Acquisitions Anonymous - #1 for business buying, selling and operating - Equipment rental from Hollywood and buying businesses from your parents - Acquisitions Anonymous 222

Episode Date: August 25, 2023

Heather  (@EndresenHeather), and Bill (@BillDA) review one of Bill's favorite types of companies. Rentals! A business that manages rentals for Hollywood movie companies. They wrap up the episode with a conversation around specialized lenders and acquiring a business from your parents.Find the listing here.Thanks to our sponsors!Acquisition Lab. 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.A lot of our listeners tune in each week to our deal reviews, want to get in on buying a business, but don’t know where to start.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]

Hello, boys and girls. Welcome back to another episode of Acquisitions Anonymous. I am one of your hosts, Bill Dallessandro. And today we have one of my favorite categories of business, sometimes controversially, amongst our group, is equipment rental. So this one rents equipment to Hollywood, porta-potties, among many other things, for movie production. They've got $1.2 million of hard assets that they move around California and rent to movie sets. They earn about a 30% yield on those assets. So it's a pretty cool deal.

And then at the end, Heather and I have a cool conversation about specialized lenders, acquiring businesses from your parents, and a couple other things from a lender's perspective that Heather really adds some interesting color on. So without any further ado, I hope you really enjoy this episode of Acquisitions Anonymous. This episode is sponsored by Acquisition Lab. Acquisition Lab, created by Walker Debel, 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. After going through the lab's month-long intensive, you have ongoing access to almost daily Q&A sessions with advisors,

regular live deal review forums with Walker, handpick vendors for your deal team, and a very active Slack group with other searchers on this path. Our team personally understands how to buy a business and will help navigate all the complexities of process, as well as provide a trusted framework tools and resources to support you from search to close. The Acquisition Lab recently celebrated 70th business being acquired and well over $100 million in aggregate transaction value. The Lab is here to stand by your side so you can take the right action at the right time and avoid wasting countless hours trying to go it alone. For more information, check out AcquisitionLab.com. Link is in our show notes or email the

Labs director, Chelsea Wood at at buy then build.com. Heather, happy Friday to you. Happy Friday. We made it. We made it. We had a fun one yesterday where we talked about $50 million a year of shapewear, but I think this one is even sexier. This is glamorous. We're going glamorous on this one.

I think this is going to be fun. This deal we have today is part of my, one of my favorite categories of businesses, which is rental businesses. But this one's a little different because of what it rents and the end market that it rents to. So this is a fun one. Okay. So this is titled, it's on the screen if you're watching us on YouTube. It's a film and motion picture equipment rental company for sale. The asking price is $3 million. And you know what? Before we even get to the asking price, the photo here is a of a port-a-potty on wheels.

I bet it just like, you know, a lot of times you use stock photos, this is not that. No, it says a royal flush, too. It's really amazing. Oh, it's so good. And assuming this is not a stock photo, the website for this business is called, it's in the can.com, which is so money because their end market is the film industry. As they call it, it's in the can, like the film pun. I love it.

Yeah. And I love the title is also for sale 3 million OBO. Or best offer. Willing to bet they don't have a broker. I think you're right about that. Yes. Because it is just listed by Mike Persky, all lowercase. So no broker for sale by owner.

Got to love it. So asking price $3 million, cash flow $400,000. So that's what? That's like eight times? Yeah, yeah, we're way off there. Seven and a half times. All right, it's a little rich. Maybe you should have got a broker.

So he makes $400,000 a year on $1.3 million of revenue. And it also has listed that they have $1.25 million of furniture fixtures and equipment, which in this case, I think means mobile port-a-potties. So the description, it says, when filming on location, we get the call. We rent equipment to the film industry and we are for sale for $3 million or best offer. We own our building, but it is not included in the sale. It is for rent. When Hollywood is out on location filming, we rent the restroom trailers, changing room trailers, hair and makeup trailers, trash bins, heaters, air conditioning, lighting, generators, and two dozen

other types of equipment needs for on location filming. Our market does not stop there as we also rent our rental equipment to events and weddings. We also have other income streams such as handyman services. So when Hollywood needs things change, like flat screen TVs removed and replaced in a bar for a quantum leap scene, or a ceiling fan in a house removed and replaced for a criminal mind scene. And by the way, scene in this case is not spelled S-C-E-N-E. It is spelled S-E-E-N.

