastructure projects. So, I mean, I really like this deal a lot, like from start to finish. I think this is a really, really cool and interesting company.

It is probably very difficult to transition ownership. If you go back, or I can't really see it in that, but I think in the biz by sell listing, they say something about the owner is like the senior estimator and project manager. Right. which is prototypical for this, this size business doing this type of work, all roads lead to the owner, right? And figuring out how to migrate them out of the business is just insanely hard. You know, I mean, it's like next level hard because the type of person who is really good at growing this business from zero to $20 million in revenue is not the type of person who

delegates right well at all. They're a micromanager, I feel sure. Well, you've also got the thing here that this is in New York State for the most part, right, which we know is a general, very heavy union area, especially for projects like this, because you're painting a bridge. Who owns the bridge? The state of New York, typically, right? And they've got the unions control the state of New York, right? So I would imagine it doesn't say here, what's interesting is they're headquartered in Ohio and not in New York, and yet they seem to win jobs. I wonder if they're still New York unionized or not. I think you have to, because at the end of the day, it does come down. to the labor. And most of those, most of those contracts, if they're publicly funded, which all

of this would, are going to, are going to highly, highly, highly, incentivize that. If not, if not mandate it. But, I mean, it's not impossible. I would say it's much easier for an owner-operator to think about buying this business with union labor. But with the caveat, you almost certainly will not be able to sell this business to a private equity firm, if and when you're contemplating that as an exit. Because there's just too much kind of long-tail liability associated with those union obligations. This is a great business to be in, right? Like you've got a niche.

Like you're one of the few contractors that can do it. And I think we've talked about, you know, I have a buddy who specializes specifically in doing this sort of contracting for, government and they just do one component of roads. And like, if you want that road done, like there's them or one other firm that bids them and nobody else has any experience, you know, and has a track record. And it's like a great little mention. What's super cool about this too is that, you know, what they're doing with this lead abatement, you know, a lot of these things, this isn't obviously the first time they've been painted. These are maintenance projects. And there's a

lot of state funding that is coming down not just from the state level, but also federal funds that are flowing to states to keep up infrastructure. And we're seeing a lot of it in like school system funding. A lot of it was like COVID relief funds that are trying to like replace HVAC units and stuff. But the infrastructure is in the path of progress. People know that our ridges and bro, you know, bridges and roads and, you know, all those things are kind of woefully under-maintained. But with the lead abatement on these, it's been painted before. It was done with lead-based paint if it was like before 1980. And so it's not just, hey, get up there with a grinder and just, you know,

knock the rust off and paint it again. It is very, very highly regulated. And the compliance behind it is a complete headache. But that keeps some random guy in a pickup truck from being like, oh, I'll do it. And obviously, if you're painting the underside of a bridge, these are monster logistical projects that take a lot of just experience to manage and to staff. and to kind of look around the corner. I think it's super cool.

So one data point here that I pulled up in the click-through listing, which is in Microsoft Word, by the way, I think you downloading a Word file. Like, can you guys save a PDF? Come on. But it says here actually, the clients are actually general contractors working on infrastructure and municipal projects.

So it looks like they're mostly a sub that gets called in on all these things. And that's typical. That happens to my buddy all the time where like five different primes will be bidding something and four of them will have him as a sub. It's like, oh, okay.

That's awesome. Yeah. It depoliticizes what you're doing because I don't know how things work where you guys are, but if you want to get government contracts in San Antonio, there's an old boys network of who gets called first. There's one very large engineering firm

that just kind of magically gets every single one of our engineering projects for road building or bridge building, like they just call this one firm. And guess what their building looks like? It's really nice. And the cars in the parking lot are really nice. So there's stuff going on there. But then you go look at the,

you go look at who donates at the fundraisers for politicians. And guess whose name's like top three every time? The guy who runs that building. That's how the game is played, especially in New York State, but probably everywhere. Yeah, there's some stuff going on there. So I don't buy these numbers. This looks way too profitable. So run through the numbers, Michael.

I don't know that we said them out loud for people who are listening. Yeah, so let's hear, well, their numbers are all screwed up, at least here on this thing. Let me pull back up the way it was in the previous one. They claim to have $22 million in revenue, and they claim to do $4.5 million in cash flow. To me, that is an incredibly profitable government contractor. I've looked at a few of these, and that's way high. Like running at 25% cash flow margins as a general contractor, like that smells funky to me.

