Acquisitions Anonymous - #1 for business buying, selling and operating - Franchisor and a Vertical Saas for sale - Andrew Swiler, CEO, First Principles - e65

Episode Date: February 3, 2022

We're joined this week by Andrew Swiler, CEO, First Principles from Barcelona, Spain.He's the CEO of First Principles, investments in small businesses, and MicroPE.We examine a franchisor and a vertical Saas currently for sale.-----Thanks to our sponsors this week!Cloudbookkeeping.com - CloudBookkeeping sets the standard for bookkeeping services. If you run a business, you know the importance of having a reliable team keeping track of your finances and managing the complexities of bookkeeping and payroll. CloudBookkeeping is a team you can call that is responsive to your needs.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 that include sophisticated reporting, QuickBooks software solutions, and full-service payroll options.With over 100 years combined experience, the team at CloudBookkeeping provides dedicated financial management services and valuable insights so you can grow your business! Give CloudBookkeeping a call or visit their website at CloudBookkeeping.com to learn more about their custom solutions to strengthen your business.David C Barnett Small Business Podcast - If you're interested in learning about buying, selling, financing and managing small and medium-sized businesses then you should check out the David C Barnett Small Business and Deal Making Podcast on YouTube and all the major podcast apps. David is offering our listeners a FREE copy of his book; 21 Stupid Things People Do When Trying to Buy a Business.  You can find links to download your copy here:  https://dbarnett.gumroad.com/l/21stupidthings/aapodcast-----* 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.-----Past guests on Acquanon include Nick Huber, Brent Beshore, Aaron Rubin, Mike Botkin, Ari Ozick, Mitchell Baldridge, Xavier Helgelsen, Mike Loftus, Steve Divitkos, Dzmitry Miranovich, Morgan Tate and more.-----Additional episodes you might enjoy:#62 Two Landscaping Businesses for Sale - Mike Loftus CEO of Connor's Landscaping#66 Analyzing Software Businesses for Sale with Steve Divitkos, experienced industry CEO#42 $900k Moving and Storage Company / $500k Rural Mini-Storage#Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Welcome back to another episode of Acquisitions Anonymous, the internet's number one podcast for evaluating and acquiring small businesses. I'm one of your hosts, Bill Dallisandro. I'm here with my co-host, Michael Girdley and Mills Snell. And today we have an awesome guest, Andrew Swiler, from Blank Holdings. Nice to have you here, Andrew. Thanks, guys. Great to be here. Would you be able to give our guests just kind of 60 seconds, who you are, where you came from, what your background is, what you're doing now, etc.

Yeah, sure. So I guess I started in private equity back in Chicago back in 2006 before the financial crisis. I would say my claim to fame in private equity was I helped shut down 8,500 Starbucks. And at one point, I worked for two different companies that at two different times owned the Polaroid brand. So that was fun over a five-year period. So illustrious career. Then I went to travel for a few months, met my wife, was from Spain. Her and I lived in San Francisco for a while, started an eyeware company.

that we sold back in 2019. And over the last couple of years, I became a partner in a SaaS development agency. We've acquired a couple small DevOps products. And now we are in the middle of our biggest acquisition. You had a 2 million EV HR, HRMS SaaS product that we're hopefully closing soon. Very cool. Lots to unpack there.

I think we've got a couple deals. Hopefully that we'll touch on some of your interesting expertise. But man, you've owned Polaroid twice at two different firms. and you still couldn't save it. No. No. Well, one of the firms, the guy actually ended up in jail.

That's a whole other story, the owner of the other firms. I feel like we might not have enough time to get it all out of you today. We may need to have you back. All right, before we dive into it, let me throw it over to Michael for our first sponsor. Yeah, great.

So first sponsor is Cloud Bookkeeping. So cloudbookkeeping.com is their website. For those of you online on YouTube, you can see their website here. it is like many accounting websites, green. You know, that's how they do when you're the accounting business. So cloudbookkeeping.com,

so it's actually owned by my neighbor. We've gone to lunch. Great guy. And they are a set of bookkeepers that are basically here to service and help small business owners. So if you want to focus on your business and you don't want to focus on bookkeeping, they can start to help you do that

by outsourcing that to his firm of bookkeepers all supervised by him. So full-scale accounting services, sophisticated reporting, and all done around the QuickBooks Online platform. So if you standardize on that, like many small businesses have, give them a call, and they can get you out of your books and out talking to your customers and building your business. So, cloudbookkeeping.com. Thanks for being part of our never-ending journey to break even on this podcast. We will get there someday, just like those guys in wagon train from the 70s, I promise. I'll be on the wagon train to profitability here at Acquisitions Anonymous. All right.