Yes. which for a person that works in Hollywood, you would not expect. So Michael is not here to rip on the typos. But you got to give him a pass. Like this isn't a broker. Well, yeah. No, I think this was texted in. Wait till you get to the end.

I mean, there's a lot of typos in here. I think he texted this listing in. Oh, boy. Okay. Great. So our handyman services also include fixing things that, film crews damage went on location, like broken sprinklers and plumbing, damage, concrete, drywall, and painting repairs typos riddled. I'm just blowing through them here. Our services also

include renting and setting up catering tents, tables, and chairs so the crews can eat. We rent changing tents, background holding tents, and often rent the lighting, heating, and cooling for these tents. We have eight restroom trailers. They're state of the art. They have two station trailer units, up to seven station restroom trailers. We have our own restroom pumping truck so we can service our own restrooms in the field and we get paid accordingly. Our restroom trailers are all solar, 100% self-contained and have onboard generators to run the air conditioning, as Hollywood expects only the best. We have a lunch trailer, which is 51 feet long and two full-size slideouts, which opens up to a seat for 100 meals, a lunch trailer with its own solar generator and air conditioning,

this six-figure rental trailer is in high demand. They do labor service, they trash sweep, they clean up the service. Our wrangled department is skilled labor to help locations navigate for their day as they move around. And their website is, it's in the can.com. Check it out. That's how the listing ends. Heather, what do you think? Well, this is really interesting. I think that they're valuing, you know, they're valuing it wrong. They're trying to value it on the equipment plus the cash flow, and that just doesn't work, right? I mean, you need this equipment to generate the cash flow. I guess it's underutilized maybe is one way to look at it, but it is an interesting business. I mean, I've looked at some things that are similar to this, bigger companies before. And there's like a,

you know, there's a post-COVID boom that they all had. You know, production all stopped. And then they started it back up again. There was a really a huge boom for a while. And then you contrast with today and there's an actor strike. And I'm pretty sure in Southern California, there's no production going on right now. So, you know, it has some industry risks, I think, you know, when you look at it that way. I mean, the equipment, he's got quite a fleet here. He put a lot of money into that, and that's what he's trying to extract the value on. But he's only making $400,000 of cash flow.

And that's probably adding back his salary. You know, that's SDE, I'm guessing, or something like that. And so that's not enough cash flow for the cost of all this. And this is, it's nice stuff. You know, these are nice trailers. Like he said, Hollywood expects it to be nice. And that costs a lot of money. Yeah, the thing that's tough, and I put it on YouTube on their website, it's in a can.

It has this slideshow of all the stuff that they rent. And it is nice stuff. But like, so at the same time, they got $1.2 million of stuff. And they're making $400,000 a year on it. I mean, that's not terrible, right? Like, that's like a 33% yield on assets. pretty good. And I'm willing to bet the life on these things is pretty long.

Probably. Like this, this isn't like construction equipment that's getting road hard and you've got to replace it every five years. Right. So, if Mills were here, I think he would be okay with it. He's like the, the cap-ex, the depreciation is a real expense guy.

But in, you know, in this business, I think it probably stretches. So from like a cash yield on assets point of view, it's really not bad. But I don't think, you're going to sell this business for basically more than the value of the assets here, right? No, that's right. I mean, and we see this a lot in a lot of other CAPEX intensive businesses, small businesses, where the seller really wants you to pay one price for the cash flow and another

price in addition to that for the assets. And that just doesn't make any sense from, you know, from pure cash flow return perspective. So I think that's what you're seeing here. And of course, it's not broker listed. You know, they do say at the very bottom of the listing that they raised nine children and put them through college on this business. So it is kind of interesting. I wonder what the real cash flow is. Again, because it's not broker listed. You want to kind of see the numbers to know whether it is really $400,000. Is it more? Is it maybe less? But one thing that concerns me is that the real estate is owned by the sellers and they're not selling it. So, and it's in California. And so a very common problem there is that maybe they're not paying market rent to

themselves in that. So when you look at that $400,000, that's not going to be $400,000 to you when you go start paying market rent to the sellers. And I've seen a number of deals fall apart like that where they thought they were getting a certain cash flow number when they figured out what market rent was going to be, it fell apart completely. And I think that would happen here. The value of this business is probably more in the real estate than it is in the actual cash flow. That's a good point. I mean, California real estate can be. very pricey, right? It can. I mean, you may lose easily 100 grand a year, right, to rent it back from the owners. So instead of 400K, you're down to 300k. Right. They want $3 million. It's a 10x.

