Acquisitions Anonymous - #1 for business buying, selling and operating - Buying A $1.95M Agricultural Aviation Business (BIG MISTAKE) - Acquisitions Anonymous 312

Episode Date: July 5, 2024

In this episode, Michael, Bill, and Heather talk about a $1.95 million agricultural aviation business for sale. It makes $1.58 million in sales each year and has $519,231 in discretionary earnings. Is this deal not as great as it seems? That’s part of what they discussed. Listen in to hear their thoughts on this deal.Thanks to this episode'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 Course. 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]

I would guess. But that being said, I don't think you can pay 3X for this business unless you will know how to fly these airplanes. Which is also kind of a crazy thing about this. He has, this person has two planes probably because one of them is always broken. But more than just lowering your STE, then you're dependent on one person. Hello, everyone, and welcome back to another episode of Acquisitions Anonymous. This was a super fun one. It is about an aerial agriculture crop dusting.

business. So picture of those planes that fly low and spray pesticides and fertilizer on crops out in kind of farmland country. That's what this business does. They own two planes. It makes half a million bucks a year. It's a super cool business, great business model. Some good discussions from the crew today. It's me and Michael and Heather. We talk about transferability of this business, how you would structure a deal. And then also is this thing going to get replaced by drones. So it's a pretty cool episode. If you like this episode, you'll probably like the other 300 plus episodes we have done of Acquisitions Anonymous. just got a new website. It's acqueu anon.com. And we have indexed all 300 plus episodes by industry with episode summaries. So if there's an industry that you want to learn about, even as niche as

crop dusting airplanes, you can go on our website and find all the episodes we've ever done. And you can get a crash course on that industry. So that's something people have asked for for a while. And we've finally gotten and put together. So go check it out. You can also sign up for an email list on there so you won't miss a deal. And of course, subscribe to our podcast and follow us on Twitter. So thanks for being here. And I hope you enjoy this episode of Acquisitions Anonymous. All right, taking a quick pause here. I have something to tell you.

This is Michael. I hate bookkeeping. I hate bookkeeping. I hate doing HR. I hate doing all that kind of stuff. But for bookkeeping, I have found a solution. It is my friend Charlie's business called cloudbookkeeping.com. So that's cloudbookkeeping.com.

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so you can do the important stuff in your business rather than worry about getting your books right. So give Charlie a call, cloudbookkeeping.com, and now back to the episode. Well, I have good news and bad news for you guys. Which would you like first? Give me the bad news. I always like bad news first. Yeah, man. The bad news is I miss like a week and a half, but the good news is I'm back. Yes, we've missed you, Michael. It's been really hard. We've run out of jokes about you. Sorry. Well, there was like a standing emergency meeting that they put right during our recording.

And the last one I was like, can we move this meeting, guys? So we moved. did. I'm glad you're back because I was going to have to grow a beard if you didn't come back. There wasn't enough beard. Like it was just Heather and I, nobody had a beard. It was going to have to be me. I wasn't going to grow one. I was in, you know, I went to Mexico for a couple days of my buddies last week. And it was interesting. This is the first time I've been there with a beard. But people looked at me like really differently than before, like really, really differently. In what way? How did they look at you before and how did they look at you now? I don't know. Are they like whistling?

I knew you're going to ask for specifics. Yeah, I don't want to tell you the specifics. Do they think you look older with a beard or younger with a beard? That didn't come up. No, in one point, my buddy was like, he's like, that woman's staring at you. I was like, oh, why? That's weird. I think it's going over.

I guess that it's your vibe. It's that way. Note to self, Mrs. Grudley should not listen to episode 335. But yeah, some of that was going on. Well, it's good. You know, sometimes it takes you many, many decades to finally arrive on the look that works, Michael. Great.