So that means it is time for our first deal, which was provided by Andrew, which is really exciting. So I'm sure he'll have a lot to say. I'll introduce it, and then I'll let the people smarter than me talk. So this business is a franchisor slash licensor of early childhood educational content. So they say they have over 300 franchise locations and service 100. 120,000 children annually with a 95% parental satisfaction rate. So they offer over 16 years of curriculum for children between the ages of six months and nine years of age. I'm not sure how you fit 16 years of curriculum into nine years.

Maybe some kids are working double time. But they also have a presence in more than 40 countries. There's international franchisee base. As I understand it, and Andrew can expand on this more, they sold this process. on CD-ROMs for years until way past the time when people did not have CD-ROM drives anymore, I think as late as 2019 they were CD-ROM-based, but have since transitioned to a digital content distribution model. Another thing that's interesting about this business is they're very international. They did about 30% of sales in Europe, about 30% in Asia, about 15% in the United

States, about 15% in Latin America. They've got over 300 master franchisees, and they've, they distinguish between master franchisees, enrichment center franchisees, which I assume means you operate a physical location with their brand, area developers, and then licensees, which maybe is like an independent tutor or something. They've got the stuff translated into

22 languages. They say recurring revenue in the form of royalty payments for the content is 76% of total revenue, which sounds pretty nice. It sounds like recurring and nearly 100% margin. Pretty solid. They got established franchise network. They say,

kids love coming to this to this place and the parents are highly satisfied. So, you know, I think it's not all digital delivery. I think you can actually go into some of these centers in some places if you would like. They say that their 15 master franchisees in 21 countries generates 68% of revenue. So while they have a lot of kind of end franchisees, it seems like they've got this, I don't want to say pyramid type model, but sort of pyramid model where they can work through a couple master franchisees to simplify their operations. And when you've got educational content that has 100% margins, I think it makes pretty easy to kind of share the wealth down the pyramid.

They say they got a fair bit of competition because it's just school. But they seem to have carved out a pretty good niche here. They've been around since the 90s. The current owner bought it in 2011, and there's kind of no special entity or licensing or anything, it says. So it seems pretty straightforward. As far as financials, they are about $1.3 million in sales, and this has been so steady-eddy since 2017. It has basically oscillated within plus or minus 5% around that $1.3 million in sales for the last five years, which ought to give you a lot of comfort if you're a buyer.

The EBITDA is also incredibly steady, Eddie, has oscillated between $315,000 and $393,000. for five years straight. So this business is extremely boring, maybe in a good way, if you're into that kind of thing, on the financial statement side. They say that they've got, they include a balance sheet here,

which does include some current liabilities and some assets, which is kind of interesting. I'm sure we can unpack that. They have a 2,500 square foot office that they do lease, but it doesn't seem like other than that, they have any owned and operated locations.

They say management's going to remain through a transition, and that no single client accounts for more than 7% of revenue. They've got strong client relationships. They got a great name. Everything is awesome. And they say, you know, you could expand. There's a growing market for the company's services,

which is interesting because they haven't been able to grow. And they've got this whole table of growth opportunities, which is add more astro franchisees, promote their brand online, migrate their digital curriculum to new technology platform. I assume that means that they actually need to move to like an actual course platform. because it's basically recorded videos on CD-ROM

that they've now made available for download. Say you could sell direct to U.S. schools or sell more content to the families. There's a ton more here, but I think I'm going to leave it there and turn it over to the people much smarter than me, Andrew, Michael, and Mills to comment. What do you guys think?

So just so I understand this, these folks provide content to several hundred franchisees and they only do $1.3 million in total revenue. I just want to understand how this word. So that's like four grand per franchisee that they're making. Like I had to break out my calculator because I didn't believe the bald noggin on that one. That's how little value they're capturing. Yeah, it appears that way.