Like, that's just going to be tough. Now, valuation aside, though, Heather, is this a good business? I think it is. I mean, I think it's, I think I like equipment rental just like you do. If you can, if you can really get your arms around the useful life of the equipment and your maintenance cap X, it's great because you know, you get a great return for what you spent on that equipment. It is, you know, there's some logistics to this one, I think, that make it a little challenging. I don't know how big of a staff you might need. It's a little more tricky than just renting out. They're really coordinating where this stuff is going. They're putting it up. They're putting it down. So it's not pure equipment rental. There's a lot of service here. So not my favorite type of equipment rental when it gets that complicated.

and then you kind of wonder, how are they pricing? How are they estimating? Because it probably is a little tricky to make sure that your price point is right for each one of these jobs. I mean, I bet it's all kind of negotiated, right? You know, like they hit a price and they show up and we'll throw in a generator, because there's not a ton of marginal cost for them to bring one more generator. They just want the job. Right, right.

And I'm sure there's a little bit of competition, right? There's probably a lot of little companies like, this servicing different productions and you've got to get to know the right people on those productions. So there's a lot of relationship, especially in Hollywood for sure. No casting couch, I don't think, but you know, you got to know people. Yeah. So in general, one of the reasons I like equipment businesses is because they're one of those businesses that can make money while you sleep. You know, I always think like you drive down the highway and you see all those construction barrels or barriers or whatever. And very awesome, often like stencil spray painted on

there is like some dude's name, right? You know, like Enderson Rentals. And you're like, this guy is ringing them for $2 a day for every single one of these cones. And they've been here for four years. Yeah. You know? And there's how many hundreds and hundreds or thousands of them? And I go, man, that must be a good business. Right. But those maybe stay where they're, you know, placed a lot longer. And these sound like they would move around a lot. So I mentioned, I looked at a business that was similar to this about two years ago, maybe it was one year ago, it was during the post COVID boom. And one of the problems for the buyer was finding where everything was to inspect it because it was all being, you know, it's working, it's out in the field, it's out on production,

how are you going to go see all of this? And do they have good tracking to know where it all is? You know, that would be interesting too, because I had definitely seen a few businesses where when you get right down to it, they couldn't actually tell you where all of their equipment was. Yeah. And I think that is one of the key things that makes an equipment rental business good or bad. Because so much of the cost is in the bring it out there, bring it back, turn it over, make sure it's not broken for the next guy, the transition, right? The best rental businesses are when you can rent somebody thing and it sits there for a year,

right? Or more. just ring in the register, right? Because it's the transition that causes you heartache, pain, return on hassle, you know, all that stuff. So I think you're right in this case, there's a lot of setup, set up, tear down, tents, et cetera. Because the thing about, I think, a lot of Hollywood filming is they move around. Like the whole point of this is this is on scene rental. So like when the production is moving around and they need to pop up their infrastructure, these guys pop it up and tear it down. So you're sitting here with one.

$1.25 million in assets yielding between three and 400 grand depending on market rent. That's a lot of work for 25% rate of return. I think it's a lot of work. I think they've got a pretty good size staff. And, you know, when I hear nine children put through college, I wonder how many of those kids are working in the business for free. Interesting. I would make my kids do it.

Yeah, and it would be a great experience for them. Yes, yeah, it would. But that's another cost, right? cost, how many of the family members are working for free and you're going to have to replace them because I do think this is pretty labor intensive. I think it'll attract a lot of buyers if they can get the price to the right place because it is kind of exciting to think you might be on movie sets and, you know, meeting famous people and whatnot. Of course, you are at the toilets, but it doesn't matter. That's still exciting. So I think it will attract some buyers, but I think there's some

challenges once you get into the numbers to know how much you can really make in this business as a new buyer. 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. dot com. They are your perfect partner if you want to get bookkeeping out of your hair and focus on making your company, your customers happier and more successful. So please give them a call, call Charlie, cloudbookkeeping.com, tell them we sent you. They're a great way. If you're a business buyer, if you're a business owner, you're tired of hassling with getting your bookkeeping done.

He's got a whole fleet of people that are well trained and work for him. He's located here in San Antonio, so I can tell you because of that, he's awesome. And they're a great partner for you to potentially call to help with all your bookkeeping needs 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. So one thing I just noticed, and I think I just figured out the investment thesis for this business, under the support and training part of this listing, it says, a seller will stay on and no charge for 30 days after closing if desired and will be available for additional 60 days.

