Acquisitions Anonymous - #1 for business buying, selling and operating - Fresh Citrus Juice Manufacturer Squeezes Out $3M of EBITDA - Acquisitions Anonymous 243

Episode Date: November 7, 2023

On this episode of Acquisitions Anonymous, Mills, Heather, and Bill discuss a niche citrus juice ingredients company focusing on its unique offerings in frozen and liquid concentrates. The team deliberates on the company's growth trajectory and potential challenges, including evaluating its asset-heavy structure and the risks associated with a rapid revenue increase. They emphasize the importance of understanding the competitive landscape and the implications of potential industry changes while considering various financing options for prospective buyers, including equity and seller roles.Today's deal comes from Axial.  Axial is a trusted deal-sourcing platform serving professional acquirers in the American lower middle market.Thanks to our sponsors!Employer Flexible will help you take action to streamline your company’s HR processes. They are the proud provider of flexible and adaptable PEO services. If you’re a small business trying to grow, and you’re struggling with a lack of internal HR or you’re just dissatisfied with your current HR setup, consider Employer Flexible as your next vendor for HR outsourcing services.Check them out at https://www.employerflexible.com/.------------Double Jump Media is your one-stop shop for creating engaging, high-quality videos.Double Jump is a boutique video production company with over a decade of experience creating professional, memorable videos for clients from around the globe and in various industries. All while helping those clients generate millions in sales through video content.So, whether you’re rebranding a business you recently purchased, launching a new product or service, or want to look awesome, Double Jump is down to clown.Visit www.doublejump.media to check out their portfolio and schedule your free consultation today.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 everyone, my name is Bill Dallessandro, and welcome back to another episode of Acquisitions Anonymous. Today on Acquisitions Anonymous, I am with Mills and Heather, and we discuss a citrus squeezing business. They bring in limes, lemons, and oranges, and squeeze them into juices, selling them in everything from little eight-ounce bottles to 47-gallon drums into the food service and market. This deals from Axiol, so it's a little bit bigger, a little bit more sophisticated. A pretty cool one to talk about. I really enjoyed this episode, and I think think you will to. Today's sponsor is employer flexible. And what employer flexible does is really function as a fractional HR department for your company or business. I've used them numerous times

and putting together my companies. I've used them when I bought companies. I've used them when I started from scratch. And basically when you're moving quickly or when you don't want to spend the time putting together your own HR department, benefits, all that kind of stuff. And you want to get the scale of being part of a larger group, you can reach out to employer flexible. And what employer flexible does is give you that buying power as if you're part of a bigger group and all that kind of stuff. And for me, I love working with them for numerous reasons. One is I know the owners and a lot of the staff and they've always treated me super good. And then the second thing is I hate HR. Like, I don't enjoy it at all. And this way I can know it gets done right. I get the

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and today you've got Mills, Heather and I, and Mills just got done telling us there is no recession, which is great news. Famous last words. Geez, thanks, Bill. So if there is a recession, is definitely Mills's fault. That's true. Yeah.

For sure. Blame it on Mills. So we have, speaking of things that should be recession-proof, we have a flavors and liquid concentrates business, today, which is pretty cool. It's from our friends over Axial market. If you're not familiar with Axial, it's usually bigger deals as a vetted marketplace, whereas kind of biz by sell, everybody can just post anything they want. The deals on Axial have to be approved, and they're usually represented

by an investment bank or an intermediary. So you're typically going to see a little bit higher quality deal on Axial and sometimes a little bit bigger deal on Axial. So we've been mining Axial lately for cooler, different deals. and this is one of them. So Mills, you want to take us away? Yes. So this, one of the, one of the tells on a teaser is, you know, in this case, we don't have the teaser direct from the investment banker.

We just have kind of an anonymized axial version. And if the deal is referred to as project something, you know that there's an investment bank working on it. It's not a broker. So this one's called Project Lemon Lime. It's a niche. Well, sorry, the headline is ingredients company in lemon, lime, and orange, citrus, frozen, and liquid concentrates.