There's a couple of red flags on this one. That's one of them. Also, I mean, if you dive into this, the question is what is really, I mean, a master franchisee and everything else in this type of deal. I mean, what I like about these type of deal is master, finding, being a franchisor and finding master franchisees gives you less points of touch. Like you can just talk to a few master franchisees. And in this case, having 300 seems pretty cumbersome.

And I think they're confusing the definitions of master franchisee and just a franchisee probably. That would be a red flag that they are capturing very little. And the other big red flag here is, if you look, they're only mentioning to 2020. I know they've been hit hard by the pandemic. And they have not given any updates on how the company is doing through 2021. and obviously now we're in 2022. So everything was going well. I don't know how things are going now.

I was just going to add, it says in the materials that the lease expired mid-20201, which is also interesting. To me, this whole idea, right, of royalty revenue from franchisees as being recurring is kind of suspect. So, like, right, the whole goal of, right, is as much as you can de-risk the revenue.

and so that's why people gravitate towards, you know, recurring revenue. Like the next deal we'll look at it, it's a SaaS business. To me, I would say this is not recurring revenue, right? Because it's highly fluctuates based on the revenue of your underlying, you know, your underlying franchisees. They also charge a 12.5% royalty, which is incredibly high. So I think when you do the math, it's like maybe their franchisees are doing a little over $10 million in revenue.

They have a mix of, you know, royalty and franchise fees and stuff. like that. But to me, I think you're going to have a lot of pricing pressure on that 12.5% royalty because there's probably not a lot of switching costs, right? Your franchisees could go find a better software or, you know, better, basically better content, right? Because it's not even software. It's CD-ROMs. They can find better content and switch. Well, wait, on the math there, they said they have 300 end-user franchisees, which are, in theory, operating these little centers where kids come in and use this particular methodology with them. And then the percentage of that is 12 and a half percent. And the math we just did is if there's 1.3 million divided by 400 or 300,

that's $4,500 per franchisee, which means the typical franchisee is doing $36,000 a year in revenue. Like, is that math what you had, Andrew, when you looked at this deal? I mean, where I looked at this, like what they, like I said, I think what they're, they're confusing master franchisee with franchisee is when you look down below where they have revenue by master franchisee, which is like way down in the same. It goes by country. And I think that's how they have this really broken out. So I think what the master franchisees then are franchising this out, and those ones are capturing very little value.

I mean, if you go by country, the U.S. is the biggest master franchisee where they're getting about 200 grand. And then from there, one of the fun facts in this one is that 8% of their revenue comes from Kazakhstan, which is a fun place to be getting your revenue. and 11% from Vietnam. But I think those are the master franchisees. I mean, they're bringing in per master about 100 in these decent ones. I mean, in Kazakhstan, they're bringing in 115K a year in revenue. So I would base it off of that because I assume that's where their revenue captures coming from on the masters of the country. So is the problem with this business then is that they've given way too much of the value capture to the master franchisee?

Is that what's going on? If somebody's running an enrichment center that's doing 36,000 a year in revenue, like you're better off, well, these days, going to work at Chick-fil-A, right? You could probably get 19 or 20 bucks an hour, and that's better than 36 grand minus a franchise fee. Except, except, right, that most of this is international. Yeah. Yeah. Okay, well, whatever Chick-fil-A is in Kazakhstan, then, like, do they have, do they have them in Kazakhstan?

Chick-fil-A in Kazakhstan is not paying that much, though. I mean, adjusted for cost of living, right? Is it owed by Borat? No, sorry. All right, anyway, back to Sirius. I mean, I would say that there's also a question around this. If these franchises, if these centers are only using this content. Like, these could be centers that are sort of like general tutoring centers,

that this is just part of the content they use and that, therefore they're paying an annual fee for using that. That's what I assumed from reading this. I mean, like Mills said before we were talking about this, it's really difficult to say what these people actually do if they have like a center with their banner on top or if there's just centers of tutoring that people are using the content for. So it's kind of a, it's up for debate. Is this, is this a testament to the idea that especially if you have a complex, difficult to categorize business, you really need to make sure that, A,

you hire a good broker to represent you. And B, you need to read what they're sending out to figure out what the hell they're telling people. Because there is no excuse for the four of us looking at this for 10 minutes and still being clueless about how the business works. There is zero excuse for that. You should fire your banker if four people who look at hundreds of deals a year have no clue what your business does after looking at the sim. So you know what? That's a great point, Michael, which I think is really important because I know we have a