Well, at the same time, though, like they're not building warehouses. Like, this is specialized, hang from a scaffold, wear a hard hat infrastructure work, right? And they're a sub, which means they're not just a GC skimming of 5% margin. Yeah, no, this is totally doable. High teens, I think, is sustainable. I think being in the kind of low to mid 20% net margins is some just uniqueness about founder-owned subcontractors that they can just squeeze profit out that like then I mean,

I'm going through this, right? There's plenty of things that I want to do differently than the founder of Aquasil. And he could squeeze out way more profit than I can just through sheer grit. Yeah. Okay. Well, cool. Maybe I'm in the wrong businesses then. You can make this much money painting?

It is brain damage every single day. I promise you. We used to have when I first started and I moved back to Texas and started our family business, we had painters working for us full time and they were bat shit crazy. They were like the craziest employees all the time. And I asked my dad, I was like, why are the painters so crazy? He's like, they're out sniffing paint all day, son. That's why they're crazy.

What do you guys think about the backlog here? The $73 million in backlog. That's incredible. That's a really high number, right? That's basically three times annual sales. I mean, that's freaking awesome if it's real. Obviously, you'd have to figure out if that's real. But at the same time, I could almost see it because how long is it take to build a bridge, right?

And you know that bridge has got to be painted at the end when it's done. So you could conceivably book your painter, right? I think these are mostly, I think these are mainly like repainting projects. Like they know it's coming up. It's scheduled. construction? Yeah. But I think these are I think these are mainly like restoration type projects. Probably not as much new construction because most of that steel is coming.

I guess no, some of it probably does get painted on site. Look at this picture here. You know, I was just looking at the pictures. It kind of gives you an idea of what they do. Like, look how red these pipes are. This is inside of some sort of like inside of the bridge. They're in there painting that. And look, this guy looks like a painter. So it's probably one of their staff. this guy in the bottom picture appears to be hanging off the bottom of the bridge and painting it. So, like, this is some high specialty stuff because it's not like you're just like walking up and painting a drywall, right?

It's like, oh, like you're hanging off the side of a 400-foot bridge and painting it while water and ships are like flowing underneath you and cars are going over the top. So it totally, totally makes sense there. And then it looks like this other picture here, it looks like they're involved in repainting a bridge that looks like it was built in the 30s. and the pain has to be redone and scraped off on all that time. So it seems like a reoccurring revenue source for them to do these kind of maintenance things. So what's going on? This is like a good business. It's fairly priced.

Like what are we missing? This is a really difficult business to transition. So that's $73 million in backlog. If that's contracted revenue, it's contracted with this entity, right? This unique tax ID number in this name of this business. and if this is a union-based business and if they have this kind of backlog, you almost certainly have to do a stock purchase. Otherwise, all of those contracts have to be repapered or assigned. And they're saying it's around 40 jobs a year, right? So you're talking like 120 contracts

that you've got to go in due diligence or immediately after due diligence, you've got to go assign all those contracts over. So the backlog kind of gets a little bit risky. also though the problem is is that most of these contracts have provisions where you're technically in default if there's a change of control in the business. So contractually, right, the revenue is there, but if there's a major ownership change in the business,

then technically the owner has an out. And it's incredibly problematic to try and transition businesses like this. The contracted revenue looks good and it feels good, but actually getting there is very, very difficult. If you could, I mean, you could buy stock and there are, you know, that's a little bit of a pain in the ass, but there's ways to make a tax election so a stock purchase looks like an asset purchase from a tax point of view, so you don't have to take that hit. I would say for me, probably the biggest risk of doing a stock purchase in this business is

that you're going to take on all the tail liability of all the jobs that they've ever done. So like if the paint on the bridge they painted two years ago starts peeling and it's supposed to last for 20 years and it's only lasted two years, you're going to be repeating that bridge for free out of your pocket, right? And you're probably not going to be able to charge for it again. So you're going to have to, if you have to do a stock purchase here to maintain their contracts, which you may be forced to do, you've got to realize all of the product liability you're stepping into. And this is true for any business where you do a stock purchase. You're stepping into all, And that's one of the biggest liabilities you are stepping into is all of the product liability from the past.

Except in the case of this business, the product is seven-figure hang-from-bridge jobs that if you have to do one refund, you're going to feel it in the pocketbook. Right. If it's consumer products business, you know, you can kind of model it out. We do 1% refunds, you know, continually and you can put a number on that. In the case of this one, I don't know that you can do, you probably got to do some sort of reserve and hold it in an estimate. or something, because clawing money back from the seller to pay you to repaint a bridge is going to be impossible. So you'd have to figure out some sort of escrow safety buffer for product warranty.