I didn't want to out your actual age. But I never said. Well, I brought us a deal. And this is the first time we've ever done anything like this. So you wouldn't think after 300 and how many episodes? are we up to, like 340? Something like that, yeah. You would think we would find something we've never done before,

but it is an agricultural aviation business. So let me tell you guys about this. So they have basically a picture of one of those crop dusting planes. You know what I'm talking about where the guys like spray crops? Have you ever seen these things in action? Yes, it's extremely cool. These guys are amazing freaking pilots. Like, they will just do these ridiculous like turns,

and flips and loops and all that kind of stuff. And it's low pass, right? I mean, they can be, you know, one or a story or two off the ground, like very close to these crops. And so, yes, for those of you don't know, they'll have these planes, which are low speed, like high lift planes, but very maneuverable. They have tanks in them for basically carrying things like fertilizer or pesticides. And then they have nozzles that go along the edge of the wings of the plane.

And they fly along. and when they need to crop dust or whatever, they fly along, click a button, and then go really close to the crop, and they spray them with different stuff. So that is what this business does. So the way they describe it is an aerial application of crop production products.

That is an essential tool for American farmers. This company provides aerial chemical fertilizer application in the southwest United States. It is very established with a solid, long-standing customer base. There are nice private facilities with an airstrip for lease. This is a turnkey operation.

with two clean air tractors, both equipped with Bantam, Sotlok, Intelliflow, ADSB, and Coms. The season runs April through October, and the seller pilot is available to help as needed after the sale. There is definitely room for expansion. They currently also offer Grand Spring services, but this would be optional for the buyer. The numbers, the listed price is $1.95 million,

down payment of $1.95 million. Discretionary earnings $519,000. on total sales of 1.6 million. So listed for Bill, it seems like a little bit short of four times sellers discretionary earnings. Yep. So I'm a dummy. So of course this is a third party company. I for some reason just pictured like the farmer owned a plane and went out back and cranked it up and fertilize his own crops.

But of course that's not how it happens. You hire a company and you go, I need, you know, Diet 1, 2, 3 spread on my crops today. and they go do it. Oh, and it even goes further on farming besides these guys being an outsource deal. A lot of times those big tractors and the combines and stuff like that, they're actually contracted out. There's a company that has those and works hundreds, if not dozens of fields around a specific area. Basically, so they can run, you know, you run that equipment 24-7 during the growing season

when you're going to do that stuff. So, yeah, a lot of it's that way. And my buddy is actually, he inherited farmland. And it's been fascinating talking to him about it. Working farmland? Like real farmland. Yeah, yeah, like in Iowa or something like that. Kansas, I don't know.

One of those flat places I never go to. Yeah. Yeah, so he does that and he's like a gentleman farmer. And like once a year he goes out there and like talks to the people. And there's different ways you can go about it. One is you just straight up lease your land to somebody else or you kind of do what he does, which is like he partners with an operator. and he's a partner with them.

And so he's kind of a gentleman farmer in that way. But it's been fascinating. And the value of farmland has just gone up and up and up over the past couple of decades, especially with private equity, has started to buy farmland. Do you guys know about this? No, why? Because there's only so much of it. And you can play a lot of games.

There's a lot more farmland than there is, you know, all other types of land. Well, farmland is actually super interesting because it really has a kind of economies of scale, obviously, but then it's a situation also where certain farmland is only really good for certain things. So there's only a limited supply, even though America is like super big, there's a limited supply of really, really good farmland that's close to the things you want to make it highly productive. So, yeah, it's basically a typical cornered resource type thing.

Okay. So, okay, so you're the guy owns two planes. As far as I can tell, this is a guy that owns two planes. and it says here is the two worst words in the whole listing, seller slash pilot. Yeah. Which means that day one, Heather, you are flying an airplane over Arizona or whatever. You are behind the cockpit. Right.

And this isn't just any pilot license. You know, this is, you know, you've got to have your license, of course, but then you've got to have a lot of skill. This probably takes time to learn. Yeah, I don't think you just go get a pilot license and hop in the cockpit of this thing. you've got to be really talented. You know, or maybe you've got to hire somewhere that's really talented, but.

And it's dangerous if you're not, right? So, I mean, yeah, very dangerous if you're not. So, yeah, I think this is a, this is one of those businesses where it might not be transferable or only to somebody else who already does this somewhere. And, you know, there's only so many hours you can fly over the crop. So you can't really scale the pilot. This is a tough one.