lot of buyers that listen to this podcast, but I imagine we also have some sellers. Yeah. And I think, you know, some of us on the podcast have been both buyers and sellers. And it's very, very easy when you're selling a business to kind of end up in the echo chamber because you know what this business does like the back of your hand. It's imprinted on your brain. And you explain it to the broker. So when you read what they wrote, it's a great description, right? Because you have so much context. So I have actually found success when I'm a seller to take the SIM and give it to a friend of mine that does not understand my business at all.

and then ask them, you know, hopefully a friend who understands finance, et cetera, you know, but then have them reading and go, what does this business do? Like, are you excited about this business? What questions do you have? And then I take those questions back to the broker because I find that a third party can be a much better interpreter, just like we, we're all third parties on this sim, right? And if the seller probably read this and thought, this was a great sim, really explained by business.

So if you're selling, I would make sure that it's just not you, proven the content. An interesting note here, too, their master franchising fees are what, that's their recurring revenue. So that's like built into the contract. That's guaranteed money for them. And it's from $10,000 to $40,000. So $40,000 is the maximum they charge. And the way that they do this is based off of, based off of geographies, regions,

range of income in those regions, and population. So imagine, like, the brain damage that goes through putting that. calculation together in their home office when they get Kazakhstan on the phone and try and figure out what that master franchises were. Oh, boy. But what do we like about this business? I mean, there's some things to like about it, right? Oh, definitely. I mean, it's super high leverage. It's super high leverage, right? You have a master franchisee situation. Like, you know, it's definitely like very sticky revenue or at least consistent until COVID came in and blew it up. You know, it's got a global exposure and you look at kind of where they're, you look at where they're looking at

going into these new markets. There's like Africa, Asia, you know, Southeast Asia, places the U.S. military just vacated. Like, there's all kinds of those like type places where they're expanding and having a global footprint on it. I mean, the thing I keep coming back to is, man, this is a huge value and a huge impact on a lot of people and they're just capturing so little of the value through the whole value chain. Structurally, just they took what should have been an, nice business and turn it into a lifestyle business. So anyway, that's my pluses, but there's just one negative that's just like way too big. It's like, oh, like you structured this the wrong way for you to really get above the hump of size, right? Because at this like one million plus, it's that

somebody has to buy themselves a job, unfortunately. Yeah. Yeah. I mean, the question too is what are these contracts look like? Are they renewable annually? Are they renewed every three, four years? How can you restructure these if you put together sort of a platform instead of delivering, I mean, before CD-ROMs and now people basically download these off of a Dropbox, it seems like. So if you actually built a platform optimized for SEO drove traffic to these franchisees and like built a distribution network for them, what kind of value could you capture then? I mean, because it seems like they have a brand in education. The question is just having someone that operates and knows what they're doing to

convert that into a distributed brand. So I'll take the other side of this. I think this could be awesome. When I see a business that is so flat for so long and reads like a lifestyle business to me, this tells me that the owner is completely unmotivated and totally checked out. And when you've got that combined with a scalable 100% margin business model like that, you know, no business for sale are perfect, right? but this looks to me like a long lever you need to pull.

Now, you're going to have to pull it. This is not one of those businesses that you're just going to buy it and it's going to explode. But if you are a good digital marketer, you understand online courses and you're up for restructuring some of these agreements, and as you mentioned, you know, probably squeeze a little bit more juice out. But frankly, this business is doing 1.3 million sales. Just grandfather all those people and triple your business with new people. You know, like, there's, there's not a big business. Like, I would think, and also it's, there's so high leverage, you know, your EBITDA is going

to explode. Your incremental dollar is going to drop pretty much straight to bottom line, I would think. If you structure it correctly and try to go direct and maybe avoid the whole franchisee model, if you could, you're probably going to break some eggs because people think they're exclusive in certain countries, I'd be willing to bet. But, you know, taking this to a kind of learning platform where you can track kids' progress, you can provide assessments. I think you could offer and extract a lot more value.