So these guys actually, they're, well, first of all, there's two interesting things I think in this. The sellers aren't, they're saying they're willing to stay around for an 18-month transition period, which is not what we typically see from the I want a haul ass seller, like very different here. The other thing is they say they're willing to roll equity for 12.5% of the, purchase price and do a seller carry for another 12.5% so 25% contribution from them, which I think is pretty interesting. A, that they have faith in it, but also, like,

they don't seem really that excited to get out the door, like our typical seller, which is good, right? I think it's a good thing. But it also, I would be surprised when somebody digs into this that you discover it's not really $18 million or $4 million in cash flow. And you discover it's really $2 million. And this thing is priced at nine times. That's what I I think that is my prediction. If, well, let's see, Dan Kohana goes to do the NDA and a site visit on this, I think you discover before the firm's adbacks get added back in, it's really about $2.2.2 million.

And this thing is way overpriced. That's my prediction for this deal. I bet there is some of that, Michael, but I don't think the earnings go to half. I think they probably go to like 3.5 or something like that, where they have some adbacks that are a little bit aggressive and they want to try and treat them as one-time occurrences, but they're actually like, you know, maintenance cap-ex or buying equipment that, you know, they have to have in the ordinary course of business.

What, Mills, what does this mean here? They say growth opportunities, increase capital to increase bonding capacity. What does that mean? So they can bid bigger jobs? Yeah. So the way that these projects work, especially state-funded projects, is that you have to have bonds, you have to be bonded as the contractor. and their payment and performance bonds.

And so what the government, especially, you know, at this level, what the government wants to know is that if you don't perform, we can come after you. And we're going to come after your bond, which means the bonding company underwrites you to make sure that you're going to perform and that you're going to pay any subcontractors and suppliers. So the way that it works is the bonding company, most people have these longstanding relationships. It's an insurance product, but the bonding company underwrites you and they want personal guarantees. And a lot of times in businesses that are maybe a little bit smaller than this,

they have your wife, you know, on the hook, they have your personal house. I mean, it is very, they have teeth in you. So that if you just walk away from a million dollar job, the bonding company is not the one who's ultimately going to be on the hook. The way that the bonds work is you pay, a slight percentage between probably one and three percent of the overall job as a premium, you know, for the job to be bonded. What happens, though, is you hit a ceiling and bonding capacity is one of those things that institutional buyers and private equity firms really help these businesses with is they can kind of negotiate better terms, get the personal guarantees removed, increase the bonding capacity. And all it is is when you, the way it's typically structured

is you have a per kind of a per project limit. Like on a business like this, it's probably three, four, five million dollar per project kind of cap. But then there's a total aggregate cap of maybe $20 to $25 million is typical. And so that's the amount of bonds that you can have outstanding.

So a lot of times when you're bidding stuff, they want to know what's your bonding capacity? It's kind of a quick way to flush somebody out to say, hey, are you used to doing projects this size and do you have the ability to continue to bond, you know, more work? The other kind of quick tell that you can ask is what their EMR, their employee modification rate is. It's a safety rating that insurance companies use for your workers' comp. And if their EMR is like over one, then they have a really bad safety record and you're going to pay more for workers' comp and general liability.

I mean, the more I look into this, more I like it. And I know they're like, yeah, do bigger deals. And I'm like, well, actually, this is kind of great. They like do 500K to a million per project. That's what they say. You're like noise in some $200 million project, and you're doing some corner of it that like the main GC doesn't want to do. So like, yeah, okay, well, I can see how you can run at 25% margins

because they just want to throw a million dollars at you so they get this part of their proposal checked off. And saving 100 grand on your 500K proposal isn't going to make a huge difference in terms of their competition, you know, being competitive in the bid. So I don't know. It does matter. No, it's like we deal with this on a day-to-day basis, right? Where your comment about your friend, right, where it's like, hey, there's maybe five GCs bidding it and he's the guy, right, who's the go-to for four of them.

And then maybe there's somebody who's coming from out of town or something like that. And there is a lot of like relational capital that's exchanged in these because what some subs will do is they'll say, hey, look, I'll lock down with you, this one specific GC. and I might give you a little bit better price than everybody else so that you can edge them out and win. That's like the way that this whole world works. But it is a competitive bid process. But when you get into these government contracts, they're slightly less competitive in one sense because only certain GCs can bid them. But then they're more competitive in the sense that they are blind bids and the lowest price gets it. And so, like, we go to pre-bid meetings, our estimators do, at the local Veterans Affairs Hospital.