So it says he's got, so he's asking for two million bucks for the business, basically on half a million bucks of earnings, but which looks like four X. But he says the FF and E, the airplanes are valued at a million dollars, if we're to be believed. I mean, I can't imagine there's much more FF&E besides the two airplanes that are all fitted out. So you've got basically, he wants two X for the business plus a million bucks for the airplanes. So I think the way you got to think about it first is are these airplanes worth a million bucks? you know, at all. You know, did he pay a million bucks for him in aggregate? I bet he did.

But, you know, in the current state they are, are they worth a million bucks? Versus, you know, are there contracts here? Like, what are you buying? Are you just buying two airplanes? In which case, maybe he should just sell the airplanes and that the planes are transferable, but there's not much enterprise value here. Or maybe you sell the airplanes to, I don't know, like the only acquire here is a larger business, right?

Or somebody that's already a pilot. Right. Someone who's got pilots. Yeah. So I just Googled it. Depending upon the model, agricultural planes can cost $1 million or even $2 million depending upon the model. An air tractor is the type that this guy has. And it is the most popular. It's basically they describe it as the Cessna of these type of planes.

And the other thing that I didn't really realize is how big they are. The wingspan is 52 feet and is 33 feet from spinner to tail. So really substantial for being a single, a single pilot, you know, single, single, single flyer airplane. But it has a useful load of 5,400 pounds that cranks out 750 horsepower. Pretty nuts. Yeah. Wow. And of course, this is an airplane. So the maintenance on it, you know, the next paragraph here on this page you have up is talking about the FAA, you know, required maintenance. So this guy, I imagine, is a pilot, but he's probably also an aircraft mechanic or an amateur one at least, right, doing all of his own maintenance, keeping his planes in the air.

So, I mean, I just don't know how you sell this to anyone who is not already doing this. You know, to come in on like day one and be responsible, not just for flying the things, but also your all your own maintenance and keeping up with FAA rags and all this stuff. I mean, you're, you're going to need some help. Yeah, and this is, so this is definitively a local business, right? It has to be. Right? Right.

Because. I mean, ish, right? You can fly your airplane. how much gas you can put in the tank, you know, there's your radius. But these crops here, they probably depend on him. You know, I mean, I'm sure they do. That, I guess, would be sort of the challenge is, you know, these farmers need to figure out, you know, how to make sure they've got someone to do the crop dusting for them. If he sells this business and he sells the plane elsewhere, does that sort of leave a void in this little pocket of the farmland that he covers?

it's kind of interesting. It is because he's probably, for your point, is an essential part of the farming economy in the area. But it's probably also a rural area. I mean, farmland kind of by definition. So how meant there's not like, it's like a big city where you just, you know,

one dog walk, dog walker sells their business to the other dog walker and the dogs keep being walked. You know, it's going to be hard to find a qualified buyer that lives there almost certainly. So you're going to need one that wants to move there or a regional company that wants to buy his two planes and take over these

plots. So interestingly enough, I'm pretty sure this business has been on the market for a long, long time, because I didn't tell you guys, I pulled this out of a database that I have of deals that I want to do at some point. And I pulled it up. It's been in there for like five months. And it's still listed. Yeah. But this guy, so this guy, when you think about it, this guy who's flying cool airplanes over crops and he's making half a million dollars a year doing it. Like this is a good life.

Yeah. I mean, he is in a rural area, too, like half a million bucks a year is a lot of money. money. It's a lot of money anywhere, but it's really a lot of money, you know, in a rural area. Like, this is a pretty cool lifestyle this guy has. And, you know, it's interesting because we look at a lot of deals in the show and we say, oh, like, it's sort of a bummer that you got to move to Nowhereville and take over this business. I bet you could probably find a lot of people who would want to take over this business. But the skill gap of becoming a pilot and knowing how to actually, like, I could want to buy this business and just, it's just not possible.