But to me, this owner is just phoning it in, obviously. So I think that's an opportunity. I agree. And that was why I looked at it for a while. It definitely has some hair on it. But you do need to be great at marketing and be able to get out there and get the name of this company out there. And take what the content is and rebuild it. There's also, I mean, the question around the contracts, if we did this, when we were franchising in different countries,

we would give people a head start on cities or on certain geographies. If they were able to open customers or open stores in that geography, but not in other parts of the country, we would then recapture that other part on the map. So that's a possibility you can say, hey, you're in Kazakhstan. You have, you know, whether neighborhood or city or whatever, and now I'm going to take this other part, hopefully focusing on more lucrative markets than Kazakhstan. But no offense to any viewers from Kazakhstan that are here. Did you learn, Andrew, as you learned about this business, who is their end market? Like, are they teaching English to foreigners? Are they teaching kids of expats, like American-style schooling that they can't get?

Like, what is the value prop here? Like, why is it so international? That I'm not sure of. Like, honestly, it's not English at all. I mean, it's not English focused. It is an English-based, obviously, because all the content is in English. At first, when I was reading, it seemed like it was more for, like, gifted learners. That seemed to be sort of the angle, because they have a lot of angles around STEM, around science, music, robotics, camps.

So I think that's the angle here, but I mean, I never got to see any of the content or tested out of my kids to see what the reaction was. Yeah. So context-wise, you know, this deal's kind of been around for a while and it's, I guess, boomeranged back to you. And the first time around you were interested in it, second time you weren't interested in it, you know, what changed for you? Was it stuff on your side? Was it stuff about the market? You know, tell us a little bit of the context that made both of those decisions kind of make sense for you. The first time, it just was so unclear what was going on post-COVID.

They wouldn't give straight answers. Basically, they just said, like, all the franchising fees are covered. Like, they're paying their franchising fees, and that's it. And I was like, well, what else is going on? Like, are the center shutting down? Are you getting any royalties? I mean, you're basically saying, okay, 50% of our revenue is covered. But I couldn't get a straight answer on that.

And then when it boomerang background, I'm just too busy right now. I got too much of my plate to deal with this. But I agree with Bill. Honestly, it's one of those deals you feel like, you know, if you could find the right operator that really knows about online courses, I love the franchiser model for any business. Like, I think it's super fun and it's super lucrative and super hands off. Yeah. Well, a counterpoint to that, this smells to me. And Andrew, I think this, you've done a bunch of SaaS so you know this and I've seen it.

But like there's two types of legacy softwares you can buy now, either ones that have not made the transition of the course. cloud or ones that are expecting you to make the, or that have already made the transition of the cloud. And to me, this kind of smells like that. Like, there's a lot of times where people go in and buy these package software or licensed software businesses that haven't gone to a SaaS model. And like, when you dig into that, you're like, oh, like, this is much easier said than done, like super hard. And this smells to me like exactly that, but for education. Our agency does a lot of those. I agree. Those are difficult. Those are tough sounds. Any price I pay, it's like, well, tell me where they are in the cloud transition.

And your options are either, we're just going to run out the string on license and maintenance and stay on-prem or like we're going to discount the deal enough to make it worthwhile to do as a conversion. So it's a lot of work. A lot of work. And it's not just technical. It's like you've got to change the whole business, the pricing model. You've got to run two product lines in parallel for some period of time. You got to double train your staff. Like, it's really expensive.

Really expensive. So to give some context, too, this was going pre-COVID, their first sales price, and this was $1.7 million is what they were hoping to get. I don't know what they would be asking for now. I assume it's been reduced significantly. So that was six times, roughly, five, six times even though. Yeah. Yep. A man can dream.

It's a woman in this case. Well, I was trying to get that away. Maybe you're the one dreaming. Gurley, about owning this business. I dream about a lot of stuff, and most of it I don't talk about. All right. Let's wrap that one up. And before we move on to deal number two, Michael, if you could give a shout out to our second

wonderful sponsor. Our second sponsor is our number one Canadian sponsor. And if you are Canadian, we are interested in more Canadian sponsors because you guys are so nice. And it's the David C. Barnett, Small Business and Deal Making Podcast. So this is their fifth episode of sponsor. So thank you to David. So David operates out of Canada, number one Canadian sponsor,

and he has a podcast and a bunch of content around buying, selling, financing, and managing small and medium-sized businesses. And you can check out his podcast. He also offers listeners of our podcast a free book that he has created called 21 Stupid Things People Do When Trying to Buy a Business. And you can find a link to download your copy and find David's YouTube channel in the show notes below. and if you go either on our podcast on YouTube or on your audio app, you can see the link to those. And please go check out what David is doing.