Should the owner, and here it is, need or want more instruction, I can be retained hands-on for $50 an hour thereafter. Let's just hire the guy to run it full-time for $50 an hour. Yeah, right, right. Help us out here. Yeah, that we've got a passive investment. Yeah, right. Maybe, you know, but he's, they don't really say they're retired.

but maybe that's what it is. It may just be there tired, you know? Like this is a tough business. They've been in a long time and they're getting tired. Oh, I think it started in 2015, so it actually isn't that old. Yeah. Yeah. Yeah, I think that's because at the end it says, my wife and I have raised our nine children,

put them through college, and it is time, and then it cuts off. It is Tim. It is Tim. And then something, you know, it's Tim for something. Yeah. And I think that's probably retirement. Yeah, probably. One thing that shocked me is attached to this listing is a PDF file called 2022 Income by Customer.

And I clicked it. And without exaggeration, it is a dump of invoices from QuickBooks. Oh, my goodness. So this, and I could, this is public. I feel insane putting this on the screen. This is with memos that shows you exactly what they rented. the, and exactly the pricing. So here is all of their pricing beginning 812, 2022, all the way to today.

Wow. Of every single thing they've ever rented and exactly what they charge for. This is not a thing you would want your competitors to have. I would not think. This is why you have a broker involved. Yeah. Oh, goodness. Okay, well, here's an advertisement for brokers.

This is why you hire them so you don't do things like this. Yes. Yes. And I feel like I say this all the time, but people all the time come to me and they're like, oh, I bet you love it when you find a deal without a broker. You know, you can really get a good price on it. And I'm like, no, I would rather the seller have a broker and pay a fair price for the business because it's this type of stuff.

Like, let's say we wanted to buy this business, right? You could never buy this business. One, because the guy thinks it's worth 10 times adjusted EBITDA, right? So you're never going to get there on price. But two, he has no idea how to do a transaction. Like when you start talking to him about working capital and accounts receivable and payable and all, like he's going to look at you like you're trying to rip him off because he doesn't have a broker to tell him that these are normal things.

And I've been there and I hate it. I have found businesses without brokers and referred them to brokers. Yeah. Right. I've worked on them as lenders. So, you know, as a lender, you get deals, however, the buyer brings them to you. And sometimes without a broker, I'll just think in the back of my head, I don't know if we'll ever close this deal. And if we do, it's going to be next year.

You know, they just drag on and on and on. And you're right. And they just, and they tend to fall apart. It takes an awful lot. The ones that I have seen be successful, the buyer convinced the seller to hire good counsel right away. you know, good M&A counsel that understood what to do and that person held the deal together. But I agree. Broker is almost always better than no broker, in my opinion.

Yes. And by the way, same for lawyers. I have done the same thing, had a seller who didn't have a lawyer and refer them to lawyers and gone. I've actually once paid the seller's legal fees for the love of God, hire a lawyer. I would even pay for it. Yeah, well, or the wrong, I'm sure we've all seen the wrong type of lawyer kill the deal. That's certainly sad. And, you know, as soon as I see that or I hear that, I just tell my buyer, we should probably

not waste our time. Let's look at something else. Not going to work. It's tough. Overall, I like the idea. I mean, this has, I would like it better if it was just the porta-potties, to be honest, right? So they've got, I mean, the hodgepodge of porta-potties intense. and tables and trailers and they've got pictures of Ferraris here for pictures.

Like, I bet they also are like sub-renting. Like film equipment company wants a Ferrari. You don't have one? I go rent one for the day, you know, and then mark it up, double and make it happen. Like these guys are like the make it happen guys, which God bless them, right? You know, they're like the, you call these guys on the phone and they make it happen. And that's a, by the way, a great way to start a business. If you can make shit happen, you will always have customers.

If you answer the phone, make shit happen like same day, you will always have customers. So I'm not knocking this dude at all, like eight years, built this business up to $400,000 cash flow, put nine kids through college. Freaking awesome. Good on you, man. I would think if I did buy this business, I would be looking for ways to streamline it. I would be trying to figure out, how do we not do the lunch tables anymore? or maybe we can find a subcontractor that is reliable that does the lunch tables. You know, how can I be, because what they're good at is relationships answering the phone,

making it happen the same day. How do I double down on that and maybe sub out all of the owning of the assets, you know, and take a booking fee or something? Right. You know, monetized relationships. But owning all these assets, all these little didly piddly things, that's a lot of pain the ass. Yeah. And all the service that you're providing, even catering.

