Acquisitions Anonymous - #1 for business buying, selling and operating - Does this school bus contractor really make $700k?! - Acquisitions Anonymous 271

Episode Date: February 13, 2024

In this episode of Acquisitions Anonymous, Heather and Mills analyze a $3.5 million school bus operation for sale in New Mexico. They discuss its financials, including a $2.5 million gross revenue and $700,000 EBITDA, and explore challenges such as maintenance costs, regulatory compliance, and the reliance on contracts with school districts. The discussion highlights the risks of customer concentration and the difficulties in scaling the business due to high capital expenditures and limited growth opportunities. They conclude that while the business has a stable client base, its complexities may make it a less attractive opportunity for potential buyers. The episode emphasizes the importance of due diligence and understanding the intricacies of such specialized business transactions.Check out the listing here: https://www.bizbuysell.com/Business-Opportunity/established-school-bus-operation/2196778/Thanks to our sponsors for this week!  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]. ------------- 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. 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]

Hey, everybody. Welcome back to another episode of Acquisitions Anonymous. I'm Mill Snell, one of your co-hosts, joined today by Heather. We talk about a really cool deal that Heather brings. It's a school bus contractor. So this is a company in New Mexico, three and a half million dollar asking price, I think two and a half million dollars of revenue, 700,000 in EBITDA. We talk about the kind of quirky things that happen around specialty equipment financing, what that looks like in a sale, regulatory environment, around a business like this that has compliance. and regulation. And we just kind of pose a lot of questions around how transferable is this business. At first glance, it looks good. They've got a 20-year history and contract in place, a fleet of 40 school buses, very

financeable in some retrospect. But it's a very difficult proposition to think about all the different ways this deal could go and what could go wrong and where is a lender going to be comfortable or uncomfortable. So I hope you enjoy the episode. We had fun recording it. Let us know if there's anything that we missed. Hey, Michael here. Want to talk to you about today's sponsor for the episode, which is cloudbookkeeping.com. So cloud bookkeeping is actually run by my neighbor, Charlie. So I've met him in person and I can attest that he's a real human being and a good person. And what cloud bookkeeping does is offer a full suite of bookkeeping services all in the cloud for you around

QuickBooks and other technologies that you're using as a small business owner. So if you're interested in getting the bookkeeping part of running a business off of your plate and focusing on running your business, Charlie and his team are one to call. They can put together a bunch of other stuff in terms of helping you manage and grow your business besides just bookkeeping. sophisticated reporting, definitely helping you get your quickbooks online set up in the right way, and a number of things around payroll as well.

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

So thanks a bunch and cloudbookkeeping.com as the sponsor for today's episode. Good morning, Mills. It's just us. Good morning, Heather. I know. I know. We haven't done just the two of us in a long time, but this should be fun. You brought a good deal.

I brought us something interesting, something anyone that has kids might be familiar with. This is a school bus, established school. bus operation in New Mexico. Should I go ahead and read it? So this is on BizBicel, established school bus operation in New Mexico, says seller financing is available, asking price is $3.5 million, gross revenue is $2.5 million, and EBITDA is $700,000. That sounds pretty good. Growing New Mexico school bus contractor, long-term established school bus contractor in a growing New Mexico region. consistent population growth has ensured steady increases in routes, approximately 40 school buses operating daily home to school and activity charters for the local schools.

The fleet is primarily international school buses, refresh consistently to maintain an appropriate, approximate age of six years, average six years. Contract has been consistent for over 20 years. turnkey of full staff and driver's core are intact and professional processes. Systems and programs have ensured the continued success and safety. Ownership will stay engaged during a customary transition period. The seller owns the purpose-built facility and will lease the property at market rates going forward if the buyer chooses.