You know, I don't have these skills that would take me years to acquire them. I mean, it's not transferable to me at all. So it's probably not that you don't have as many willing buyers. It's probably you don't have able buyers, which is interesting. Another thing to talk about is this is not the safest business to own and run. So I just looked at what the crash rate was for crop dusting. And by the way, they don't like to call it crop dusting. No, that's what your uncle does after he eats chili.

Yeah, that's what. Pretty much. So it says the crash rate for aerial crop dusting varies from Euter, but the overall rate is high compared to other types of aviation. In 2020, there were 12 fatal accidents with 13 deaths, including one mid-air collision. In 2019, they had seven accidents per 100,000 hours flown and 0.7 fatal accidents per 100,000 hours flown. The pilots face many risks, including low altitude flying, exposure to dangerous chemicals and collisions with power lines and meteorological towers.

Other factors that can lead to fatalities include stalls, fatigue, and pressure from farmers. Pressure. Fatality from pressure from farmers. Yeah, that was weird at the end. Well, I think that definitely contributes to it, right? Because you're in a situation where you have to do so much during a compressed time of the year, and fatigue has to become a real problem. Oh, yeah.

So you work. Right. Yeah. Keep going. And keep going. We have to have all this done by Saturday or whatever. Yeah. Yeah. Fly too late. Fly in the dark. You know, you're tired. Who knows. But I mean, that being said, like there are regs on all this. Like you could very easily, I think, run a safe business doing this. You know, but I think you would need some scale. I mean, you need to have 10 plus airplanes. You need to have pilots on staff.

You need to have enough profit to like have mechanics on staff and safety and compliance people on staff. And I think it's a super, super cool business. I love the model. I mean, the margins are good. I think he's got one and a half million in sales and half a million in profit, 33% net margin. I mean, like it's essential. It's recurring. It's not going anywhere.

You know, I like it a lot for a lot of reasons. The problem is that this guy is the owner slash pilot and it's not transferable. But otherwise, this is a cool business. There is actually, I just Google it. There's an entire ag aviation organization. And I read just a moment ago there are 3,000 pilots in the United States doing aerial application crop testing. And the average aerial application business has 2.3 aircraft. So to your point, Bill, like this is a fragmented owner operator market.

Like there's no private equity has figured out how to roll this up yet. Yeah. Well, it's a whole bunch of owner operators. So you kind of have this inertia to the roll up where how do you, if they've every single single time you have to hire another pilot and your pilot becomes totally key to running the business, right? You buy this business, even if you've got one pilot waiting the wings, you got to have more than one because that guy gets hit by a truck or whatever. Now your business doesn't work and he's hard to backfill.

So I think there's like a cold start problem a little bit to rolling these up. And I would wonder of these 3,000 pilots, how did they get into it? They probably just bought a plane and, you know, in an area where they knew that, you know, started talking to the farmers. So this seems like a business where maybe you don't want to buy it. You just, you know, buy the plane or buy a plane. And, you know, when this guy retires, you go in. There's no reason to pay a multiple of the SDE in this case because they probably all get into the business just by buying a plane and knocking on doors. Yeah, well, I think that's the problem, right?

The labor is the scarce commodity. You can wait for this guy to retire. You can come in and you can buy his airplanes from him even. But who's going to fly him? I mean, you'd almost need like a. you need to start with like a school where you could train these people a flight school right a flight school and then put them in crop dusting planes all across the country and heck it might exist the school maybe the players buy the school first and then start vertically integrating so let's see so the planes

the planes they say the planes are worth about a million bucks and then they want another million dollars on top of that. But yeah, it's tough to figure out how that makes sense. I mean, you could finance the planes, probably. I mean, I'm sure there are banks, you know, ag banks that know how to finance these planes. So you could finance probably 800,000 bucks of the million bucks of the airplanes, I would think. But I would think this is SBAable, Heather. I mean, would you know? Maybe. I have done an SBA loan. Whenever you know, whenever you're talk about planes and boats, it is really tough to find an SBA lender willing to take it on because it's a totally different process for them to collateralize with those kinds of assets.