And we have these guys who are technically able to bid these projects, but they're like AV contractors bidding $10 million renovation projects. And they're veteran-owned and they technically are able to bid it. But they have no business actually building a building or renovating a building. And so they're like, hey, will you give us a roofing number to, you know, re-roof the VA hospital? We're like, no way, because it would be a nightmare to work for you. we're going to bid to the guy we know and the guy who we know can actually deliver and manage the project and deal with all the headaches. See, I do like this business, but now, this happens every time we look at a business like this,

like a heavy industrial business. I'm like, oh, this sounds great. And then Mills starts talking about the employee modification radio ratio and the bonding capacity. And I go, oh, shit, I have no idea how to deal it in some business like this at all. Like, I could totally get snowed by a seller. and I would have never asked about the employee modification radio. All right. So, Bill, I want to go back to one thing you were saying about kind of product liability.

So I don't know how this works in painting. In roofing, it all kind of hinges on manufacturers' warranties. If you're going to spend a million, like, let's just say it's a million bucks on a roof, you want to know that it's going to last 20 years and the manufacturer backs it up. For painting, like Sherwin Williams and like Benjamin Moore and all these people, even industrial painting manufacturers, I don't think there's the equivalent of a warranty. like this, but there is some product liability kind of insurance in a way that the manufacturer provides. Like, if you go paint this bridge and the paint fails, either it's a workmanship issue,

like your painters didn't prep it, didn't prime it, didn't remove the rust, didn't brush it on the right way, whatever it may be. The way these projects work is there is typically a workmanship warranty that you have, like in South Carolina, we have to offer between a one year and a two-year workmanship warranty. Any issues that come up, we have to go fix it. And if it's our fault, right, there's other things that can happen that aren't our fault. But if it's our fault, we have to fix it, no cost. But then you're two through 20, those next 18 years, it's covered by the manufacturer. Painting, I don't think works the same way, but there is at least some kind of protection, right, in a way that we get from the person who's manufacturing the product. We're just the installer.

We're just the applicator. Same with these guys on the painting side of things. I do think that, you know, you bring up a good point. In any kind of transaction like this, you would want extensive reps and warranties that protect you from those long-tail liabilities, especially in a stock purchase, but you do it in an asset purchase too. But like any employment liability, any environmental liability, I have a friend who sold a business. And he had a five-year, five years worth of escrow.

And it burned off, like a little bit burned off. Actually, a lot burned off after a year. more burned off after three years and then like the really long tail environmental stuff burned off after five years and they just held it in escrow and it was a percentage of the purchase price and he kind of knew like I feel confident and I'm willing to

put my money where my mouth is on a portion of the purchase price. So you're going to want to ask for that if you buy this painting business also. Yes, yeah, because to your point if you're like, hey, by the way, you know, we did get dinged and I need $100,000 from you and it's been, you know, 26 months, good luck.

He's not even answer your email. Good luck. Yeah, yeah, exactly. Exactly. But, I mean, there are ways that you can, you can set it up,

you know, through the reps and warranties to at least have some protection. Actually, collecting that money is a totally different story, which is why the escrow is kind of the strongest for you as the buyer

when you're worried about those liabilities. So do we think it's fairly priced? What is it priced at? It's got like roughly $5 million in cash flow, and they want what for it? 4.4 and they wanted 18, or 22 for it. They claim it's at 4.5 times.

4.5 times. What do we think about valuation? I think it's pretty high because Mills is shaking his head. Milk says it doesn't pencil. No, I didn't run the math to see if it pencils, but most of their deals don't. I think it probably sells for,

you know, between 10 and maybe $13 million worth of enterprise value. What the firm does, and I'll give them credit, they are basically structuring this in such a way to justify their purchase price. I think it is a good signal that the seller will roll equity and it's a good signal that they may take a subordinated note or something. But it's all kind of a construct, I think, of the broker to say, here's how you can pay what we're asking. And it kind of traps you in that line of argument to go, oh, okay. But the all-cash price, and I think what it's actually worth is much less. than what they're asking.