The property has space for additional parking and buses. Potential growth in tourism charters or employee shuttles could be operated from the property. Terms and price are determined. However, expectation is based on market and cash flow margins. That was interesting. What do you think? This is kind of interesting. So I don't know if this is different in different parts of the country, but at least here,

most of the school districts own school bus fleets and operate them. But it makes sense that maybe in certain areas, if they're more rural or less rural or not as much population or something, like that that maybe it's all contracted out like ambulances. Some counties have their own ambulance service and then there's also maybe additionally some kind of augmented, you know, medical transport. So it reminds me of that a little bit. It's kind of interesting. Yeah. And I've seen, I've seen all kinds of businesses around school buses. I've seen some like this where they're actually running, you know, owning the buses and running the routes. I've seen a lot related to repair and maintenance specifically of school buses. And I've even seen a really cool business that

that was private transport, almost think of like Uber, for the districts where a student through no, you know, circumstances they can't control, has to be, you know, driven from further away to their regular school. And the districts have to provide that. So that was a really cool business that I got to look at. So I think these can be really interesting, you know, very stable businesses. But I want to ask you about one thing that I read there that kind of made me pause. I got a little confused. The fleet is primarily international school buses. I just went, what? What does this mean? So that's international is a manufacturer like Troy built or Peter built or whatever. You know, they make school buses. So they're kind of saying they're not made

overseas necessarily, but they're saying, hey, this is a reputable fleet. Right. So I was like, I had all kinds of visions of kids going to, you know, Spain for, I didn't know that that was a brand. Yeah, they're driving into Canada. Yeah. Yeah. So that, so it's a, so it's a brand. And obviously, it's a lot of buses, you know, and they're, they're touting here an average approximate age of six years. But, you know, there's a lot to consider here in terms of CAPEX and, you know, what the, what the actual just annual cost to maintain the existing fleet, plus like, what does the replacement cycle look like. So the first thing I think of is that I see that 700,000 EBITDA shrinking. You know, it's probably yeah, it's just adding down depreciation. It's not taking out CAPEX. Yeah, big time. And, you know,

the proxy for the maintenance CAPEX, because you want to know, what's the maintenance CAPEX and what's the growth CAPEX? Looking back, you know, they have 40 now, but I'm wondering, you know, they say they have a consistent contract. So maybe the revenue has been super stable and it doesn't really fluctuate. as long as that contract gets renewed. But, you know, what if their contract expanded and two years ago they went from 30 buses to 40, well, that's a big step up in CAPEX. And, you know, that may not be reflected in the last 12 or 24, even 36 months' worth of financials.

So doing some kind of fleet analysis would be really important. The proxy that I like to use that I think is a pretty good rule of thumb is the maintenance CapEx is probably lining up with the depreciation. But it's going to be lumpy, right? You can't, you can't, if you have, if these buses are $200,000 a piece or something like that and you have 40 of them, it seems like they've done a good job rotating out, some of the older ones as they buy new ones. But even if you're buying, you know, one or two a year, you're talking about a lot of money,

right? That, like, two a year, you're talking about $400,000. maybe they have, you know, a really good financing program in place with international or with the school bus, you know, kind of intermediaries. But still, you're talking about a lot of, a lot of that EBITDA is going to get whittled down either in the form of CAPEX or in the form of, you know, financing payments. Right. And when you say financing from international or, you know, some kind of fleet financing, then they know my bells go off and say, okay, yeah, financing. when you buy a business that is dependent on some kind of specialty financing like that.

So sometimes it's fleet, sometimes it's flooring, you know, like motorsports. You think that, you know, retailers like that. There's companies that need bonding. So there's all these businesses that there's a specialty financing component. They have to have it to do business. And it becomes problematic when you buy the business because not only do you need to figure out how to qualify for the SBA loan or whatever you're going to do to buy the business. business, but you have to qualify for the ongoing specialty finance. And I tell you something, they don't like new buyers. Surprise. And they don't want to assign those loans over.