And you'll find just a lot of banks just won't play. They don't want to deal with an asset type that they just aren't familiar with. I have done an SBA loan with small aircraft where that, you know, the business basically had aircraft that fly over oil, pipeline to detect leaks, to find where the leaks are. It's kind of an essential service for the oil industry. And we did that as an SBA loan. And it wasn't that easy to do with a bunch of aircraft, small aircraft. So it's doable. It's just your pool of lenders is going to be probably quite small for something unique like this. And they would struggle with the same things we're talking about here. The only buyer they'd finance is somebody who's got, is a licensed pilot and has some,

some experience with this type of flying is going to actually be the operator. Because if you had to hire a pilot, that's even scary too. Let's just say that obviously reduces your SDE because you've got to pay them maybe 200,000 and something like that. But more than just lowering your STE, then you're dependent on one person. You know, he's sick or he quits his job. You have no business. So I don't even know that you can do that.

Or crashes your airplane. Yeah, that's bad too. Yeah. Yeah. It's just, it's a little too fragile, but it's such a cool business because the, I mean, I bet if you look at the P&L on this thing, you know, it's pretty straightforward. Gas maintenance and the cost of fertilizer. And he can probably charge nearly whatever he wants. I mean, how many competitors could he have in the local area, right?

And the farmers have to have to fertilize and insecticide their crops. So he's got some pricing power. I mean, it's a good business. It's just tough. Tough to transact. So I think there's an interesting question. about the future of this business. I was wondering when you were going to bring up the drones.

Oh, really? Why did you bring it up? Because I only thought about it like 12 seconds ago. Oh, we had that. Bill already knew I was going to bring this up, but I didn't have any thought about it yet. Well, we've done 300 and however many episodes together. I knew it was coming. All right.

So what do you think I'm good? Tell them what I was going to say, Bill. Well, when Heather was talking about the aerial inspection of the pipelines, like that, you know, drones make sense there, right? But as I was thinking about drones for this business, it's harder, right? Because there's a payload here. I mean, there's a significant weight of the of the liquid that's got to be sprayed. I think it's, if it's one thing to do an inspection with the drone, it's a whole other thing,

the whole fertilizer. So, I mean, what do you think, Michael? Is this droneable or no? I totally think it is. And actually, I just Googled aerial crop dusting drones and there's people making them. Cool. That's all. Well, I want to say, I want to tell you, we had this discussion on the other deal, you know, in depth.

And the guys that bought that business are pilots. And one of them was a former military pilot. And the opinion there was, you know, that really, these are really expensive drones. I don't know what this one costs that you've got up here, Michael. But, you know, it was kind of cost prohibitive to do what they were doing with drones. But they were following the technology. and that when the time came, they would pivot. So, you know, that's very interesting that you found it here, a crop care drone.

Wow. So, I mean, the planes themselves are a million bucks new. Like, these drones have to be much cheaper than that, right? Much cheaper. That being said, though, looking at these drones, though, that's not a lot of payload. I mean, there's, like, think about how much you can put in the back of an airplane. And these things look like they might hold five to 10 gallons. So you'd have to have a whole fleet of them to be able to do what one.

So that's what you'd have to add up is how many of these have the capacity of what one plane can do. Yeah, yeah, yeah. By the way, I didn't mention it to you guys, but the planes, these special, these air tractors, they're specially designed to be able to do landings and takeoffs 30 to 100 times a day. Wow. So, okay, so they're reloading several times a day as well. They're filling up, flying over to where they're going to drop stuff off and come back, which I think goes back to our point about this has to be very much a local business because

you're going to fill up unless you take the plane somewhere fill up land and take off there your range is relatively limited but yeah it's so interesting because you have to basically bring the pesticide to wherever your airfield is because any as however far you fly the airplane from the airfield you're burning gas which is cost so you probably have to price it differently based on how far your farmers were from the airfield, plus how much acreage they have. It's just so fascinating. I bet it's also not that sophisticated either because it's just a guy with an airplane, but it should be. The drone sort of makes me think of, it's kind of like those automatic pool cleaners you can buy now.