As we discussed before, we're on episode like number 65 for us. David's like on 400 and something. So Mills and I were flabbergasted by how prolific he is. So check out the David C. Barnett Small Business Podcast. I just got to love, I got to appreciate David's candor. I feel like he vibes very well with the actual. This is Anonymous podcast. If you're watching this on YouTube, you'll see 21 stupid things people do in trying to buy a business.

And he introduces it by saying, every day, thousands of really awful businesses go for sale and thousands of good businesses go for sale without outrageously inflated asking prices. So I just appreciate David's style. So go check out David's podcast and the free e-book. He assumes that we share the same bias. Super duper duper direct. That's right in. Yep. Love it.

All right. Thank you, David. Let's pass it over to Mr. Mills now for deal number two. Yeah, I got it. Michael, I think my internet is better now so I can edit. Did you kick the hamster? For those of you listening, Mills has the worst internet in history, and the joke I always ask when it goes out is, hey, go wake up the hamster.

He stopped running on the wheel to power your modem. So anyway, go for it, Mills. It feels like that sometimes. So we have a deal. Michael hasn't pulled up for those of you on YouTube, but it's a deal that Reg, Zellerson, over to us. I don't know. Part of me wonders if there wasn't a business broker on here, I would think that maybe Reg created this listing to bait us, but it's software for the foundry and metal casting industry. It's based in the Midwest. This honestly sounds like, it sounds like he's spoofing us, but there's no

asking price. They don't say how much cash flow the business generates. The revenue is $1,180,000 a year. this has to be a typo, but the EBITDA is $10. There's no furniture fixture and equipment, no inventory. They don't say when the business was established. The description that we have, and this is kind of brief, but we're going to banter about this because we can come up with something to say. A business software company serving companies in the foundry and metal casting industry. The company's software provides enterprise resource planning, ERP, and manufacturing execution systems, MES software, to clients, using a software as a service, SaaS, and on-premise deployment models.

That is a bunch of acronyms. Key aspects. Industry-leading technology designed for foundries and metal casting companies in the U.S. and globally. Recurring subscription-based revenue model, over 30 years worth of industry experience. The growth and expansion plans, which we see a lot of, you can expand national and international sales and marketing efforts, expand into additional verticals beyond aerospace and defense, which I guess that's one of their specialties we didn't know about. Increased technical talent by hiring developers and software engineers,

increase research and development efforts in order to integrate the software into new technologies, for example, Internet of Things, IoT. And it gives the broker's contact information. We tried to find him on the brokerage houses website and couldn't. So not a lot of information to go on on this one, except we know their revenue and we know the vertical they focus on. Yeah, and I mean, I think one of the things we commented on is there's good Sims and bad

sims and there's good teasers and bad teasers. I put this as a bad teaser. To some extent, you have to wonder in Tyrus' defense when there's something this specific. I mean, there maybe or two, maybe three packages in the whole world that focus on this particular vertical market for software. So this broker, you know, before I poop on it and be like, this is the worst. teaser I've ever seen, which it's pretty close. But before I poop on him, he may be getting direction from the client, like, hey, you need to

really anonymize me because I don't want my clients knowing how much I'm doing. But yeah, this is another example of, man, if I was hired this broker, I would be really disappointed. This was the amount of promotion they're doing in my business to create a market for me. So is this not the wet dream of all searchers and would be SaaS, whole co-assemblers, right? niche, SaaS, super sticky, because it's ERP. It's probably not, it's small-ish, so Google's not going to come into your space, probably sent, like, this is what everybody wants, right?