That is a mouthful. So they just, you know, Project Lemon Lime. It's a niche citrus juice ingredients company that serves the food manufacturing and food service segments of the market. In addition, they have offerings that are directed at consumers and grocery retailers. Their product offerings include frozen concentrates, frozen orange, lemon and lime purees and bottled shelf-stable lemon and lime juice. Packaging sizes range from retail size, small squeeze bottles, 12-ounce bottles,

32-ounce, all the way to the bulk 25 to 47-gallon buckets. I mean, that is just making my mouth pucker thinking about it. Yeah. The company has a niche manufacturer. The company as a niche manufacturer produces a natural ingredients product by avoiding adding citric acid and only sourcing and using the best lemons, limes, and oranges. All of their products are bottled and packaged in their processing facility. The company enjoys a who's who list of customers in the food service and food manufacturing sectors.

They say they have a healthy focus on ingredients in food manufacturing. Citrus benefits are packed or back. Citrus benefits are back post-pandemic. I think they were they were. Did citrus go away? Right? It was you got the benefits before the pandemic. You got them during the pandemic and they're still there. Tail wins for flavoring and natural preservatives. I'm not sure what about that. The company history with science is the next header.

Company was founded in the 1950s by a citrus chemist and bacteriologist. This changed the way lemons, limes, and orange ingredients were processed, packed, frozen, pureed, and shipped. Company has been family owned and operated ever since. The reason for the sale says, the owners of Project Lemon Lime have been operating the family business for over 50 years and are at retirement age. The company has a strong team in place. Owners are willing to stay on during a transitional time of one to two years. Transaction being contemplated as a complete sale of the business to a capable group who can take the company's reputation, staying power, current supply, and distribution to the next level.

So we've got 2020 through 2022 actual financials. And if you're on YouTube, you can see this on the screen. And then 2023 estimate financials. But the revenue went in 2020. They were at 6 million. Then it went to 7.7, then 8.2. And in 2020, they estimated $9 million in top line. The EBITDA on those in 2020 was 1.8 million, then 2.3 million, then 2.7.

And now they're forecasting $3 million in EBITDA on 9 million in revenue. This is very linear. This is very smooth. This is very, you know, predictable, you know, kind of just this is up and to the right. The margins seem fairly, you know, fairly stable. But we don't have any other detail, any other finer details on it. What do you guys think? So, I mean, let me just say one thing that jumps out of me, right?

This always kills me. So I've got four years of financials from 2020 to 2023. It goes from $6 million to $9 million. The business grows by 50% in three years, right? The three-year period they show us. But then they tell us it's a 50-year-old business. Exactly. So it takes them 47 years to go from zero to six million,

and then they go from $6 million to $9 million in three years, and then suddenly the owners feel like retiring. It's just all so convenient because you read this at first, you're like, oh, it all seems reasonable. It's an old company. It's growing nicely. And the, you know, there's a decent reason for them to be selling. They're retiring. But then you take a second, you think about it and you go, wait a minute. Like, why is there this huge inflection point in the last three years and why all of a sudden do the owners want to retire now? What is, like, I would really need to unpack that. And in some case, it can be one of two things.

It can be that it took them 50 years to go from zero to six, or they went from zero to 20, and then there were structural changes in the business, and it came down, and now they're just showing us the last four years of, you know, linear upwards growth. I've seen a lot of businesses where it's like that, and they're like, yeah, we used to have, you know, 300 employees and we did all these different things. And then, you know, a division left. We had a fallout, you know, owner died, whatever. and now we're a totally different business, but that's not necessarily a bad thing. You just got to dig in and see what,

I need more than three years worth of snapshot. And could it be an exit planner did a good job? I mean, could someone have come along and done some consulting here and said, hey, if you do want to retire in four years, these are the things you've got to do. I mean, like to your point, Mills, that wouldn't be a bad thing if they did them and they were effective. But also is this sustainable, I guess, is the other thing,

is we just grew finally 50% is that sustainable. Is it also just a sales function that they finally kind of turned on? And then how dependent are you on some salespeople who maybe did very, very well in the last few years? Definitely a lot of questions when something that old has grown that quickly. But the benefits of citrus are back. Citrus is back post-pandemic. Well, I mean, let's not forget this is manufacturing, right? So they have a facility.