And that's why, you know, the financials are a little bit dated, at least than what we have. I think that's why this type of thing takes a really long time to sell, not just because of the expectations around valuation, but because of how difficult it is to actually transition this type of business. It's just incredibly tied up in the kind of owner's personality and their balance sheet and their way of doing things. It's really tough. Well, so Mills, I know that you bought not a painting business, but obviously a roofing

contractor as long-term listeners now. And you told me that the sellers are, you're several years in and the sellers are still involved, right? Because you set up a multi-year transition process, right? Because it's that hard. Yeah, two years. Yeah, April 1st was two years that I've been in it, and they're still involved and have been taking more and more steps back. But it allowed us to navigate some of these things like, you know, transferring contracts and navigating our bonding relationship and our bonding capacity and, you know, just all the, I mean, then all the soft stuff, you know, like employee relationships and customer relationships and supplier relationships. I mean, all those things are incredibly critical. And it's not impossible to do quickly,

but it adds a lot of risk if the seller needs to go away quickly. Yeah, my buddy that bought into a general contractor business was a five. five-year transition period. Mm-hmm. Just took that long. Took that long. And GCs typically, I mean, they typically operate with much less margin than these subs. They, the risk-reward profile is different.

They typically are doing, you know, if they're paying, right, if they're paying the painting contractor in this case a million bucks, they're marking it up, you know, because they have, they have a role in it. But it's not uncommon to see general contractors that, you know, they're not. do $100, $200 million in revenue, and they do it for very low single-digit margins. Because they're really functionally just a middleman and a project manager and a construction manager. And they do bear a lot of risk. They are, how many, I mean, I tweeted the other day how many general contractors are like

two payrolls away from insolvency? Like, it's just even the big ones. And I've, you know, I've looked at the financials of some of these folks that are doing exactly what you're talking about, like the 60 million, 100 million in revenue. at 3% net margins and you're like, and you have $8 million worth of equipment? Like, this does not seem to. So most GCs are not that asset intensive. They don't have to be.

Because, like, if I look at the job sites that we go to, you know, not just us, but most of the other trades are renting equipment. Yeah. Tractors, forklifts, all that kind of stuff. The GCs, the problem that they have is that to break into the market is very, very difficult. And so once they establish those relationships, especially if it's kind of municipal K through 12,

if it's something that's recurring like that, a multi-asset owner, the people that I think it's really difficult is the ones who are just doing one-off private development and, you know, hoping that new buildings get built and get renovated. The customer acquisition model on that is a lot tougher and can go away, you know, much more quickly. It's kind of feast or famine. Bill, I think the more time I been on the podcast with Mills, the more, the more picky I get about the businesses I'd be in. Yep. Oh, yeah. I'm like, oh, I'm reminded of the last one where it's like, you and I are like, oh, cool, huge digging machines and like 20% margin. This looks awesome. And Mills is like, guys, this is a disaster. You don't understand. You don't understand. I went to,

to, I guess, put it into perspective. I talk to you guys and I'm like, man, I'm doing things really, really hard. It seems so hard. I went to a conference that one, Michael, when you and I recorded and I was in Austin, and it was a bunch of residential roofers. And I looked at them and I was like, I have a lot of respect for you guys. What you're doing is really, really hard. So I think it's all relative.

I talked to a guy who's in my holdco course. And he decided as part of his holdcoe was to start a home roofing business in 2021. and he has done the math and he's got to basically double the business to make it profitable. Like that's how it's got to work. And he's hired these people, he's paying staff,

he's got all this fixed overhead. So, yeah, I was like, have you considered launching a course? It's a much better business. Zero marginal cost, baby. Well, except for the six months where you have to like basically unload your brain

onto pieces of paper, it's pretty fun. But once it's done, it's okay. All right. Well, way to go, Debbie Downer. Mills, we were so excited about this one. Let's buy it. I want it.

This is great. This just comes back to buyer business fit, right? TM. But like, Mills is probably really comfortable buying this business and he's fired up. But like, Gurdley or I walking into this thing, we're going to miss half of the most important

questions, right? So if you're going to buy a business that you don't know Jack about, the best thing you can do is either hire an industry guy or bring them on as a minority partner or something so he can tell you where you're an idiot and what you're missing. Or at the very least, don't buy the first one you look at, right? Do diligence on 20 of them. And eventually someone's going to mention the bonding capacity or the employee modification ratio. And you're going to go, what's that? And then eventually you'll add it to your diligence list. And when you buy the 20th one,

by then you'll know what questions to ask. I love it. All right, you want to wrap us up there, Mills? You're hosting today, so. Yeah, sorry, I've just been talking the whole time. You do great. This was fun. I'm always thankful.

I'm thankful for you guys' perspective. Thanks, everybody for giving us a listen. If you would subscribe, right? That's what we're asking people to do, or give us a rating. It's more important, Michael. I think, yeah, any of the above, also take your most favorite episode,

might not be this one, but take your most favorite episode and send it to one friend that you think should become a subscribe. and ask them to subscribe. That's our ask. Please help us out. It helps us in our never-ending quest, as Michael says, to

break even on the podcast. And we'll see you guys next week.