I mean, this is Constellation Software, right? Except for the lack of cash flow. That's a big issue. You don't know about the cash flow, but also this is too small. Like, like, the problem with this is, in all software businesses that are like in this one to one-and-a-half million-dollar, like, no-go zone of revenue is it's almost impossible to build a team out of anything other than an owner-operator, right? Like, how do you find somebody? How do you build a sales organization? How do you

grow the thing without either hiring a unicorn-type person who you can put in charge of it or like just getting stuck, right? And so the constellation, for example, doesn't really want to go sub-5 million on stuff like this. They tend to only do it totally around to earn out. So that's your problem. It may also be that they have 100% of the total addressable market here. Like, you may be buying something and you really can't get it to $2 million because they have 95% of the 250 foundries that are still in operation globally. So that's kind of the one big thing about why this is actually probably good for a searcher looking for a job or a self-funded searcher especially is like, you know, you're not going to see a lot of competition from the people

that are paying big multiples. So, Andrew, you're about to say something before I went on a high rate. I mean, Google and Microsoft aren't going to come into this market, but you are competing with Google and Microsoft because there are a lot of these types of companies that their ERP is Excel spreadsheets. I mean, I know a lot of companies that are more industrial, and that is their ERP. And if you try and get them to transfer onto something else, a big majority of this market is just going to say, like, I've already got this built out. I've got this guy that sits in our accounting department and in our finance department. He kind of takes care of all this stuff. So you are competing indirectly with them. Also, looking at this type of SIM, I mean, when they just say like ERP

or MES or something like that, it's so hard to know what this actually does as a product. You're coming in totally blind as to like what the actual value at is here. And I was saying about the cash flow, when he puts 10 bucks of EBITDA, usually when I see these and I've reached out to people, it means there is no EBITDA. At least that's been my experience with these types of companies. So I mean, these guys are doing a million bucks in sales and not making money, which if they just built this in the last five years, okay, because they're building up the product. But if it's been around for a while, it's one of those old legacy SaaS deals, that's kind of a red flag. Don't you think, too, like, if you own a foundry business or a

metal casting business and you need software or you're thinking about migrating from Excel, right, and, you know, just something that's kind of antiquated to software, I mean, it almost seems like this type of business needs to be like all things, not to all people, obviously, but they need to be like all things to like 100 people. And I have a hard time imagining, right, that at roughly a million dollars in revenue, that they are like fully saturating that specific niche in vertical. Like, and then, right, if you go broader, if you say, hey, look to the red sellers of the world, we want to be your one-stop shop for all your software, it's very difficult to compete, right? Because you may have, at a business this size, you may have like

one developer or an outsource developer, I'm guessing, and you're competing against somebody who's like, hey, we do ERP that isn't industry specific, but it's industry agnostic. You can plug anything into it. And so all of a sudden, if you say, hey, we want to do ERP, but also we're going to add on like a customer relationship management module, CRM module, or, right, we're going to help you manage your supply chain better. There are other providers that do those things way, way, way better. And they're probably built dynamically enough and flexibly enough that they don't have to be industry specific.

So it sounds like if you're going to buy this business, you better have a damn clear path to $5 million in sales, at which point it might start to get interesting. And if you can't clearly articulate a way to 5x this business, you better be sure you love running it. you're going to be stuck running it. This is a really interesting sentence here, too. You can tell what niche they're actually in and who they're selling to. They're selling to aerospace and defense.

The growth and expansion expand into additional verticals beyond aerospace and defense. So they're not selling to the red sellers of the world. They're selling to the guys who are making custom parts for Boeing and stuff like that. It's very interesting. Sorry. Andrew, are you about to say something? No, no. That is an interesting point.

You think that's like a deflection, like put in the top line saying it's for foundries and that it's actually for a different vertical? Well, you know, so we learned from Reg there's actually different segments of the foundry market and different ones are more appealing than others. And if I recall correctly, he was very positive on the type of geographic moat type foundry that he does, which is a specific type of metal and a specific type of customer base. And he was actually really poopy on aerospace and defense. Like I think, Bill, you and I were talking about how excited we were, you know,

It's like, well, somebody's got to pay up for those parts if you're going to make sure your airplane doesn't fall out of the sky. And, you know, I can't remember the argument. But Reg was like, no, no, you're wrong. Actually, you want to be in the corner of the market where I am because aerospace and defenses is harder to service as a foundry. So I found that interesting. But yeah, so that's why I brought that up. I was like, okay, I remember Reg saying, like, these were problem verticals to focus on as a foundry because of different reasons. And I think maybe it was because there was too few buyers, right?