They have, you know, their asset heavy. And you've got to dig into the details here. Like I had some friends knew a guy who expanded his brick plant, you know, built extra kilns, ramped up pre-2008, had a ton of, you know, capacity. And then demand for, you know, residential bricks and brick in general fell off of a cliff. and the business is upside down on a bunch of debt that they, you know, had to build all these facilities. And you can't just like turn this on and off overnight. There is a ton of sunk cost. So you look at this and say, okay, this could be a production line that is all 50 years old and it's just held together by a hope and a prayer. And they're squeezing more revenue out of the same amount of, you know, equipment and it's older and you've got a ton of deferred capax, a ton of, you know, deferred maintenance. you could get in and go, wow, they actually have reinvested a bunch of money into the business.

They've modernized. They're able to do more with less. You know, you just don't know until you get in, but the assets are going to tell a lot of the story on this because you could get in there and realize, I have to spend $5 million in order to grow the revenue. I just can't sell anymore. I can't make anymore. But that's a hard thing. Before we hit record, Bill was talking about the magic in business of just getting on a plane. this is one where you've got to go see it. And you can walk into the factory and the production plant and you're going to be able to tell a lot really quickly. Yeah. I tell a lot of my clients who buy a CAPEX or looking at buying a CAPEX heavy business,

I've never closed on a deal like that where the new buyer didn't come back and tell me within the first year that they had to spend a lot more on CAPEX that first year just to keep it running, to repair things. And, you know, people don't realize that the current owners know that equipment kind of intimately. And they know how just how to keep it going. And a new buyer comes along and a lot of it breaks. And, you know, you've got to fix it. So, yeah, Cappex is huge consideration for a deal like this. And that is something that you can finance, right?

Heather, I mean, like, that's easy to finance, but it's still real money, even if you have to borrow it. So you don't want to get hit with having to finance $5 million of equipment either two years after you buy this thing. Right. It's sort of a capital allocation question. You know, how much cash are you going to have to have at close to comfortably operate and cover the CAPEX? You know, we go through an exercise when we finance these types of companies is what should

the normalized maintenance CAPEX be? We're never right. You know, like it's just a guess because we don't know the equipment very well. and, you know, it can be very, very costly. We can be way off, and we try to pad the number as much as we can. You know, we come up with what we think is reasonable, and then we add more to it just because. So it's always a bit of a mystery,

and it's a risk that a lot of people don't fully consider when they're looking at a business that's got a lot of equipment. Yeah, and you have to be reserving every year. You've got to be kind of putting cash aside for that deferred cap X. A lot of times, you know, I see like old businesses like this. They usually don't have a lot of debt on them because one of two things has happened. Either they're stretching the 50-year-old equipment for everything it's got or they've just used cash and they've been maintaining it and it's been well run and the owner is allergic to debt and he's just doing it the right way. But rarely do you see a 50-year-old family business with debt on the balance sheet.

That's right. I have a real life story about this. So a friend of mine owns a trucking company and a food processing company. And we were talking at the baseball field the other day. Our kids played together. And I was asking them about, you know, fleet kind of maintenance and, you know, just how do they manage their fleet of trucks? And they kind of finance, release, you know, release to own. They have like some different things that they do.

But they own like, you know, 60, 70 semis and a bunch of trailers. And he said, yeah, when our trucks, they have in-house mechanic, just like, like us. They're a lot bigger than us, but he's like, yeah, when they get up to, you know, on a semi, when they get up to like 350,000 miles, maybe half a million if we're pushing it, we're recycling those out because you still get a lot of residual value. You can sell them, roll that, you know, into, you know, the equity of the new asset and it just is more predictable. We have a, we have a semi that we own that has 1.1 million miles on it. Wow. And it's like, I bought a founder-owned business.

You know, I mean, we have a full-time mechanic. They have squeezed and the thing still runs. We're getting the clutch changed on it right now. It is all pulled apart and pieces. But it's night and day different, right? And you walk in and you go, oh, yeah, like, sure, how bad could it be? But you extrapolate that over the base of assets that might be, you know, several million dollars worth of assets and go, oh, my gosh, you could, you could, if a couple things, you catch some bad luck and a couple things go. belly up equipment-wise in a short period of time, you're hurting.