So it's a lot of logistics and a lot of, yeah, a lot of hard work, I think, for this business, the way it is today. And you're right, if it's just the porta-potties. But however, Hollywood wants what Hollywood wants. And, you know, maybe that's really the only way you can be in that industry is give them what they want. It's always something different. It's movies after all.

Yeah, they're not going to be wanting the same thing every time. Yeah, you're just a fixer. And that's super valuable. But I don't know. I mean, how do you grow this business? It's not, you know, like a lot of other businesses, like, this is fundamentally a local business, right? They're based in Hollywood. Normally, you would say, let's go to adjacent geographies or let's add on adjacent services.

But it sounds like they're already doing all the freaking services. And how do you go to additional geographies? There's only one Hollywood. Right. I mean, what would you, I don't know, I don't know how you get this any bigger. I don't either. But I did see something interesting in the other deal that I looked at. It was, it was, you know, like I said, the time frame was post-CO.

everybody's trying to get things done and supply chain was crazy. And they started doing routes for FedEx. Wow. Yeah. And it became like a whole separate sales channel where they were using some of their trucks and trailers for FedEx, but they had to sort of customize them a little bit differently for the FedEx stuff versus what they were doing for the film industry.

So it's logistics. You know, at the end of the day, you've got trucks and trailers and you're moving stuff around. You could maybe, but, you know, then you're really getting away from your core business. And so I don't know. I think it's very tough to expand a business like this, definitely. I mean, it just becomes a hustle, right? Like, this is a very successful hustle. This guy's making $400,000 a year on a hustle, right?

Doing whatever needs to be done. And yeah, he could add FedEx routes. You could add adjacent services. But if I'm, if I could give this guy one bit of advice, it's try to figure out what it is you do, right? Because this is just a agglomeration of hustles, lots of different things. Yeah. And make this into a business. rather than a hustle, and that I think would make it much more saleable.

Yeah, I agree. I agree. And as a hustle, who can take this over? You know, you have to be good at all those things, the day one. Well, that's pretty tough. You know, you know, who can take this over? There are exactly nine people on planet Earth who can take this over. I know.

And they don't want it. Obviously, you know, they went to college and they're going to do something else. So they don't want this business for a reason, probably. Yeah. This would be a killer business to have. hand down to a child. Yeah. Killer.

Right. Relationship based, like you've been working in it on your growing up, makes a great living, $400,000 a year. Man, if just one of his kids would want this, that would be awesome. Yeah. And maybe he doesn't know, but his kids could get an SBA loan and buy it from dad. So if he's listening. Interesting.

But at the same time, though, I guess this isn't enough money. In general, though, that's a risky proposition from an estate tax point of view. Right? Because you're you're passing capital kind of up the chain the wrong way. So in this case, you would be under the $11 million limit because it's a $3 million deal. But in general, I always think this is a sticky wicket. And I get interpersonally why people buy businesses from their parents. But you have to really pay attention when buying a business from a parent because that capital in theory is coming back to you one day. In theory, I mean, I know people have different arrangements, right?

But even if it doesn't come back to you, even if it's all going to charity, Uncle Sam is still going to take his bite. Yeah, when otherwise you wouldn't have to, right? Right. So I often think in those situations, it is much better to have some sort of long-term earnout or some sort of, you know, continued note or continued employment or something. Like you want to avoid the huge bolus going up the generational chain. Very good point. Very good point. So, but I think that is the best, you're right, one of those nine kids is the best buyer,

or two of them, but a third party to come in and try to take this over, pretty tough. Pretty tough. Yeah. But in general, though, I like this category of rent durable things. I just like it to be longer and fewer categories of things. Yeah. And I would like to be it to be more diverse. Like, you know, they kind of threw in weddings and other venues, but I'd love it to see more 50-50.

you know, something like that plus Hollywood because Hollywood is a concentration and it's a risk. Yep, exactly. Yeah. So you're very leveraged to one end market. Yeah. And they're not working right now. So guess what? If you had a loan on this, you would not be making your payment right now.

Whuff. Yeah. So I was actually thinking this morning about kind of what makes, you know, we talk all the time in the show about what makes a business saleable. Like there are plenty of good businesses out there and they're not saleable. Right. one of the big reasons, maybe the biggest reason a business is not saleable is stability, because it's going to get bought with debt, usually, right?