The number of aerospace and defense companies, there's only. A handful they're actually going to be buying parts from you. Yeah. All right. Cool. Anything further on this one? Look, I think it's worth getting the SIM. I would, you know, you know me.

I'm like the half glass full guy, a glass half full guy. And like, I think it's worth getting in the SIM and seeing if there's something here. And the good news, at least from, for me at this time of the cycle is this kind of looks crappy. So maybe there's something here. It's like a treasure hunt. So. Which means they're only asking $5 billion probably. Oh, yeah.

Yeah, well, that's why one of my business partners uses this phrase, like, that's where you just got to hang around the hoop. Just got to wait for that rebound, you know, so they come back to you. You know, in this market, you know, so many, I hear of so many searchers. I know you guys probably do too. Search for two years and they don't pull the trigger on anything because they wanted to be perfect. You know, and they're out there looking for this business that just checks all the boxes and it's automatic yes. Well, guess what, you know, those businesses either don't come to market, sell instantly, or you can't afford them. Yeah.

So, you know, ultimately, if you're trying to get into this, you're going to want to find something that has something wrong with it, but that something doesn't bother you that much. Yeah. Right. Either you want, you're okay working in the business or you have a plan to fix that thing that's wrong with it. Like, or you think you're uniquely qualified to grow this or whatever. So many people go into acquisition through entrepreneurship as kind of saying, treating it more like investing than operating, right? Like, they want to, they want to invest in something and continue sitting on their butts. but the reality is you got to invest with a growth thesis.

I mean, that's kind of table stakes, right? Like, what are you doing investing in a business if you don't think you can grow it and having a fully baked growth thesis? So like on this one, if I, let's say someone was searching and I was backing their search, I would be very hesitant to pull the trigger on funding this acquisition unless they were very sure and explicit about how it was going to get to $5 million. But that wouldn't be a reason not to do it if I bought their growth thesis. Well, I think it's one of Brent Bruchor's lines is like, you know,

there's a reason these businesses are small. Like, there's, if the, if the business was really that perfect, they would be public by now after 30 years. So that's the one. And then another way of encapsulating what you just said that I heard a smart investor say once was every deal has red flags. It's just your job to A, know what those red flags are, and then B, figure out how you're going to deal with them. So if you're up five million, there's some huge red flags like banner size and you just need to make sure you know what they are. And then understand that's just the way it works with tiny businesses. Exactly. All right. Cool. Well, let's wrap that one up. Let's, before we ask Andrew to give us his final thoughts, let's throw it over to Michael, just to summarize sponsors.

Yeah, thanks again on our never-ending quest to break even. Like Don Quixote, 2,500 page book, we'll get there. The David C. Barnett, Small Business Podcasts, check out his free book that he's made available to our listeners. And there's a link below in the show notes for. you there. And my neighbor, Charlie and cloudbookkeeping.com, if you want to outsource your QuickBooks and accounting to a trained professional group of professionals, all in the U.S. Charlie is the one to check out there at cloudbookkeeping.com. So thank you to both for our sponsors. All right. Thanks to our sponsors. So Andrew, thanks so much for being with us today. If our listeners kind of find you, what can they do to help you out? You have any asks, follow you on Twitter, send you deals. How can everybody help you out? Where can they find you? So you can follow me on Twitter at Swiler A, S-W-I-L-E-R-A.

Our SaaS agency, if you guys are acquiring a SaaS company, you need TechD, you need a partner to work with. Our SaaS company is called Firstprincipals.io. We work with actually quite a few independent sponsors and tech companies that are acquired in tech companies. And right now we are finishing up our fundraising on this acquisition. So if there are any investors that are interested, I got a couple of holes left to fill there. So hit me up. All right.

Sound good. Have you told the story of selling your optical business anywhere? Has that, like, been recorded on a podcast? I would love to listen to it and point other people to it. No. No, there's like the actual sale of it. There's a whole bunch of odysseys that we went through to get to the sale over the years. But no, I've never recorded it all to sort of give the background.

We have friends who record interview-style podcasts about founders or sellers' journey. So for those of you who listen, Andrew should be on your list because I really want to hear his story. All right. Hopefully someone wants to ask. It's interesting. It was my wife and I. So it was a couple that built a business and sold it. It's fun.

It's super cool. Well, thanks for joining us, Andrew. Thank you guys.