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and figure out what's best for your business. They're great folks and can help you on your journey in producing amazing video content to help meet your business needs and goals. And thanks to them for sponsoring today's episode. This business has got energy costs too in cold storage, I imagine. right? So probably a freezer, a big one. I was mentioning before we started recording, I toured one of these freezers at the port of Los Angeles one time, looking at a company that did something very similar. It wasn't citrus juices, but it was all kinds of other fruit juices,

and they were selling them in bulk to soda manufacturers. They were going into drinks like that. I imagine that's where a lot of this goes to and into different drink mixes. But the freezer was, it was obviously very expensive to build. And this is the kind of thing where you probably don't move very often. You know, it had different levels of cold. I don't know if this particular company needs it. But like, you know, the beginning of the freezer where it feels pretty cold and things are frozen is just, you know, one level. And you keep going deeper and way, way in the back is where you have the coldest storage.

and they made it clear that I couldn't stay there very long, which I was glad not to do because I wasn't dressed for it at all, but it was quite interesting. So I also wonder, because that was at the port, so that was a business that was importing the juices frozen. And, you know, that was very expensive, but they were different types of juices. I would imagine citrus, they didn't say,

but I would imagine this is probably mostly domestic crops. Any guesses on that? Lovely. Yeah, I mean, because it's got to be fresh. And it's, it's, they say, so I want to understand the industry a little bit, right? To your point, Heather, a lot of this stuff is imported frozen. And they even imply in the teaser that this business is different because they don't add citric acid to it. I'm sure everybody has had a, you know, margarita made with margarita mix.

And it purports to be lime juice, but it's actually mostly just citric acid, like industrial. And it just like puckers your entire. system. It's terrible. So I think these guys are differentiating and that's why I think it's domestic, that it's not citric acid because citric acid is a preservative also. So they seem to have differentiated here. But I would want to know, to your point, Mills, about the brick industry, about the guy spent all this money on a new brick plant and the brick industry fell apart. Right. And there's really nothing you can do. I really want to understand this business's competitive position in the squeezed puckered, hucker your mouth fruit juice industry. Right? You know, like, is,

is China and South America imports coming for this? How has the industry been trending over the last couple years? You know, are there other producers of this without citric acid? What's the drawback of not doing it with citric acid? Because there's a reason most other people do it with the citric acid. It could be that, you know, this business is smaller because it's nichier, right? You know, mass produced stuff needs citric acid because it makes it cheaper because there's less waste and is preserved. So it's possible that their stuff is 30% more on shelf than the other stuff. That's not the end of the world, as long as consumers are willing to pay for it. Some niche, but that's going to put a cap on your growth. So I'd really want to understand

the fruit juices industry and competitive landscape. Because it's an asset-heavy business, you probably can't pivot really quick. You're making these products. I want to make sure they're still demand for it. Well, and I think we've talked about it in maybe it was a pharmaceutical ingredient supplier or something. Maybe it was food. But, I mean, this is a B-to-B business. And you've got to think about the FDA components of not just, right, what this company is doing, which they would have compliance to deal with, but also their customers. And so if, you know, if you have a B-to-B relationship with, you know, like MinutMade or something, right?

and they're putting your raw ingredient into a frozen lemonade, you know, dessert kind of thing. And they want to switch up suppliers. There's a domino effect of it's not just as easy as, hey, we've been buying cardboard boxes from so and so. And we need to buy new cardboard boxes from somebody else because they're, you know, two and a half percent cheaper. Whenever food companies change ingredients, it's a really, really big deal. When I was doing M&A advisory work, I was visiting a client in Texas. And I was just like looking for another, I was just looking for businesses to go talk to and me. And I reached out to this guy, reached out to a bunch of people.

But one guy was like, sure, you can come by. And I go. And lo and behold, they are the people who make the dry seasoning that went on Doritos. And like that's not on their website. But like I talked, you know, went and met with him and talked to him. And he was just really open. And he was trying to transition the business to the next generation. But they were the people that made.