No way. They don't assign the loans over. They make them go through a brand new credit approval process. So this is something I point out to a lot of folks when they're early stage in a deal is, you know, this deal might look fine and good, but you've really got to go figure out whether that specialty finance lender is going to prove you. An example is like the companies that need bonding. The bonding agencies, their underwriting is kind of old school. It really looks at like how much cash they have on the balance sheet and really kind of simple metrics like that.

And of course, a buyer is going to come along and there's not going to be much cash left. So it's a problem every single time that they've got to solve before they can close. And I think that would be an issue here. Yeah. How do you, are they paying cash for the, for the buses? You probably can't afford that in the beginning. And if not, they're, and they're financing it, you've got to figure out whether that fleet lender is going to lend to you on the same terms. And I mean, I've seen plenty of circumstances where the deal kind of falls apart and it becomes unsellable when the seller goes, okay, I realize

that I can't transfer over, you know, the financing that's in place. And so I have a million dollars of debt outstanding and I have to pay it off in conjunction with the purchase and this person then has to get financing in place to kind of augment that and purchase price changes, net proceeds to seller change. It can really, it can really make a deal unravel quickly. There's also issues. So we, in my business, I mean, we have bonding requirements because, you know, people want to know, hey, if something goes wrong in this job, we need to be able to come find money more than just your, you know, general liability policy, your insurance policy. But there's also usually kind of a compliance overlay with businesses like this.

This is, you're moving kids, so that's complicated. And anytime you're moving goods or people over public roads, there's a regulatory component. My brother owns a moving business, and I've talked about it a bunch of times on the podcast, but he's regulated by, in South Carolina, the Public Service Commission, and the public Service Commission regulates nuclear facilities, railroads, public utilities, and also moving companies, which like one of those things is not like the other, but it's because they're moving people's stuff over public roads. And there's a lot of instances, I guess, where unregulated movers, people who aren't, you know,

doing things by the book, go to somebody's house and they load up all their stuff and they're like, we'll see you at the new house and then they just leave and, like, steal all their stuff. And so it became a regulated business. With something like this, you know, there's a lot of risk. There's a lot of different components at play. My guess is, and I've never gone down the path, but there is some kind of state agency. There's some kind of compliance and regulation that says, we want to know, one, who owns this entity, and there may be some requirements for them. But then also, these are probably Class A CDL type drivers.

And they've got at least probably 40 of them. give or take. Class A CDLs, the demand is pretty significant right now. So it's just a lot of different complexity for what's going on when you kind of peek below the surface here. Yeah. And the liability, like you said, is huge. So you've got liability to think about and whether your liability insurance might go up too. You know, that's an interesting topic that came up on Twitter this week, somebody's insurance for their large trucks going on the road,

the liability side of it went up astronomically. That's a big issue. Insurance costs rising everywhere. And something that somebody pointed out was that they had some rollover equity in their deal. And that was a big component in helping them keep the insurance costs from rising, from the rates from rising,

because he was still involved. So something I never thought of, you know, when you're factoring in what your go-forward, Ipeta is you have to think about what may happen to your insurance when you change ownership. And maybe there's some ways around it with rollover equity. I don't know, but that was the case, at least in one situation. So, yeah, this one's tough because you've got liability, you've got insurance costs, you've got licensing of some kind, I'm sure. And then you have CAPEX, not only maintenance CAPEX, but growth CAPEX.

And I would imagine even some of the repair and maintenance is regulated. I mean, I've got to believe there's some kind of inspections and, you know, some kind of process where the regulatory agency makes sure that, you know, the vehicles are safe for the kids. So, yeah, not an easy business. You probably have to do regular DOT inspections. A lot of, a lot of heavy equipment is subject to DOT, regular inspections, sometimes daily. Like, you have to take pictures before and after, you know, at the end of the day and stuff like that. Wow. Yeah. So this is something, you know, the kind of buyer I'm thinking up for this is got to have experience in something very similar to this, very, very related. And I, you know, I don't think this is going to be the price that someone's going to end up paying because, again, that EBITDA is going to be, you know, probably cut in half. You know, it's going to go from 700 to at least 350. And then you're not going to pay a 10 multiples. So this is not a three and a half million acquisition. And it's one of those.