It's kind of a little robot. You stick in your pool and it will sweep it and clean it. I kind of feel like those can eventually replace pool service companies to some degree. And I would think the same thing with these drones, like the farmer would maybe buy one of these drones or two of these drones and own it and just do their own pesticide spraying with those, you know, rather than hire a company that has a bunch of drones. That's at least the way I would think about it. Maybe, but it would take so long. Michael, Michael found a great stat in this article. Would you want to read it?

Sure. Despite the benefits, some dude that they quoted, does not believe drones were replaced crop dusters. The drone he uses on a daily basis can carry 60 to 70 pounds of payload. A plane can carry upward of 10,000 pounds or more depending upon the model. Planes carry a lot more than drones and they operate at a faster pace. Ruck, who is the guy they quoted, explained. Yeah, I feel like drones are probably a ways off. I mean, you need a swarm of drones probably.

You need the drone technology to come farther so they can carry more payload. You know, I feel okay. if I was a crop dusting pilot right now. You probably also want a gasoline powered or an ag, you know, an av gas, aviation gas, um, powered drone as well because you need them to operate all day. But yeah, I mean, you could, you could imagine a fleet of like three to four of these drones running at once that you drive over on a pickup truck and they come back, you fuel them back up and you put more of the of the applicant in them and I don't know.

Yeah, I think it'll probably get there. I think you're probably okay on a, you know, if you pay three X for this business, you'd probably get your money back before the drones come for you. I would guess. But that being said, I don't think you can pay three X for this business unless you know how to fly these airplanes. Yeah. Well, I mean, I think you're also paying a million dollars for.

for the airplanes, in theory, if that's what they're worth, because they were a million to two million new. And now he's valuing them at 500,000 apiece because you get two planes. And, uh, which is also kind of a crazy thing about this. He has, this person has two planes, probably because one of them is always broken. It's like one's always in the shop. So he's going to fly the other one. Um, if I had a guess, you actually probably started with a smaller plane and the business scaled and they bought a bigger one or something. There you go. super interesting but yeah so you're paying a million bucks for the planes and then two times earnings discretionary earnings for the business um you know still seems thin i all right so here's let me if

you had to do it here's how you would do it um you the the thing that would you'd have to be able to get the revenue up because you've got to absorb a pilot let's let's assume you can hire a pilot which is a big you know how much money you got to pay to attract the guy to live half the year in you know, whatever rural community this is. You know, let's say you're about to pay $250 for this pilot, right? So that's half your earnings. So now you're down to $250 in ebid, in discretionary earnings. You got to scale this business.

Like you've got to look at it and go, can these planes fly farther? Can I charge the farmers more? You'd have to understand the P&L of a farmer too, not just like, you know, like, can the farmers afford to pay me more? Or, you know, does it put their economics of their corn upside down or whatever it is? And you'd have to figure out if you could increase your radius, win more clients, or charge more. And you need a really clear path to do in that where you could get, you could make up the cost of the pilot that you would have to hire. And I think because that's speculative, you could not pay anything up front for this.

I think maybe you could finance the airplanes. Yep. And then everything else, whatever you were able to finance and buy the airplanes from him, you could probably do that. You could probably give him that at close. And everything else would have to have to be some sort of earn out. based on if we were able to hire the pilot and do a transition. That's how I'd do it if I had to do it. Yeah.

All right. Well, so are we going to pony some money up for this one? Heather, you're going to lead our syndicate? No, I am going to thumbs down it. Sorry.

The only reason I'm thumbs downing is because there's no pilot. If this guy owned it and had like a pilot or two, like there are a couple people that flew the planes occasionally, I would love this business. I would love it. But the staffing is the problem. Staffing is the problem. And look, maybe I'm just much more optimistic about the future of the drone capabilities,

but drone's going to kill this business. And it's going to happen in the next decade. So I think there's better places to spend your time. So I'm a thumbs down as well. All right. I want to like it, though. I really want to go for a ride in your crop dusting plane. They're only single-seater, unfortunately.

You can't even take anybody on a date in your crop dusting plane. All right. So the only crop dusting we'll be doing is at Thanksgiving this year, I guess. Hey, now. All right. Thanks for coming. Good one, Michael. Thanks for bringing it.

Talk to you guys next time.