And they were like, Dorito, they basically can't change it. But we also can't change anything. Like, we can't go competitively try and source from somebody else than the people we've always been using because the quality control. Like, imagine if it's like whenever Coke and Pepsi try to like, you know, reamint themselves, it flops most of the time because people are like, no, it has to taste the same way it's always taste or else. You know, it's not Coke to me. It's not, you know, a frozen Italian ice or something like that. Yeah. And there was a, I wonder this growth that they've had since 2020, it just kind of popped into my head because I did.

talked to a couple of, I talked to a business that did the peppers for hot sauces, right? And that was fascinating because they can ship that unrefrigerated. If it's, you know, it takes a chemist to get it just right. But once it's at the right pH, those are shipped in these big plastic bladders inside of a shipping container without refrigeration, the type that goes into Tabasco, that kind of thing. Anyway, they were able to expand their plant since COVID based on a USDA program that was targeted toward food supply companies. So I'm just curious as a finance person, if this business maybe took advantage of one of those

programs since COVID, and maybe that's what drove some of the growth? That would be a question I might ask. Overall, I think I like this business. I mean, it's assuming that there's no funny. business on why is it growing so fast in the last couple of years and do we think this sustainable and is there a huge defer capax? But I think I like it other than those things, right? If it's an individual buyer that comes along, this is at a weird size to finance, maybe just a little small. So, you know, you've got your no man's land for SB. Like SBA sort of ends at about a million

and a half EBITDA size company. And conventional doesn't really begin until three million. and this is barely getting to $3 million. So it needs to probably be acquired by somebody who isn't just getting a standalone, you know, a strategic acquirer or somebody like that, private equity who can put a lot of equity into it. But it's a little small. So Heather, let's say you were an individual buyer that wanted to acquire this company, right? How do you do that?

How would you structure this deal? I mean, we assume it's probably going to sell for, what do you guys think, five times, something like that? Probably. So sell for $15 million on $3 million. to EBITDA. So Heather, if I don't have 15 million bucks of cash, how do I get there as an individual buyer? You need what we call sponsors. And the bank wants heavy hitter sponsors who have been investing in small businesses who have a track record. They're going to probably form a board

around you. Your economics aren't going to be so great if you found this on your own. you know, your economics are going to be very similar to what we would call a traditionally funded searcher who eventually only can own up to about 25% of the deal that they find. That's, it's going to be similar to that. And a lot of people don't like that because they think, well, wait a minute, I went and found this myself. I want the same economics that someone who does an SBA self-funded deal gets. But when you go too big, you just can't because you need all that equity.

And if you're going to get some debt, you're going to need. those kind of sponsors in your cap table. And so it drives a lot of people back towards the smaller SBA-sized deals because they don't get personally as great of economics. And this is food service. So I think an individual buyer that would have to have a great resume for this. They'd have to have some experience that made sense in this industry. So it would be tough for an individual buyer.

What is the, as an individual buyer, so let's say it's a $15 million deal. with $3 million of EBITDA. What is the minimum amount of equity, do you think I'm going to have to bring myself or from my sponsors? Like what is, because obviously I want to raise as little equity as possible, because the more outside sponsor equity I raise,

the more diluted I get. How, what are some ways that I could minimize my equity requirement on this deal? So first we start with how much debt can you get. We're going to, it's about 2.5 turns of EBITDA. That's the way we say it. but it just means three million times 2.5, that's $7.5 million.

That's as much as any conventional senior lender is probably going to lend these days. You know, in the past maybe three, but this is small and credits tight. So I'm halfway there. I'm halfway there with bank that, seven and a half out of $50. Guess what? Now you need a whole bunch of equity and some seller note. They're not going to let you make up the bulk of that with seller note. So the majority of the other seven and a half needs to be equity.

And it needs to be from, again, it can't just be any equity. It has to be from sponsors. They're probably going to have some pretty good terms on that equity. You know, so they're going to get paid pretty well. It's going to be more expensive than the debt. Much more expensive than the debt. Much, much more expensive than the debt. And you as a buyer who becomes the CEO, there are going to be a lot of control.

in your operating agreement. So kind of be above and beyond the cost of the equity, you are, you know, again, under sort of a board of directors. You might, they may even have the ability to fire you if they don't feel like the performance is there and the growth is happening. So it's a very, very different kind of deal. But it's a lot of equity you'd have to raise.