that's probably pretty tough for the seller to swallow because they're looking at the value of all that equipment and thinking, you know, I'm not going to get paid that much of a premium over that, but that's the case when you have all that cash that has to be tied up in the equipment all the time and the Kappex. I think that's something people don't quite realize until they go to market for sale. The other thing that I'm kind of looking at and reading between the lines here on is, you know, the seller owns the purpose built facility and will lease the property at market rates going forward if the buyer chooses. It makes me wonder if maybe he owns the facility and they're not paying rent right now. That is very possible. You know, you see it all the time. You know, sometimes people charge below market rents. Sometimes they charge above market rents as a way to, you know, be able to extract some cash flow out of the business and kind of a tax

preference way. But chances are, you know, you want to keep renting this facility. You don't want to go somewhere else. But if all the sudden, you know, your yard and a small office space, you know, aren't incorporated into the 700,000 of EBITDA and you've got, you know, another $100,000 a year or something like that in rent expense, it's getting whittled even further down, you know. Yeah. And you'd think, I would think anyway, that more brokers would factor that in when they're advertising an EBITDA like that, but they don't. It's almost never that the broker has that light, bold moment, I can't, you know, this is not the EBITDA, the sellers, the buyers are rich, you know, going to eventually figure that out. Why waste everybody's time? Why not just advertise the EBITDA

aftermarket rent is extracted? But it's, you know, something definitely we talk to all of our clients as they're looking at deals to make sure they ask that question up front and make that adjustment before they make an offer. Yeah, so this one probably does not have much cash flow left at the end of all those adjustments. Hey, everyone, this is Bill. I'm just taking a quick break from this week's episode to tell you about a long-time sponsor, major fan of the podcast, Acquisition Lab. So a lot of our listeners that you guys tune in every week for our deal reviews,

you want to get in on buying a business, but you're not really sure where to start. The cool thing about Acquisition Lab is they were created to solve that problem. So they exist to help people buy a business and also to navigate all the complexities of the process. They provide a trusted framework, tools, resources. they kind of support you all the way from search while you're looking to buy a business, all the way to close. So if you're serious about buying a business, you want to learn more about the process and you want

someone to Sherpa you through buying a business, check out AcquisitionLab.com. Or you can email the labs director, Chelsea Wood, directly. It's just Chelsea at buy, then build.com. It's tricky, too, because, you know, you think about, okay, even if this seller's kind of, you know, broadcasting, hey, I'll provide some seller financing. Even if there was some, you know, slam dunk structure where you say, hey, look, because of the, you know, specialty finance around the assets, because of, you know, the EBITDA getting, you know, kind of whittled away, let's say there's a scenario where the seller finances the majority of

this or all of it, and you don't have to have an outside lender. You're just bringing cash and seller financing. You play that scenario forward and go, okay, even with, the right entry price and valuation and the right, you know, entry terms. And maybe you're going to balloon out the seller note in a few years once things are stabilized and you pay down a little bit of debt and it's maybe more financeable and you don't have the kind of new owner, you know, new incoming owner risk. What are the growth prospects of this business? Because, you know, you got to think, okay, best case scenario, I can grow within my existing yard,

which they kind of allude to. There's some room to grow. But I can grow. But I can grow. within my existing footprint, I don't have to go put a bunch of sunk costs somewhere else, you know, and open another office and deal with a different school district or whatever. The population is probably the limiting factor here, you know, unless you're going to go to

a new school district or like they say, maybe start doing a different type of service, like charters or employee shuttles, then you're buying a different piece of equipment, not a school bus. So the growth kind of story around it for me is a little bit difficult. You know, you've got to think,

if they have a contract that's been in place with the school district for 20 years, it's been renewed multiple times. You know, these aren't, they don't offer 20-year terms on those. You just wonder, though, I'm sure you've seen it, Heather, where you're like reviewing a lease, you know, that's been extended, and it's like 25 years old, and you go back to the original lease that somebody finds, and it's like just so, you know, cobbled together, and then you've got this line of, like, extensions and amendments to the lease.