And if it's not going to get bought with debt, that shrinks your buyer pool dramatically, you know, the all cash equity buyer. So usually gets bought with debt. And debt has fixed monthly payments, right? And they generally, you know, you're going to have fixed monthly payments for five years, right, or more, right? five to 10 years. And so when you buy a business with debt, you have to have pretty good confidence that this business is going to be stable, at least flat, right? For five to 10 years. And when you can't bet on that, it'll kill a business, even if it's like, you know, you zoom out and you just

plot the point every year and it looks stable, but on a month-to-month basis, it's all over, there are months in there where you don't make your debt payment, you know, and it becomes very hard. Right. And I think that's lost on many sellers because they were founders and they did it without debt. And they think of their cash. So what if we have a bad month or a quarter? You know, we just sort of hibernate and we come back and it's fine. For you, that's great, seller. But buyer has a ball and chain of a P&I payment every month. And you're right. I think it's just that sometimes that perspective is lost. And even I've even seen brokers not really get that. You know, still kind of pushing that this is still a great business. Well, yeah, we're not saying it's a bad business. It's a business that doesn't belong having debt. Right. Yeah. Great business to own. Yeah. Top business to buy with debt. Yeah. Yeah. Right. Yeah. And I think this one sort of falls in that category. Yeah. I agree. Although, interestingly enough, probably easier to buy with debt because it's full of hard assets. Yeah. You know what? People think that. But, you know, it's, you really then have to go find a specialized lender that's just kind of lending on the value of those, that equipment. That's usually going to be a leasing company. And they don't like to lend on you. equipment. They will lend, they will give you leases on new equipment because they know how to liquidate it really well and they don't worry too much about the cash flow. But on used equipment, it's actually not very easy to get a lender to just lend on the value of that because you have to have a special lender who knows just what they're going to do if you default to liquidate

your porta potty's. That's a good point. Our body's hard to liquidate. I personally do not know how to do that. I often wonder that about all asset-based lenders because most assets are hard to liquidate. Right, they are. So you have to become very good at a niche. So leasing companies all have these little verticals and they become very good at just those. You can't just throw anything at them, any type of equipment because they don't have a good way to liquidate just everything. So it's a misconception that having hard assets in a business will make it easier to get a loan, especially to acquire the business. Almost every lender in the SBA. B-A space is just lending on cash flow coverage, not on the value of the liquidated assets.

Yeah, which are in some ways easier and harder loans to get the cash flow loan. Yeah, I think to me they're easier. I like to look at a deal. It doesn't have hard assets because I don't have to worry about CAPEX. You know, it just makes my cash flow a little bit easier to understand. And when I have to think about CAPEX, the other thing I tell most of my clients is, you're buying a business with a lot of equipment. Let's take landscaping.

That's my favorite example. you're going to have to estimate CAPEX. We don't know what it's going to be. And every single time I've closed a deal like that and talked to my client six months later, what are they telling me? I had to buy more equipment than I expected. I had to put more money into the equipment. And even though we padded the CAPX and we estimated it was still more.

So you never really know what your cash flow is going to look like in a business that has a lot of equipment used to get. Yeah. Yeah. You know, when you talk about specialized lenders choosing a vertical, You think about, oh, it's because they know how to underwrite that vertical. And yeah, they can be part of it. But it's actually because if things go south, they know how to get their capital back in that vertical. Right. That's exactly right. There's two types of underwriting.

One is the cash flow lender wants to underwrite to low probability of default. This cash flow is so good. This business is so durable. The chances of you not being able to make the payment are very, very low. So I don't have to liquidate. The asset lender is the exact opposite. They're saying, well, you probably will, you know, there's a chance you'll default. I don't, not too worried about, I'm not going to go in too deep on the business because I know there's a certain chance you'll default. But when you do, I can recover most of my, what, you know, what I've laid out by liquidating the assets.

Yeah. You see that in real estate a lot. Which is in some ways the easiest asset to liquidate. Yes. Real estate. Can be. Versus a bunch of porta potty trailers. Yeah.

Yeah. All right. Well, cool, Heather. I think this was a good one. Thanks for showing up on a Friday. I hope the listeners like it. I feel like these always come out probably on Tuesdays and folks have no idea what we're talking about. And we're saying, happy Friday. And they're like, no, it's only Tuesday. I know. And then who knows when people listen to them. But that's right. I hope it's Friday wherever you are and whatever day it is. And we will see you on the next episode of acquisitions and honors.