Out of that, you have to have at least $5, $6 million of equity. So, Heather, I've had this conversation like two or three times now in the last week with folks. about real estate and operating businesses, that it almost feels like right now, there is a incredible, I guess, bent or bias towards being able to do a deal, all equity, stabilize it, and then go put debt on it, you know, in 12 to 24 months and kind of refi out.

And I think the lenders that I've talked to about it are like, I would do that in a heartbeat because it, my strike zone widens if it's a going concern and not, you know, or if it's a stabilized building that now has, you know, a better lease in place or whatever it may be. It's a totally different proposition from an underwriting perspective. If you can, you know, get in, acquire the asset. And then all of a sudden, Alender's saying, wow, you've been doing this for two years and you've maintained it or you've improved it or you've rolled with the punches. And instead of, hey, I'm a nobody. I'm a new guy here. And I want to start doing this.

Absolutely. The first year is from the lender's perspective, the riskiest year. So if you're taking that risk out, that what we'll call transition risk, yeah, it looks a lot better to a bank. But what's interesting is right now the banks would still, let's just say you try to do that with seller debt and not that much equity. And then you thought, okay, now I've got it, you know, it's grown or it's doing great. That's still hard to refinance with a bank if you don't have those sponsors. So it's just kind of of a weird time, but I agree. If you can somehow take that transition risk year out of the picture for a bank, the debt gets much easier to raise, definitely. How material is the term difference, the difference in terms, from a loan to value perspective and a rate perspective between, hey,

I'm acquiring something and it's new to me, and I don't have any established, you know, kind of track record there versus refi rates. Let's just say it's, you know, a business who wants to refi out some debt. I mean, is the loan to value is pretty dramatically different. And the rates are maybe not so different. The rates are not that different. I think that's a function of banks aren't really great in this space at risk-based pricing. They don't really have sophisticated models to say, oh, this is a lower risk now. They just know they have to, you know, the budget says we have to have this much spread and this much yield. And this is, it's fitting in this category, so I have to price it that way. So the rate doesn't really get that much better. Leverage, yes, maybe you can get a little more

leverage in that kind of situation. It's still hard to say because they just, they want really a lot of equity in these non-SBA funded deals lately. It's a very interesting credit market. the SBA lenders have stayed pretty much the same. They haven't tightened up much. And the non-SBA lenders have tightened up a lot. They've really gotten super picky. One other way that's worth mentioning to bridge your equity gap is by seller role. So your seller can be one of your equity investors, right, by basically not selling the whole business. You know, if you need like one or two million dollars to plug an equity hole, you can ask seller to sell 90% of the business instead of 100% of your business. And that 10% effectively

becomes equity contribution, right, because it reduces your purchase price. Your seller becomes an investor with you. So that's another way to kind of bridge it. You can get seller debt, but you can also get seller equity if he sticks around. And lenders love that, right, Heather? Well, they love it, but they think about the equity in different, you know, I guess let's put it in order, right? The best equity that they like is from experienced sponsors. That's number one, the equity that they like the most. It likes some from the CEO as well, if they can put some in. That's also nice. Seller role, it's not cash equity or what we call fresh equity. So we like it. We like that the seller's got skin in the game, but not as good as hard cash that somebody has

something to lose. So I think the banks kind of think of equity in terms of skin in the game. Who's got something to lose here besides the bank? And, you know, and how experienced are they? And what other value add might they be bringing? So the seller brings that extra value ad but doesn't bring the cash. So it usually kind of sits a little bit lower in, you know, in quality, you know, in terms of the way the lender might look at. Yeah. Makes sense. All right. Anything else to add on this one? No. I think that's fun. I think it's a good one. I mean, it's, if you can put together the deal structure, the 15 million bucks as an individual, I think that's your challenge.

Private equity could probably easily take this down with a higher amount of equity and then refinance it out later. If it is stable and asset heavy, those are easily refinanceable businesses. I think somebody probably outbids, outbids most business acquirers on this. I think it's either a private equity tuck in or a street. strategic that says, great, we do all the other flavors, but we don't have citrus. And they come in and they blow your socks off because they're underwriting it very differently.

Absolutely. That's probably true. All right. Let's wrap it up from there. Thank you for listening. If y'all like this episode, it would really help us if you told a friend. We are at our never-ending quest to break even here on Acquisitions Anonymous on all of our editors and everything.

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