I'm kind of picturing that. And the seller's like, look, I have this great agreement from the school district. And like, you go back to the original document that's 20 years old and then there's just been all these amendments. I don't know. It's probably not that way. But I've seen it so many times. No, probably. It probably is.

And it's a school district document that's been, you know, extended and extended. I think like on the other, on the plus side, the value in this business is in the consistency of that relationship with the school district. And, you know, whatever is in that contractor. But it's really the consistency of the switching costs, right? They're not going to go searching for unless this company really screws up something bad. And then they probably would have a hard time getting a replacement. So the switching costs is really difficult. And it's a very sticky relationship.

That's the main value here. But everything else is kind of tough. You know, like you said, growth, totally dependent. Growth or shrinkage. You're going to grow or shrink based on the population. They did say in the teaser that a consistent population growth. Yeah, but that doesn't last forever.

And who knows how rapid it really is? And of course, the housing market has been a lot more. It's moved a lot faster than it ever had in the past, you know, in the last few years. So it's less predictable, I guess, than it used to be where the population is going to go. So I think, you know, that's, but that's the value of this business.

That's the enterprise value right there. and the rest kind of makes it, you know, you kind of take away from that and kind of arrive at sort of what you would pay for something like this. Have you ever, Heather, looked at or have you ever done anything with funeral homes? Have you ever been involved in any funeral home type of else?

Yeah. At my past bank, they actually had a vertical for that. Oh, yeah, that's right. And they originally called it. I cracked it up because they changed the name eventually, but they originally called it death care. And it just made me laugh.

Yeah. I don't know why that made me laugh, but it did. Yeah. Yeah, it's crazy business. It's interesting because it really is. And you have a lot of like multi-generational, you know, families. There's been big waves of consolidation and privatization and stuff. But the fascinating thing to me about that business that is just true in any part of the country is, you know, there's only a certain number of people who die in each kind of area each year.

And it's like eerily predictable. You know, you get things like COVID or you get, you know, a natural disaster. You get some things, but over the long term, these funeral homes are kind of like, yeah, we do, you know, 300 calls a year. Yeah. We do, you know, a thousand calls a year, whatever it is. They kind of know, you know, just based on our population and based on competition, it is what it is. Like the same number of people die. Yeah, right.

You can't grow that. We don't want them to, actually. So that's good. No, no, exactly. And so growth there is just we need to acquire market share, you know, and we need to protect margin. Yeah. And so, like in that industry, the big kind of. of taboo thing is cremation because the margins are so much lower for funeral homes on cremation

than they are on traditional burial. And so they've like kind of fought it, you know, and tried to hold it at bay. And certain parts of the country are more prone to cremation than others. Like in the South, people don't get cremated as much. And so it's like a real, I just wonder, like, this school bus business, you know, it's got it's got a limited, I think, kind of ceiling on growth. You know, only so many kids are going to school day in and day out. If you want to grow this thing, you know, population maybe, you know, grows the routes a little bit, you know, nominal. Maybe you keep pace with inflation or something. But in order to really grow it, you'd have to go acquire new territories. You'd have to go to the person in the next county over and

say, hey, you know, you're, what do you think about, you know, exiting someday? And I'll be your exit plan. But the underlying dynamics and the unit economics don't change. You still have really high capex that's never going away. You know, you still have a fleet of drivers that are probably in short supply and you still have the risk factors, you know, all the different things that they don't get solved necessarily with scale. They may lessen, but you still got capex no matter what on this. Yeah, exactly.

So this is a tough one. It's probably going to go for a much lower price than this unless the, you know, bus company a county over wants it. But, you know, you figure. that it wouldn't be on biz by sell if that was the case. So, yeah, the price is going to probably be quite a bit lower than this when somebody kind of unravels the cash flow, what the pro forma cash flow looks like.

And I would have a tough time wanting to be in a business like this for a limited amount of cash flow when you have an unlimited amount of liability. That's what would be my no-go here is no cash flow is good enough here because the liability is pretty huge. Well, Ann, you know, I'm thinking about kind of regulatory risk What if the school district, you know, right now the big thing for school districts with funding is ESER funds. They're, you know, federal funding dollars that have been handed down to school districts to be able to, you know, modernize infrastructure, you know, reinvest in the buildings, become more energy efficient. Some of it was kind of COVID relief funding to be able to help schools navigate those changes.

What if a school district receives a bunch of money and they say, hey, we're going to take this in-house. we're going to do our own fleet now. You're left with 40 school buses, a bunch of debt, service, and no customer. And then what are you going to do? You're going to basically auction off the buses. Yeah. That's the risk of any business with a customer concentration, even these businesses that have 20 years and a contract.

Because, yes, it's just one school board meeting away. And, you know, like you said, some budget dollars that they need to spend and you're out. And that's it. Yeah. So that is absolutely a really good point. because they do have some money now that they could spend on this. Yeah, yeah, it's a little bit tricky. It's interesting that the broker lists, you know, no FF&E, not that we have, you know,

biz by cell is never known for giving us, like, great detail. I would be really interested to see what shape the balance sheet is in from just a, like, information accuracy standpoint and a reporting accuracy standpoint. There's at least some, like, awareness around the age of the fleet and, you know, that that would be a question for somebody. So it makes me think maybe it's not all fully depreciated, but I'd be really curious just around what kind of, what kind of things do you see when you start to peel below the surface on this?

It's a good question that, you know, something that comes up a lot when I talk to clients about deals that they're looking at, when we talk about whether they're getting a Q of E, which thankfully most small business buyers now kind of have that awareness and they're getting it. But a lot of them don't understand what's, what's going to happen in this Q of E? You know, what's going to change? Most of the time, what changes is that the accounting was not done very well.

You know, and the more, the more to me, like the thing that I can sort of predict is the more the accounting required some balance sheet entries like KAPX does and depreciation and fixed assets or prepaid, you know, customer deposits, things like that, the more it required some balance sheet entry, the more likely it wasn't done accurately. because it's just not something most small business bookkeepers are really good at. So what you find is not that sellers or brokers are trying to lie to you about the EBITDA. Maybe sometimes they are, but most of the time they're not. It's that they just, the bookkeeper wasn't doing it right.

And when the Q of the provider comes in and irons all that out, it changes the EBITDA even more. So there's certain things I can kind of spot in financials where I know when we get the Q of E back is going to be pretty different. Yeah, are we going to buy this one? I think this is just very, very tricky. I think this is like one of those businesses that is really, really good for the seller to have owned. And it's really, really difficult for anybody else to own it. Yeah. I agree.

I agree. Yep. This is a tough one to sell. I wonder, you know, this is one of those things where you wish you had like a crystal ball and you could see how it plays out for the seller. I wonder if this business actually sells or if the some of it's like if the pot. like if the pile of assets is worth more than anybody would be willing to to pay for the business. Yeah, right. I am such a big person about, you know, how does things turn out that I call all my past clients. If I'm no longer, you know, at the bank where I did the loan, I still call them

or they call me regularly just because I like to hear, I like to go back to like, what did we think when we started and what, how did it really play out and what did we learn about that? I'm just, actually what makes this so fun for me is kind of knowing and learning from those stories. So, yeah, this would be an interesting one to see what happens. Well, good. Well, thanks for bringing a fun, fun deal. Heather, that was a good one. Yeah.

Thanks. Thank you. Thanks, everybody for joining us. We'll see you next week.